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©COPYRIGHT 2007 BY JANET M. JOHNSON. 7 — 1

Landlord’s Duties and Liabilities JANET M. JOHNSON Schiff Hardin LLP Chicago The author would like to thank Jennifer L. Burton, Lauren G. Robinson, Lisa A.

Mason, and Sean Venden, all former attorneys at Schiff Hardin LLP, and Stephen A. Copenhaver and Joseph L. Seliga, former summer associates at Schiff Hardin LLP, for their assistance in researching, writing, and updating this chapter.

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COMMERCIAL LANDLORD-TENANT PRACTICE

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I. [7.1] Scope of Chapter II. Use and Enjoyment of Premises A. [7.2] Exclusive Possession of Demised Premises B. [7.3] Landlord’s Covenant of Quiet Enjoyment C. [7.4] No Implied Warranty of Habitability D. [7.5] Constructive Eviction 1. [7.6] Tenant’s Rights on Constructive Eviction 2. [7.7] Caselaw on What Is or Is Not Constructive Eviction 3. [7.8] Foreseeability of Events 4. [7.9] Waiver by Tenant III. Landlord’s Obligation To Pay Real Estate or Leasehold Taxes A. [7.10] General Rule: Landlord’s Obligation Unless Lease Provides Otherwise B. [7.11] Tenant’s Obligation To Pay Increased Share of Taxes C. [7.12] Tenant’s Obligation To Pay Taxes on Its Improvements D. [7.13] Effect of Governmental Ownership or Leasing on Obligation To Pay Taxes E. [7.14] Effect of Lease on Tax-Exempt Owner’s Tax Exemption F. [7.15] Effect of Tenant’s Bankruptcy IV. Landlord’s Duty To Repair and Maintain A. [7.16] General Rule: Landlord Has No Duty To Repair B. [7.17] Exceptions to General Rule of No Duty To Repair 1. [7.18] Landlord’s Express Covenant To Repair 2. [7.19] Tenant’s Remedies upon Landlord’s Breach of Express Covenant To

Repair 3. [7.20] Landlord’s Obligation To Make Structural or Nonstructural Repairs 4. [7.21] Improvements Made on Landlord’s Behalf 5. [7.22] Landlord’s Duty To Maintain Common Areas C. Landlord’s Tort Liability for Property Damage and Injury to Tenants and Third Parties 1. [7.23] General Rule: No Liability for Personal Injury or Property Damage 2. [7.24] Exception to General Rule for Injuries Within Tenant’s Premises When

Landlord Retains Control 3. [7.25] Exception to General Rule for Injuries Caused by Latent Defects,

Landlord’s Failure To Repair, Concealment of Defects, or Negligent Repairs

LANDLORD’S DUTIES AND LIABILITIES

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 7 — 3

4. [7.26] Exception to General Rule for Injuries Resulting from Code Violations 5. [7.27] Exception to General Rule for Injuries Occurring in Common Areas 6. [7.28] Sublessor’s Tort Liability to Third Parties 7. [7.29] Comment V. Landlord Exculpatory Clauses and Statutory Prohibitions on Exoneration A. [7.30] Statutory Prohibition on Exoneration for Landlord’s Negligence and Caselaw

Interpretation B. [7.31] Caselaw Prior to Statutory Prohibition on Landlord’s Exoneration C. [7.32] Effect of Landlord’s Relinquishment of All Control over Premises to Tenant D. [7.33] Comment VI. [7.34] Landlord’s Obligation To Protect Tenant Against Criminal Acts of Third

Parties A. [7.35] General Rule: Landlord Has No Obligation B. [7.36] Exception to General Rule When Landlord Breaches Affirmative Duty C. [7.37] Exception to General Rule When Landlord Has Knowledge of Criminal

Activity D. [7.38] Exception to General Rule When Landlord Voluntarily Assumes Obligation E. [7.39] Comment VII. [7.40] Property Damage A. [7.41] Fire 1. [7.42] Situations in Which Landlord Bears Risk of Loss 2. [7.43] Situations in Which Tenant Bears Risk of Loss B. [7.44] Other Loss Events C. [7.45] Waiver of Subrogation Provisions VIII. [7.46] Security Deposits A. [7.47] Landlord’s Duty To Return Security Deposits B. [7.48] Assignments of Security Deposits

COMMERCIAL LANDLORD-TENANT PRACTICE


IX. [7.49] Options To Renew and Options To Purchase A. [7.50] Options To Renew or Extend Lease 1. [7.51] Exercise of Option To Renew; Excusable Neglect 2. [7.52] What Constitutes Valid Exercise of Option To Renew 3. [7.53] Effect of Lease Assignments on Options To Renew B. [7.54] Options To Purchase C. [7.55] Comment X. Enforcement of Tenant Covenants and Other Lease Provisions A. [7.56] Effect of Landlord’s Failure To Enforce Lease Provisions 1. [7.57] Waiver by Acceptance of Late Rent Payments 2. [7.58] Landlord’s Reinstatement of Previously Waived Right to Prompt Payment 3. [7.59] Waiver of Right to Prompt Payment Does Not Waive Tenant’s Obligation

To Pay 4. [7.60] Waiver of Tenant’s Obligations Does Not Make Landlord Liable to Third

Parties B. [7.61] Effect of Non-Waiver Provisions C. [7.62] Assignment of Lease and Subletting of Premises 1. [7.63] Prohibition in Lease Against Assignment 2. [7.64] Landlord’s Failure To Object to Assignment 3. [7.65] Unreasonable Withholding of Consent 4. [7.66] Withholding Consent in Exchange for Concessions 5. [7.67] Effect of Tenant’s Bankruptcy D. [7.68] Effect of Assignment or Subletting by Tenant E. [7.69] Effect of Assignment by Landlord F. Breach by Landlord 1. [7.70] Effect on Tenant’s Obligations 2. [7.71] Rights of Tenant G. [7.72] Special Circumstances When Oral Modifications or Waivers Are Not Binding

on Landlord XI. Termination of Tenancy A. [7.73] Landlord’s Obligation To Mitigate Damages upon Tenant’s Breach 1. [7.74] Statutory Duty To Mitigate Damages 2. [7.75] Burden of Proof 3. [7.76] What Constitutes “Reasonable Measures” To Mitigate Damages



4. [7.77] Prior Illinois Caselaw 5. [7.78] Landlord’s Contractual Obligation To Mitigate Damages 6. [7.79] Comment B. Expiration or Termination of Lease 1. [7.80] Expiration of Lease Term 2. [7.81] Requirements To Properly Terminate Lease for Tenant’s Breach 3. [7.82] Termination of Possession Without Termination of Lease 4. [7.83] Exercise of Termination Option C. [7.84] Landlord’s Potential Liability After Eviction of Tenant XII. [7.85] Commercial Real Estate Broker Lien Act A. [7.86] Statutory Provisions B. [7.87] Caselaw Interpretations of Commercial Real Estate Broker Lien Act 1. [7.88] Different Agreements and Interplay with Real Estate License Act 2. [7.89] Interplay Between Statutory Claims by Multiple Brokers and Contractual

Arbitration Provisions XIII. Visual Artists Rights Act of 1990 A. [7.90] Statutory Obligations and Rights B. [7.91] Caselaw Interpreting VARA 1. [7.92] “Works Made for Hire” Under VARA 2. [7.93] Applicability of VARA to Artwork Created Before VARA’s Enactment 3. [7.94] Works of “Recognized Stature” Under VARA; Waiver of VARA Rights C. [7.95] Comment

§7.1 COMMERCIAL LANDLORD-TENANT PRACTICE


I. [7.1] SCOPE OF CHAPTER In the United States during the Nineteenth and early Twentieth Centuries, the common-law rules governing the landlord-tenant relationship established the duties and attendant liabilities of a landlord to its tenant. Illinois courts applied the common law with little exception to all leases. Over time, the rise of an industrial and service-based economy, the concentration of the population in urban centers, and the introduction of contract concepts to the more traditional status-driven concepts of property law have gradually led to a bifurcation of the common-law principles traditionally applied to all leases to the extent that there are now differences between residential and commercial leases. Nationally, certain of the harsher aspects of the common law have been ameliorated with respect to residential leases by statute or by the development of the common law to incorporate modern societal concerns of habitability, inequity of bargaining power, and proper allocation of risk. Illinois law is no exception to this trend. However, in the context of commercial leases, Illinois courts have been more likely to strictly apply the common-law rules when the lease was unambiguous or when the parties failed to contract around the dictates of the common law. This chapter examines the current state of a commercial landlord’s duties and liabilities under Illinois law within the context of negotiated commercial leases. The landlord’s duties and obligations typically arise in broad areas of landlord-tenant law, ranging from such age-old topics as a tenant’s use and enjoyment of the demised premises, the landlord’s duty to repair, and the landlord’s enforcement of lease provisions, to more modern considerations of a landlord’s obligation to protect tenants against the criminal acts of third parties and the landlord’s obligation to mitigate damages. New statutory and regulatory developments affecting the landlord’s duties and obligations are also discussed. II. USE AND ENJOYMENT OF PREMISES A. [7.2] Exclusive Possession of Demised Premises In any leasing arrangement, the lease confers exclusive possession of the demised premises on the tenant. Baumgardner v. Consolidated Copying Co., 44 Ill.App. 74, 75 (1st Dist. 1892). Accordingly, the landlord has a duty to refrain from disturbing the tenant’s possession while the tenant remains in possession and continues to pay rent. Generally, a tenant’s obligation to pay rent is a continuing one that is independent of the landlord’s obligations under the lease. City of Chicago v. American National Bank, 86 Ill.App.3d 960, 408 N.E.2d 379, 380 – 381, 42 Ill.Dec. 1 (1st Dist. 1980); 601 West 81st Street Corp. v. City of Chicago, 129 Ill.App.3d 410, 472 N.E.2d 827, 831 – 832, 84 Ill.Dec. 690 (1st Dist. 1984). See also Lipkin v. Burnstine, 18 Ill.App.2d 509, 152 N.E.2d 745 (1st Dist. 1958). However, a tenant is sometimes relieved of certain of its obligations if the landlord breaches one or more of its obligations under the lease. For the effect of a landlord’s breach on a tenant’s obligations and the rights of a tenant if the landlord breaches certain covenants in the lease, see §§7.70 and 7.71 below. See also §§7.5 – 7.9 below addressing a landlord’s constructive eviction of a tenant, which also relieves the tenant from future obligations under the lease.

LANDLORD’S DUTIES AND LIABILITIES §7.3


B. [7.3] Landlord’s Covenant of Quiet Enjoyment Closely related to the concept that a tenant is entitled to exclusive possession of the premises is the landlord’s covenant of quiet enjoyment. The covenant of quiet enjoyment is implied in all leases under Illinois law and is breached when the landlord substantially interferes with the tenant’s use and enjoyment of the demised premises. Blue Cross Ass’n v. 666 North Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 190 (1st Dist. 1981); Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, 869 F.2d 1073, 1075 (7th Cir. 1989). In Blue Cross Ass’n, supra, the appellate court addressed the breadth of the landlord’s covenant of quiet enjoyment. The landlord argued that its entry into the demised premises to make repairs or alterations did not effect an actual or constructive eviction of the tenant. Consequently, the landlord argued that its activities could not create a breach of the landlord’s covenant of quiet enjoyment. The court refused to interpret the covenant of quiet enjoyment so narrowly, noting that the intent to deprive a tenant of possession by a showing of actual or constructive eviction was not necessary to finding a breach of the covenant of quiet enjoyment. Unless the landlord reserves the right to enter the demised premises to make repairs or alterations, or for some other specified purpose, the landlord’s entry may breach its covenant of quiet enjoyment. Such an invasion may be enjoined by the tenant, particularly if the invasion threatens destruction of a tenant’s property or substantially interferes with its business operations, as did the landlord’s building-wide remodeling in Blue Cross Ass’n. 427 N.E.2d at 273. In Infinity Broadcasting, supra, the tenant sought to block the landlord’s construction of a 64-story office building next to a building in which the tenant operated a broadcasting facility. The tenant asserted that the 64-story office building would interfere with the tenant’s operation of its broadcasting facility by blocking the radio frequencies and therefore would breach the landlord’s covenant of quiet enjoyment. The court dismissed the tenant’s complaint, noting that a decision in the tenant’s favor would require the court to imply, contrary to Illinois law, an easement of air and light in the lease. The lease did not expressly grant the tenant an easement for radio wave transmissions. Because the tenant failed to protect its broadcasting concern through an explicit lease provision, the landlord did not breach its covenant of quiet enjoyment. Justice Cudahy’s dissent in Infinity Broadcasting, 869 F.2d at 1079, argued there was a breach by the landlord of its covenant of quiet enjoyment. It cited American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255 (7th Cir. 1980) (decided under Pennsylvania law), for the proposition that once a landlord grants a tenant a lease for a specific commercial use, the landlord has an obligation to refrain from unreasonable interference with the tenant’s ability to conduct its business on the demised premises. This view was not adopted by the majority of the justices in Infinity Broadcasting, however. A landlord’s breach of its covenant to pay real estate taxes does not necessarily deprive the tenant of its use and enjoyment of the demised premises either. 601 West 81st Street Corp. v. City of Chicago, 129 Ill.App.3d 410, 472 N.E.2d 827, 832, 84 Ill.Dec. 690 (1st Dist. 1984). However, when the landlord’s tax delinquency results in the appointment of a receiver and the threatened forfeiture of the demised premises, a tenant’s use and enjoyment is disturbed, and, by implication,



the landlord’s covenant of quiet enjoyment is breached. Sixty-Third & Halsted Realty Co. v. Chicago City Bank & Trust Co., 299 Ill.App. 297, 20 N.E.2d 162, 167 (1st Dist. 1939) (tenant may properly apply rent to payment of landlord’s delinquent property taxes, and landlord is not entitled to declare forfeiture by reason of tenant’s nonpayment of rent). If a landlord is found to have breached its covenant of quiet enjoyment, the tenant’s damages for the breach are the difference between the rental value of the demised premises and the rent the tenant agreed to pay under the lease. Damages may also include additional expenses incurred or damages suffered by the tenant as a direct result of the landlord’s breach. Madison Associates v. Bass, 158 Ill.App.3d 526, 511 N.E.2d 690, 701 – 702, 110 Ill.Dec. 513 (1st Dist. 1987). C. [7.4] No Implied Warranty of Habitability Under Illinois common law, historically, no covenant as to the condition of the demised premises has been implied in leases, although explicit agreements are enforced. 24 I.L.P. Landlord and Tenant §277 (1980). The doctrine of implied warranty of habitability, as enunciated by the Illinois Supreme Court in Jack Spring, Inc. v. Little, 50 Ill.2d 351, 280 N.E.2d 208 (1972), ameliorates the common law rule for residential rental property by imposing a duty on landlords to maintain such property in a habitable condition. This doctrine has also been incorporated into numerous municipal ordinances statewide. For example, see Chicago Municipal Code §§5-12-070 and 5-12-100 on Chicago Residential Landlords and Tenants, which set out the landlord’s obligations to maintain its property and to notify any prospective tenant or renewal tenant of any notices that the landlord has received from governmental agencies of code violations or notices from utility companies threatening to terminate utility services, and Chicago Municipal Code §5-12-110 setting out a tenant’s remedies for the landlord’s noncompliance. However, the doctrine of implied warranty of habitability does not apply to commercial leases. Thus, a commercial tenant may not recover against a landlord for property damage on the basis of an implied warranty of habitability. J.B. Stein & Co. v. Sandberg, 95 Ill.App.3d 19, 419 N.E.2d 652, 657 – 658, 50 Ill.Dec. 544 (2d Dist. 1981) (retail premises lease contained language exculpating landlord from liability for damage to tenant’s property from fire allegedly caused by overloaded wiring system). Furthermore, no duty to repair can be imposed on the landlord by means of an implied warranty of habitability. Elizondo v. Perez, 42 Ill.App.3d 313, 356 N.E.2d 112, 114, 1 Ill.Dec. 112 (1st Dist. 1976) (no implied warranty of habitability exists with respect to commercial property; as result, lessor had no obligation to repair cracked windows or any alleged structural defects in building leased to tenant). D. [7.5] Constructive Eviction At common law, a tenant had to be physically dispossessed by the landlord to establish an eviction. See Annot., 33 A.L.R.3d 1356, 1358 (1970). This rule has been modified to a certain extent by statute in Illinois (see §9-101, et seq., of the Code of Civil Procedure, 735 ILCS 5/9-101, et seq., addressing forcible entry and detainer) and by the legal doctrine of constructive eviction. A landlord’s breach of certain lease covenants, such as an express duty to maintain or repair the demised premises or a substantial interference with the tenant’s use of the demised premises, can result in a constructive eviction of the tenant. 24 I.L.P. Landlord and Tenant §344 (1980).



Illinois common law defines constructive eviction “as something of a serious and substantial character done by the landlord with the intention of depriving the tenant of the beneficial enjoyment of the premises.” Dell’Armi Builders, Inc. v. Johnston, 172 Ill.App.3d 144, 526 N.E.2d 409, 411, 122 Ill.Dec. 150 (1st Dist. 1988). The landlord’s intent need not be express. If a landlord’s acts or omissions precipitate the tenant’s abandonment, it is presumed that such a consequence was intended. John Munic Meat Co. v. H. Gartenberg & Co., 51 Ill.App.3d 413, 366 N.E.2d 617, 620, 9 Ill.Dec. 360 (1st Dist. 1977). 1. [7.6] Tenant’s Rights on Constructive Eviction A tenant may abandon the demised premises if, as a result of a breach of the landlord’s covenant to repair, the leased premises are no longer fit for the purposes for which the tenant leased them. Dell’Armi Builders, Inc. v. Johnston, 172 Ill.App.3d 144, 526 N.E.2d 409, 412, 122 Ill.Dec. 150 (1st Dist. 1988); American National Bank & Trust Company of Chicago v. Sound City, U.S.A., Inc., 67 Ill.App.3d 599, 385 N.E.2d 144, 148 – 149, 24 Ill.Dec. 377 (2d Dist. 1979). In Dell’Armi, the court found that the tenant had not waived the landlord’s obligation to complete repairs the prior landlord had promised to complete but had not finished at the time the tenant took possession. As a result, the tenant was justified in declaring a constructive eviction three months later despite the prior landlord’s attempt to make the repairs. Also, the court held that the tenant had no obligation to provide an additional notice or opportunity to cure to the successor landlord. See also Home Rentals Corp. v. Curtis, 236 Ill.App.3d 994, 602 N.E.2d 859, 176 Ill.Dec. 913 (5th Dist. 1992) (unsanitary conditions in bathroom, kitchen, and basement and roach infestation in tenants’ apartment were sufficient to establish constructive eviction); John Munic Meat Co. v. H. Gartenberg & Co., 51 Ill.App.3d 413, 366 N.E.2d 617, 9 Ill.Dec. 360 (1st Dist. 1977) (affirming trial court’s finding that company was constructively evicted when it abandoned building after building’s federal inspection number was withdrawn because of deficiencies and conditions that were responsibility of lessors to remedy). Upon a landlord’s constructive eviction, the tenant is no longer liable for the payment of rent or the performance of the lease terms, and the tenant can abandon the premises. However, a finding of constructive eviction requires the tenant to abandon the demised premises within a reasonable period of time, but only after the tenant has permitted the landlord a reasonable opportunity to correct the situation creating the constructive eviction. Dell’Armi, supra, 526 N.E.2d at 412. See also Automobile Supply Co. v. Scene-In-Action Corp., 340 Ill. 196, 172 N.E. 35, 37 – 38 (1930) (commercial tenant was not justified in waiting two months after loss of heat to its premises to vacate, and there was no constructive eviction). However, a tenant’s delay in abandoning the premises is excusable when the tenant remains in reliance on the landlord’s promise to correct the problem. Sound City, supra, 385 N.E.2d at 146. If a tenant fails to vacate its premises within a reasonable period of time, its duty to pay rent is not suspended while it continues to occupy the premises. Thus, in City of Chicago v. American National Bank, 86 Ill.App.3d 960, 408 N.E.2d 379, 381, 42 Ill.Dec. 1 (1st Dist. 1980), when the tenant was in default in payment of its rent for three months prior to vacating its premises, the landlord was entitled to terminate the lease for that nonpayment, which meant the tenant had no claim for a portion of the condemnation award that was paid to the landlord after the tenant’s lease had been terminated.



2. [7.7] Caselaw on What Is or Is Not Constructive Eviction Any determination as to whether a constructive eviction has occurred is necessarily fact specific, given the need to examine the lease and each party’s conduct. Establishing at trial that a constructive eviction has occurred is a difficult task, especially when the tenant was aware of the problem creating the alleged constructive eviction either before the commencement of the lease term or for some time before vacating the premises or when the landlord has made good-faith efforts to correct its breach. In Dell’Armi Builders, Inc. v. Johnston, 172 Ill.App.3d 144, 526 N.E.2d 409, 122 Ill.Dec. 150 (1st Dist. 1988), the First District Appellate Court affirmed the trial court’s finding that no constructive eviction had occurred. Even though the tenant abandoned the premises, complaining that the landlord had failed to repair a leak in the roof, the landlord had taken action to maintain and repair the roof as well as to arrange for the installation of a new roof. 526 N.E.2d at 413. Likewise, in Zion Industries, Inc. v. Loy, 46 Ill.App.3d 902, 361 N.E.2d 605, 608 – 611, 5 Ill.Dec. 282 (2d Dist. 1977), the Second District Appellate Court failed to find a constructive eviction had occurred because the tenant remained in possession and had been aware of the defective roof at the time the lease was executed, the lease released the landlord from liability for damage resulting from water seeping through the roof, and the landlord had attempted to repair the roof. Similarly, in Metropolitan Life Insurance Co. v. Nauss, 226 Ill.App.3d 1014, 590 N.E.2d 524, 168 Ill.Dec. 887 (4th Dist. 1992), the Fourth District Appellate Court refused to overturn a jury determination that a retail tenant had not been constructively evicted from its premises. According to the court, the evidence demonstrated that, after the tenant complained, the landlord had acted to prevent construction odors from penetrating the premises and to control crowds gathering in a mall area in front of the premises. See also Fitzwilliam v. 1220 Iroquois Venture, 233 Ill.App.3d 221, 598 N.E.2d 1003, 174 Ill.Dec. 371 (2d Dist. 1992) (no constructive eviction when tenant vacated premises two months before end of lease term and landlord, pursuant to lease provisions, thereafter entered premises in order to prepare premises for new tenant); St. Louis North Joint Venture v. P&L Enterprises, Inc., 116 F.3d 262 (7th Cir. 1997) (retail tenant not constructively evicted due to decrease in foot traffic because of landlord’s eight-month parking lot construction project). Likewise in Shaker & Associates, Inc. v. Medical Technologies Group, Ltd., 315 Ill.App.3d 126, 733 N.E.2d 865, 872 – 873, 248 Ill.Dec. 190 (1st Dist. 2000), the First District Appellate Court affirmed the trial court’s decision to dismiss the tenant’s affirmative defense of constructive eviction and to grant summary judgment to the landlord on its complaint to collect unpaid rent and to terminate the lease. The tenant did not vacate its space until ten months after it first complained regarding the landlord’s failure to provide heat and air conditioning. The undisputed facts also demonstrated that the tenant had failed to pay rent for over three months prior to the landlord’s filing suit, and the tenant did not vacate the premises until two weeks after the landlord’s suit was filed. 733 N.E.2d at 868. According to the court, the burden of proof is on the tenant to show whether the time between the landlord’s breach and the tenant’s abandonment of the premises was reasonable. 733 N.E.2d at 873.



In Shaker, supra, the tenant’s deficient pleadings may have been partially to blame, as the trial court found there were insufficient supporting facts for the tenant’s claim, possibly due to its omission of factual details when it amended its counterclaim and affirmative defenses. As a result, the omitted facts were considered abandoned and withdrawn, and the counterclaim and affirmative defense were found to be insufficient as a matter of law to establish a constructive eviction. 733 N.E.2d at 871. See also Automobile Supply Co. v. Scene-In-Action Corp., 340 Ill. 196, 172 N.E. 35, 37 – 38 (1930) (burden of proof is on tenant to prove failure to provide heat was proper basis for constructive eviction, but tenant failed to satisfy that burden when it waited after loss of heat to declare constructive eviction and gave notice it would leave two months later). Conversely, in American National Bank & Trust Company of Chicago v. Sound City, U.S.A., Inc., 67 Ill.App.3d 599, 385 N.E.2d 144, 24 Ill.Dec. 377 (2d Dist. 1979), the Second District Appellate Court affirmed a judgment in favor of a tenant for constructive eviction. The tenant took possession of the premises on a condition, which was incorporated into the lease as an addendum, that the landlord would make certain repairs to the premises. The landlord failed to complete the specified repairs. Approximately three months into the lease term, the tenant was notified that there was then a new landlord. One week later, the tenant abandoned the premises. The trial court found that because the appearance of the premises was important to the tenant’s business, the landlord’s failure to make the repairs made “the premises unsuitable for the purpose for which they were rented.” 385 N.E.2d at 146. Furthermore, the tenant had not waived its right to vacate simply because it took possession of the premises prior to repair. Perhaps most significant to purchasers of property subject to existing tenant leasehold interests, the court did not find that the tenant had an obligation to notify the new landlord of the premises’ state of disrepair before the tenant’s abandonment. Id. For a further discussion of the effect of a landlord’s assignment on the parties’ respective duties and obligations, see §7.69 below. Similarly, an old Illinois case found that a tenant was constructively evicted due to the landlord’s breaches of its representation that the premises were in satisfactory condition and of its covenant to repair any leaks in the building’s foundation. The tenant took possession on the basis of the landlord’s covenants, but the landlord’s repeated attempts to repair failed. The court determined that the condition of the demised premises and the landlord’s inability to repair rendered the premises untenantable for a retail store and for the tenant’s occupancy. Gibbons v. Hoefeld, 299 Ill. 455, 132 N.E. 425, 428 – 429 (1921). A similar result occurred in a later case involving a residential apartment lease. See Applegate v. Inland Real Estate Corp., 109 Ill.App.3d 986, 441 N.E.2d 379, 65 Ill.Dec. 466 (2d Dist. 1982). Applegate involved a suit brought by a tenant seeking a return of her security deposit. The court held the cockroach infestation in the apartment was sufficient to constitute a constructive eviction of the tenant even though the landlord had attempted to correct the problem by sending an exterminator prior to the tenant’s move in, and had advised the tenant that an exterminator would be sent the next time one was scheduled. According to the court, the number of cockroaches and their resistance to efforts by the landlord and the tenant to exterminate them, along with other items of disrepair, were sufficient to justify the tenant moving out before her lease had technically even begun, and affording the landlord an opportunity to cure would have “availed the plaintiff little.” 441 N.E.2d at 383. Thus, a landlord’s attempts to make some repairs or remedy an untenantable condition will not always preclude a claim for constructive eviction by the tenant.



3. [7.8] Foreseeability of Events If a landlord’s actions that give rise to a tenant’s allegation that it has been constructively evicted were foreseeable at the time of contract, the tenant may not use such actions as a basis for a constructive eviction. See Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, 869 F.2d 1073, 1078 (7th Cir. 1989) (construction of tall office building on land next door that might interfere with tenant-broadcaster’s transmission of radio waves was foreseeable, and tenant’s move to premises in unobstructed building while still occupying demised premises was not constructive eviction). Several old Illinois cases suggest that when a tenant is not aware of another tenant’s noise or nuisance before leasing its premises, the offending tenant’s conduct may result in a constructive eviction of the new tenant. See generally Annot., 1 A.L.R.4th 849, 868 (1980), citing Halligan v. Wade, 21 Ill. 470 (1859) (noise resulting from activities of many tenants in mixed-use building sufficient justification for constructive eviction of tenant operating a hotel); Kesner v. Consumers Co., 255 Ill.App. 216 (1st Dist. 1929) (tenant constructively evicted due to landlord’s failure to abate another tenant’s creation of potential fire hazard and noxious fumes). But see A.H. Woods Theatre v. North American Union, 246 Ill.App. 521 (1st Dist. 1927) (no constructive eviction of tenant when music firm’s noise disturbed employees of complaining neighboring tenant but tenant did not show any loss of business). 4. [7.9] Waiver by Tenant Even if it has sufficient grounds to claim a constructive eviction, a tenant waives such a claim when it fails to abandon the premises within a reasonable time after the untenantable condition occurs. See JMB Properties Urban Co. v. Paolucci, 237 Ill.App.3d 563, 604 N.E.2d 967, 969, 178 Ill.Dec. 444 (3d Dist. 1992), citing Dell’Armi Builders, Inc. v. Johnston, 172 Ill.App.3d 144, 526 N.E.2d 409, 122 Ill.Dec. 150 (1st Dist. 1988). In addition, the tenant bears the burden of proving that it vacated the premises within a reasonable period of time after the landlord’s breach of a lease covenant. See Automobile Supply Co. v. Scene-In-Action Corp., 340 Ill. 196, 172 N.E. 35, 37 – 38 (1930) (failure to provide heat can be basis for constructive eviction; however, tenant’s failure to show proof that its written notice declaring breach and declaring termination of lease effective two months later was reasonable meant there was no question of fact for jury); Shaker & Associates, Inc. v. Medical Technologies Group, Ltd., 315 Ill.App.3d 126, 733 N.E.2d 865, 872 – 873, 248 Ill.Dec. 190 (1st Dist. 2000) (tenant failed to meet burden of proof that its abandonment of premises ten months after landlord’s breach first occurred was within reasonable period of time). In JMB Properties, supra, a tenant operating a jewelry store (Paolucci) in a retail mall was held to have waived its claim of constructive eviction by remaining in the mall nearly five years after the untenantable condition arose and six months after the offending tenant moved out of the mall. 604 N.E.2d at 968. Paolucci alleged that its premises were made untenantable by excessive noise emanating from its tenant next door, an audio and video equipment store (Barretts). Paolucci consistently lodged complaints against its offending neighbor from December 1985 to February 1990, when Barretts vacated the mall. Despite this alleged untenantable condition, which allegedly caused the walls of the jewelry store to rattle and prevented Paolucci’s



employees from performing intricate repair work, Paolucci remained on the premises until August 1990. Moreover, Paolucci renewed the lease for another six years in August 1986. The court determined Paolucci failed to leave the mall within a reasonable time after the untenantable condition arose and held that Paolucci had waived its right to claim it had been constructively evicted. In making its determination, the court considered the fact that Paolucci had an opportunity to leave the mall but chose to remain and enter a new lease. 604 N.E.2d at 970. III. LANDLORD’S OBLIGATION TO PAY REAL ESTATE OR LEASEHOLD

TAXES A. [7.10] General Rule: Landlord’s Obligation Unless Lease Provides Otherwise If the lease fails to allocate responsibility for the payment of real estate taxes or special assessments between the tenant and the landlord, the landlord will be responsible for the payment of the taxes and assessments. Metropolitan Airport Authority of Rock Island County v. Farliza Corp., 50 Ill.App.3d 994, 366 N.E.2d 112, 113, 8 Ill.Dec. 950 (3d Dist. 1977) (airport authority, not its tenant, was responsible for payment of real estate taxes on land, but under lease language requiring tenant to pay taxes “on the leasehold interest or any property of the Lessee on the leased premises,” tenant was liable for taxes on its improvements erected on land). In addition, if a lease obligates the tenant to pay taxes and assessments merely on the leasehold interest, the landlord becomes obligated to pay taxes and assessments on the real estate itself. 366 N.E.2d at 114. The lease at issue in Transcraft Corp. v. Anna Industrial Development Corp., 223 Ill.App.3d 100, 584 N.E.2d 1033, 165 Ill.Dec. 599 (5th Dist. 1991), provided that the tenant would pay general real estate taxes, annually, in an amount not to exceed $800. The balance, if any, was to be paid by the landlord. When the landlord failed to pay its share of the taxes, the tenant paid the full amount. Eventually, the tenant sued the landlord for the excess real estate taxes it had paid and, after its exercise of an option to purchase the premises, sued for reimbursement for the real estate taxes paid to clear title to the property. Although the lease permitted the tenant to deduct the excess real estate taxes it had paid from rent payments made to the landlord, the tenant had not done so. According to the court, the tenant’s failure to do so did not result in a waiver of its right to enforce the landlord’s obligation to pay them under the lease. In addition to its obligations with respect to real estate taxes during the lease term, the landlord was required to deliver title to the real estate by a warranty deed free and clear of any liens and encumbrances in connection with the tenant’s purchase of the property (i.e., free and clear of any liens due to the landlord’s failure to pay its share of the real estate taxes). 584 N.E.2d at 1035. In 601 West 81st Street Corp. v. City of Chicago, 129 Ill.App.3d 410, 472 N.E.2d 827, 84 Ill.Dec. 690 (1st Dist. 1984), the landlord’s failure to pay real estate taxes, which it was obligated to pay under its lease of a parcel of land to the city, did not relieve the city of its obligation to pay the rent called for under the lease. The court found it significant that the city had not been deprived of its use of the premises by the landlord’s failure to pay the taxes and, in fact, continued to use the parcel as an automobile pound. 472 N.E.2d at 831 – 832.



The decision in another case illustrates the importance (from the tenant’s perspective) of specifying in the lease which party will pay the real estate taxes and how holdover rent is to be determined. In Ceres Terminals, Inc. v. Chicago City Bank & Trust Co., 259 Ill.App.3d 836, 635 N.E.2d 485, 200 Ill.Dec. 146 (1st Dist. 1994), the trial court held that an increase in the tenant’s rent did not constitute a shifting of the landlord’s tax liability to the tenant because the landlord retained its obligation to pay all real estate taxes on the land. A landlord sought increased rent for the period of its tenant’s stay during a wrongful possession suit. The tenant argued that the trial court improperly excluded the expense of property taxes in computing the value of the property when it calculated the increased rent as 12 percent of the fair market value of the property, thereby shifting the burden of the taxes to the tenant. The appellate court affirmed the trial court’s decision, holding that it was proper to exclude the expense of the property taxes from the calculation of the increased rent because the landlord, as owner of the land, retained an obligation to pay taxes on the property that was separate from and irrelevant to the amount of rent to be paid by the tenant. 635 N.E.2d at 504 – 505. B. [7.11] Tenant’s Obligation To Pay Increased Share of Taxes In LaSalle National Bank v. Service Merchandise Co., 827 F.2d 74, 79 (7th Cir. 1987) (applying Illinois law), the Seventh Circuit construed a lease provision that calculated a commercial tenant’s share of taxes on the basis of the leaseable space in a shopping center. The court found that because the lease contemplated both an increase and a decrease in the amount of leasable space, the tenant assumed the risk of an increased share of taxes if the landlord decreased the leasable space in the shopping center. As a result, when the landlord’s remodeling led to a decrease in leasable space, the landlord had a right to adjust the calculation of the tenant’s share of taxes. The Seventh Circuit reversed the district court’s judgment for the tenant, stating that Metropolitan Airport Authority of Rock Island County v. Farliza Corp., 50 Ill.App.3d 994, 366 N.E.2d 112, 8 Ill.Dec. 950 (3d Dist. 1977), the case on which the district court had relied, was not applicable because the lease at issue in that case, unlike the lease in LaSalle National Bank, failed to address which party was responsible for real estate taxes. 827 F.2d at 80. C. [7.12] Tenant’s Obligation To Pay Taxes on Its Improvements The general rule that the landlord is responsible for real estate taxes if the lease is silent does not apply if the tenant improves the real estate. A tenant will be taxed for all improvements that the tenant places on the land, regardless of whether the tenant has covenanted in the lease to pay the taxes. Lannon v. Matilda Lamps, 53 Ill.App.3d 145, 368 N.E.2d 196, 200, 10 Ill.Dec. 710 (3d Dist. 1977). The Lannon court, citing Annot., 86 A.L.R.2d 670 (1962), noted that a landlord should not be taxed for improvements that it does not own and that will be of little or no benefit to the landlord at the end of the lease term. 368 N.E.2d at 200. See also Metropolitan Airport Authority of Rock Island County v. Farliza Corp., 50 Ill.App.3d 994, 366 N.E.2d 112, 113 – 114, 8 Ill.Dec. 950 (3d Dist. 1977) (airport authority, not its tenant, was responsible for payment of real estate taxes on land, but tenant was liable for taxes on its improvements erected on land); Bournique v. Williams, 225 Ill.App. 12 (1st Dist. 1922) (if lease is silent regarding taxes, landlord is responsible for taxes



on land only and tenant is responsible for taxes on improvements erected by tenant, but holding, in case declaring specific performance of option for 99-year ground lease, that tenant should pay all taxes, both on land and on any improvements it later erected). D. [7.13] Effect of Governmental Ownership or Leasing on Obligation To Pay Taxes Under Illinois law, real estate and any improvements on that real estate that are owned by governmental entities for governmental purposes may be exempt from taxation. See 35 ILCS 200/15-60; ILL.CONST. art. IX, §6. In City of Chicago v. Department of Revenue, 210 Ill.App.3d 273, 569 N.E.2d 65, 155 Ill.Dec. 65 (1st Dist. 1991), aff’d, 147 Ill.2d 484 (1992), the City of Chicago purchased two buildings that had been constructed on land owned by a nongovernmental entity. The prior owner of the buildings had been the lessee under a long-term ground lease that was also assigned to the city at the time the city purchased the buildings. Under the terms of the ground lease, the burden of paying all real estate taxes imposed on the real estate and improvements was placed on the lessee. The court determined that the city was not entitled to a tax exemption with respect to the land, as it had no ownership interest in the land and the landowner was using the land to derive a profit. 569 N.E.2d at 69. However, the buildings themselves were exempt from real estate taxes while they were owned by the city. 569 N.E.2d at 70. Although real estate owned by certain governmental bodies may be exempt from taxation and certain other property owned by other governmental bodies and used for governmental purposes may be exempt from taxation, the leasehold interests of private nonexempt parties in such properties are taxable. People ex rel. Korzen v. American Airlines, Inc., 39 Ill.2d 11, 233 N.E.2d 568 (1967). See also 35 ILCS 200/9-195. The value on which such taxes are based is the value of the right to occupy and use the leased property throughout the term of the lease. 233 N.E.2d at 571. Such value is generally considered to be an amount equivalent to the present value of the total rental payments to be made during the unexpired term of the lease. 233 N.E.2d at 572. However, the appraiser should also consider a sales comparison approach and other market data for leases on comparable property. United Airlines, Inc. v. Pappas, 348 Ill.App.3d 563, 809 N.E.2d 735, 744, 284 Ill.Dec. 169 (1st Dist. 2004) (just because air terminal property was single-use property did not mean leases for other airlines’ facilities at O’Hare or other airports shouldn’t have been considered in appraising leasehold estate of United Airlines at O’Hare Airport). In American Airlines, the airline challenged property taxes levied against its leasehold interest in a hangar and hangar site at Chicago-O’Hare International Airport. The airline had leased the land and hangar from the City of Chicago under a 40-year lease. The airline argued that the leasehold estate should have no value (or at most a minimal value) because the contractual rent payments exceeded the current fair market rental value of the premises. The county assessor disagreed and determined that the value of the airline’s interest in the lease was $2.2 million, using the present value method articulated by the court, on which taxes of $116,752 were levied. 233 N.E.2d at 569. The court agreed with the assessor, concluding that it was fallacious to assert, as the airline did, that a lease for which a willing lessee would voluntarily pay a willing lessor an agreed-on amount had no value. 233 N.E.2d at 572. American Airlines, therefore, had failed to sustain its burden of demonstrating by clear and convincing evidence that the county’s assessment was fraudulently excessive. 233 N.E.2d at 573.



In Metropolitan Airport Authority of Rock Island County v. Farliza Corp., 50 Ill.App.3d 994, 366 N.E.2d 112, 8 Ill.Dec. 950 (3d Dist. 1977), the lease of land on which the tenant was to build a motor lodge and restaurant specifically provided the tenant would pay all taxes on its leasehold interest and its property but did not specify which party would pay the taxes on the land itself. The land had not been taxed prior to the lease to the tenants because the land had been used for airport authority purposes. The trial court determined from the language of the lease that the parties apparently did not contemplate that the land itself would become subject to tax. In that situation, the appellate court agreed it was proper to require the landlord to pay taxes on the land when the taxing authorities later assessed the land for tax purposes. 366 N.E.2d at 113 – 114. E. [7.14] Effect of Lease on Tax-Exempt Owner’s Tax Exemption Certain real estate owned by charitable, religious, or other tax-exempt organizations may qualify for a real estate tax exemption when it is “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit.” 35 ILCS 200/15-65. Receipt of incidental profits will not defeat the continued exemption because the test is the primary use of the property — whether it is to serve a tax-exempt purpose or for the production of income. To remain exempt, however, under Childrens Development Center Inc. v. Olson, 52 Ill.2d 332, 288 N.E.2d 388, 390 – 391 (1972), the revenue received must essentially amount to a charitable contribution or represent little more than the payment of expenses associated with use of the property. See also Mark R. Davis and Elizabeth L. Gracie, Ch. 1, Taxable and Exempt Property, REAL ESTATE TAXATION (IICLE, 2005). In determining whether the property is leased or used with a view to profit, courts consider the primary use to which the leased property is devoted. REAL ESTATE TAXATION §1.51. The number of days the property is used by the owner for its exempt purposes as compared to the number of days it is used by others for nonexempt purposes is relevant, but is not the only measure for determining whether the primary use of a property is for exempt purposes. “Relying exclusively on one factor may result in an inaccurate or unrealistic finding of primary use.” Grundy County Agricultural District Fair, Inc. v. Department of Revenue of State of Illinois, 346 Ill.App.3d 1075, 806 N.E.2d 695, 698, 282 Ill.Dec. 398 (3d Dist. 2004). The Grundy court held that it must consider four factors in determining whether the primary use of the county fairgrounds was exempt, despite its periodic leases to other users. Those factors included “(1) whether non-exempt uses directly and substantially support the exempt uses, (2) the amount of time the property is used for exempt purposes, (3) the percentage of the property used for exempt purposes, and (4) the percentage of total visitors who use the property for exempt purposes.” 806 N.E.2d at 699. See also Arts Club of Chicago v. Department of Revenue of State of Illinois, 334 Ill.App.3d 235, 777 N.E.2d 700, 711 – 712, 267 Ill.Dec. 897 (1st Dist. 2002). Under these principles and the principles articulated in §§7.10 – 7.13 above, exempt organizations should be sure any lease to a third party places the burden on the tenant to pay any real estate taxes assessed by reason of its lease. Otherwise, the exempt organization may have to pay the taxes if it loses its exemption due to the lease. Within 30 days after there is a change in use or a change in leasehold status of any exempt property, the “transferee” is obligated to notify the chief county assessment officer by certified or registered mail, return receipt requested. 35 ILCS 200/15-20. In addition, by statute in Illinois, if any exempt property is “leased, loaned or



otherwise made available for profit,” the owner of that property is obligated to file with the chief county assessment officer a copy of the lease or agreement and a complete description of the premises so the chief assessment officer can create a tax parcel for that property. 35 ILCS 200/15-15. Failure to do so is cause for the assessment officer to terminate the exemption. Id. Effective August 16, 2001, the Illinois legislature amended the Property Tax Code to make it clear that one exempt property owner may lease its property to another exempt entity without loss of its property tax exemption as long as the property’s use in the hands of the tenant would qualify for exemption if owned by the tenant. Section 15-65(c) of the Property Tax Code provides:

If a not-for-profit organization leases property that is otherwise exempt under this subsection to an organization that conducts an activity on the leased premises that would entitle the lessee to an exemption from real estate taxes if the lessee were the owner of the property, then the leased property is exempt. 35 ILCS 200/15-65(c).

Although codified as part of the exemptions applicable to certain types of residential facilities, such as old people’s homes or facilities for persons with development disabilities and similar types of not-for-profit organizations, the legislative history makes it clear that the intent was to make the change applicable to all leases by exempt entities. See 92d General Assembly, Regular Session, Senate Transcript, 43d Legislative Day (May 17, 2001), available at www.ilga.gov/senate/transcripts/strans92/st051701.pdf; Senate Transcript, 44th Legislative Day (May 18, 2001), available at www.ilga.gov/senate/transcripts/strans92/st051801.pdf; House of Representatives, Transcript of Debate, 65th Legislative Day (May 24, 2001), available at www.ilga.gov/house/transcripts/htrans92/t052401.pdf. F. [7.15] Effect of Tenant’s Bankruptcy A commercial landlord’s worst nightmare occurs when one of its tenants files for bankruptcy relief in order to liquidate or reorganize. Any unpaid amounts due and payable under the lease prior to the entry of an order for relief by the bankruptcy court become unsecured debts. This means, just like the holders of any other unsecured debts owed by the tenant to others, the landlord must file its claim and wait in line to see how many cents on the dollar it will recover, if any. In addition, if the tenant wants to reorganize rather than liquidate or needs time to sell its merchandise or other personal property located in its leased premises, the landlord must wait until the tenant elects to assume or reject its lease with the landlord before it can make plans to release the space. Not all the news for a landlord is bad, however. A special provision of the Bankruptcy Code requires the tenant to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease . . . until such lease is assumed or rejected.” 11 U.S.C. §365(d)(3). (Such obligations are often referred to somewhat erroneously as “post-petition” obligations.) A Third Circuit Court of Appeals decision arising out of the bankruptcy of Montgomery Ward, In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001), sheds some light, at least in the Third Circuit, on what real estate taxes are considered post-petition obligations and must be paid to a landlord under Bankruptcy Code §365(d)(3) when a bankrupt



tenant files for relief in bankruptcy court. Courts in other jurisdictions differ on whether and what portion of an obligation for real estate taxes or other rent due under the tenant’s lease is post-petition or prepetition. Thus, the outcome will depend on the jurisdiction in which the bankrupt tenant files its bankruptcy petition and the provisions of the lease at issue. In Montgomery Ward, supra, Montgomery Ward’s Illinois property lease with Centerpoint Properties obligated Montgomery Ward to pay all real estate taxes assessed for periods of time during its lease term, which expired September 1, 1997. However, unlike many leases under which the tenant is to pay real estate taxes, Montgomery Ward was not required to make monthly estimated payments to the landlord to be held by the landlord to pay the taxes when they came due. Instead, it was obligated to pay each installment of taxes upon receipt of an invoice from Centerpoint and before any fine, penalty, or interest was added to the amount of taxes. In addition, Montgomery Ward was obligated to pay an estimated amount of taxes to the landlord for the last two years of the lease (to the extent it had not previously paid such taxes) no later than 30 days prior to the date the lease expired. Montgomery Ward filed for bankruptcy in July 1997. Later that month, Centerpoint sent Montgomery Ward three invoices for real estate taxes. The first covered the first installment of 1996 taxes, which was due in 1997. The second covered an estimated amount for the second installment of 1996 taxes, which was to become due later in 1997 (but after Montgomery Ward’s lease expired). The third covered an estimated amount of taxes for 1997. Montgomery Ward did not pay the first two invoices, and sent a prorated payment of the amount shown on the third invoice for the 1997 taxes. The prorated portion paid represented the portion of the invoiced amount Montgomery Ward calculated was allocable to the period of time from the date its petition for relief in the bankruptcy proceeding had been granted through the date its lease expired, based on Montgomery Ward’s claim this was the only post-petition amount of real estate taxes for which it was liable. Centerpoint filed a motion for an order requiring Montgomery Ward to pay the remainder of the invoiced taxes. The bankruptcy court agreed with Montgomery Ward, and Centerpoint appealed. On appeal, the Third Circuit Court of Appeals held that Montgomery Ward was liable for the entire amount of taxes billed by Centerpoint. It agreed with Centerpoint’s argument that, under the terms of Montgomery Ward’s lease, all of the taxes at issue were post-petition obligations arising under the lease after the date of the order for relief because Montgomery Ward was not obligated to pay the amounts until the date they were billed. According to the court, even though the taxes related in part to periods of time during the lease term that had elapsed prior to the date of the order for relief in Montgomery Ward’s bankruptcy proceeding, nothing in Bankruptcy Code §365(d)(3) authorized proration of the amounts billed. In its decision, the Third Circuit cited prior decisions from other courts that had agreed with its analysis. For example, it cited In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir. 2000), a case in the Sixth Circuit. That court had held the tenant was liable under Bankruptcy Code §365(d)(3) for the entire month’s rent because the tenant’s obligation to pay rent for the month in which the lease was rejected arose on the first day of the month, the tenant remained in possession as of that date, and the effective date for its rejection of the lease was on the second day of the month.



Similarly, in In re Comdisco, Inc., 272 B.R. 671 (Bankr. N.D.Ill. 2002), the Bankruptcy Court for the Northern District of Illinois held the tenant was liable for the full month’s base rent when the tenant’s trustee in bankruptcy sent a notice on August 1 that the lease would be rejected effective August 11. However, the court also held that, under In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), pass-through expenses, such as taxes and common area maintenance charges, needed to be prorated and charged only for the period from August 1 through August 11. 272 B.R. at 676. Likewise, in In re R.H. Macy & Co., 152 B.R. 869 (Bankr. S.D.N.Y. 1993), a New York bankruptcy court held a bankrupt tenant (Bullock’s, Inc.) was liable under Bankruptcy Code §365(d)(3) for the entire amount of the additional real estate taxes due to its landlord as a result of reassessment bills that were issued after the tenant filed for bankruptcy. Even though the reassessment occurred as a result of an event that had occurred four years earlier (the sale of Bullock’s, Inc. to R.W. Macy & Co., Inc.) and was for tax years prior to the filing by Bullock’s of its petition for relief, the reassessment bills were not issued by the county tax collector until eleven months after Bullock’s petition was filed. Thus, the court held that they became obligations under the lease after the order for relief and were payable in full under Bankruptcy Code §365(d)(3). Also, in Inland’s Monthly Income Fund, L.P. v. Duckwall-Alco Stores, Inc. (In re Duckwall-Alco Stores, Inc.), 150 B.R. 965 (D.Kan. 1993), the court held that the bankrupt tenant was liable under Bankruptcy Code §365(d)(3) for only the installment payment of real estate taxes due under a lease for premises in Illinois after the order for relief but before the date the lease was rejected, because the lease expressly required the tenant to pay “only those installments falling due during the term” (150 B.R. at 974) and “did not provide for payment of taxes to the landlord as they accrued” (150 B.R. at 976). Under the language of the lease, the court found the tenant was not liable for the installment payment due after the lease was rejected, even though the landlord paid it (as was its right by law) at the same time it paid the first installment and billed the tenant for the full amount prior to the date the lease was rejected. On the other hand, there are other jurisdictions (perhaps the majority view) where courts have held that proration of similar amounts was appropriate. For example, in circumstances similar to those in Montgomery Ward, supra, the Seventh Circuit (the federal jurisdiction for cases filed in Illinois federal district courts) in Handy Andy, supra, stated that any rule that would have made Handy Andy’s obligation to pay a tax bill related to periods of time prior to the entry of the order for relief in its bankruptcy case “turn on the happenstance of the dating of tax bills and the strategic moves of landlords and tenants” was not appropriate. 144 F.3d at 1128. As a result, it ordered Handy Andy to pay a prorated amount of the taxes at issue, based on the time periods over which they accrued. Likewise, the Southern District Court for the State of New York in Child World, Inc. v. Campbell/Massachusetts Trust (In re Child World, Inc.), 161 B.R. 571 (S.D.N.Y. 1993) (citing additional cases in New York, Ohio, and Pennsylvania), concluded, based on the legislative history behind §365(d)(3) of the Bankruptcy Code, that its purpose was to provide landlords of bankrupt tenants with current payments for current services and this purpose would be thwarted



to the detriment of other unsecured creditors if a landlord could receive payment for amounts that related to prepetition periods of time. As a result, it remanded the case to the bankruptcy court to determine the portion of the taxes due, prorated to cover only the post-petition, pre-rejection period. There has been a plethora of opinions issued after the cases cited above in a number of jurisdictions, some of which have sided with the courts in Koenig, Montgomery Ward, Macy, and Duckwall-Alco Stores, and others of which have sided with the Handy Andy and Child World courts. A number of courts have begun using the terms “billing method” or “performance date rule” or other similar terms to describe the Koenig, Montgomery Ward, Macy, and Duckwall-Alco Stores approaches and “accrual method” or “proration rule” or other similar terms to describe the Handy Andy and Child World approaches. See, e.g., Heathcon Holdings, LLC v. Dunn Industries, LLC (In re Dunn Industries, LLC), 320 B.R. 86, 88 – 89 (Bankr. D.Md. 2005) (accrual method and billing method); El Paso Properties Corp. v. Gonzales (In re Furr’s Supermarkets, Inc.), 283 B.R. 60, 66 – 67 (B.A.P. 10th Cir. 2002) (performance date rule and proration rule). While not all of the cases are cited here, the trend appears to be in the direction of siding with the accrual method, not the billing method. The following are citations to some selected billing method cases: HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794, 800 (7th Cir. 2003) (agreeing with Koenig, supra, in stating “equity as well as the statute favors full payment”); In re Garden Ridge Corp., 321 B.R. 669, 676 – 677 (Bankr. D.Del. 2005) (critical date is date when tenant became obligated to pay monthly rent or tax payments, and when in case of rent lease called for due date prior to filing of petition, entire month’s rent or tax payment was considered prepetition and thus not within amounts due under Bankruptcy Code §365(d)(3), but when tax payments were not required to be made until after filing of bankruptcy petition, they would be considered post-petition obligations); In re DVI, Inc., 308 B.R. 703, 707 (Bankr. D.Del. 2004) (critical date is date when tenant became obligated to pay monthly rent or tax payments; and when in case of rent lease called for due date prior to filing of petition, entire month’s rent was considered prepetition and thus not within amounts due under Bankruptcy Code §365(d)(3)); Trizechahn 1065 Avenue of the Americas, L.L.C. v. Thomaston Mills, Inc., 273 B.R. 284, 289 (M.D.Ga. 2002) (landlord entitled to full amount of rent for two full months that became due prior to tenant’s rejection of lease based on Koenig, supra); Comdisco, supra, 272 B.R. at 675 (distinguishing Handy Andy, supra, on basis that payments for real estate taxes were due in arrears, but base rent was due and payable in advance in holding that obligation to pay rent that came due on first of month could not be prorated between pre-rejection and post-rejection periods). The following are citations to some selected accrual method cases: In re Winn-Dixie Stores, Inc., 333 B.R. 870 (Bankr. M.D.Fla. 2005) (adopting accrual method of determining when obligation of tenant to pay its share of shopping center insurance, common area maintenance expenses, and real estate taxes accrued to deny landlord right to recover amounts that accrued prepetition but billed post-petition); Dunn Industries, supra, 320 B.R. at 90 (adopting accrual method for real estate taxes paid in advance); In re Ames Department Stores, Inc., 306 B.R. 43, 63, 80 (Bankr. S.D.N.Y. 2004) (disagreeing with Koenig, Macy, Comdisco, and HA-LO decisions in discussing treatment of rent for month in which leases were rejected when rent was due on first of month under applicable leases, but did not discuss real estate tax obligations); In re Phar-Mor, Inc., 290 B.R. 319, 320, 328 (Bankr. N.D. Ohio 2003) (adopting accrual method for real estate



taxes assessed and paid in same year); In re NETtel Corp., 289 B.R. 486, 496 (Bankr. D.D.C. 2002) (disagreeing with Comdisco, supra, in holding rent obligations for occupancy after date of rejection arises post-rejection because service being provided by landlord for which it is compensated occurs post-rejection); Furr’s Supermarkets, supra, 283 B.R. at 65, 68 (when leases called for quarterly rent payments in arrears and payment for taxes when due directly to taxing authority, adopted proration approach from Handy Andy, supra); In re Trak Auto Corp., 277 B.R. 655, 673 (Bankr. E.D.Va. 2002) (discussing treatment of both rent for month in which leases were rejected when rent was due on first of month under applicable leases and real estate tax obligations), rev’d on other grounds, 367 F.3d 237 (4th Cir. 2004). When the lease also calls for payments of percentage rent in addition to the base rent, the Bankruptcy Court for the Northern District of Illinois adopted a third method, called the “breakpoint method,” in In re Kmart Corp., 286 B.R. 345 (Bankr. N.D.Ill. 2002). Under this approach, “developed to address the peculiarities of percentage rent . . . percentage rent is not viewed as accruing over the lease year. Whether the percentage rent is owing at all is contingent on the Debtor reaching a certain level of sales. Once that level is met, the contingency is satisfied, and the obligation comes into being, or in other words, arises.” 286 B.R. at 349 – 350. Thus, if the “breakpoint” (i.e., the specified sales level) is not reached until after the bankruptcy filing, percentage rent is to be calculated based only on sales made post-petition, and the entire amount of percentage rent would be considered a post-petition obligation of the tenant. If the breakpoint is reached prior to filing of the bankruptcy petition, then the post-petition obligation would be calculated only on those sales occurring after the filing of the petition (citing John C. Murray, Percentage Rent Provisions in Shopping Center Leases: A Changing World?, 35 Real Prop.Prob. & Tr.J. 731, 784 (2001)). 286 B.R. at 350. The Kmart court distinguished the percentage rent situation from the Handy Andy decision, which involved the payment of real estate taxes, on the basis that payment of percentage rent was not inevitable, as was the obligation to pay taxes. 286 B.R. at 351. Based on the cases identified above and others around the country, only one thing is clear. The amount of post-petition rent or real estate taxes or other items of rent a bankrupt tenant is required to pay under §365(d)(3) of the Bankruptcy Code will depend on both the jurisdiction in which the tenant files for bankruptcy and the terms of the lease itself. For example, even under the decision of the Third Circuit in Montgomery Ward, supra, had the lease obligated Montgomery Ward to make monthly estimated payments for the taxes due under the terms of its lease as they accrued, the Third Circuit likely would have sided with Montgomery Ward and found estimated tax payment amounts due but not paid prior to filing a petition for bankruptcy were prepetition obligations, and estimated tax payment amounts due post-petition would continue to be payable under Bankruptcy Code §365(d)(3) until the tenant elected to reject the lease (or, as in Montgomery Ward’s case, the lease expired). See also Gwinnett Prado, L.P. v. Rhodes, Inc. (In re Rhodes, Inc.), 321 B.R. 80 (Bankr. N.D.Ga. 2005) (holding Bankruptcy Code §365(d)(3) ambiguous and requiring landlords and tenant to file supplemental briefs on subject of when, as a matter of contract interpretation under terms of each lease, tenant became obligated to pay rent for period of November 4 – 30, 2004, remainder of month on and after filing of tenant’s bankruptcy petition).



Under §1408 of the portions of the United States Code now addressing the proper venue for bankruptcy proceedings, 28 U.S.C. §1408, many entities seeking relief under the Bankruptcy Code have some choice as to where they must file their petitions. Any entity’s choices include a court in the jurisdiction in which it is formed, the jurisdiction where its principal place of business is, or the jurisdiction where its principal assets in the United States have been located during the 180 days prior to its filing for protection under the Bankruptcy Code. 28 U.S.C. §1408(1). In addition, if one of its affiliates or a partnership in which it is a partner or the general partnership in which it is a partner has a bankruptcy case pending in a jurisdiction, then it may chose to file in that jurisdiction. 28 U.S.C. §1408(2). Many retail and office tenants are entities formed under Delaware law, but have principal offices or assets located in many different jurisdictions. Under these venue provisions of the United States Code, such tenants may have a number of jurisdictions to choose from in deciding where to file. Many large tenants are able to negotiate real estate tax payment provisions similar to those in Montgomery Ward’s lease, unlike smaller tenants that are often required to make real estate tax deposits in advance with their monthly rent payments. In such cases, the bankrupt tenant and its other unsecured creditors may find under Bankruptcy Code §365(d)(3) that the tenant’s landlord is entitled to the payment of real estate taxes accruing during time periods other than the post-petition, pre-rejection period if it files in the Third Circuit, the Sixth Circuit, or the Ninth Circuit, but only entitled to a prorated portion of those taxes in the Seventh Circuit or the Second Circuit. In Montgomery Ward, the amount of the additional taxes taken out of the hands of the unsecured creditors (which were all paid approximately 30 cents on each $1 of claim) and required to be paid to the landlord at $1 for each $1 of the claim was over $970,000. Any landlord with a tenant in shaky financial condition would be well-advised to seek counsel from its attorneys before billing that tenant for taxes or other amounts due under the lease or, at a minimum, to review the tenant’s lease to determine whether it is possible to engage in any preventive or preemptive planning. Once the tenant files for bankruptcy, the landlord must also engage in some quick planning in order to determine what amounts might be due under the tenant’s lease during the post-petition, pre-rejection period of time. Even in those jurisdictions where the courts side with the Sixth Circuit’s approach, the time period for payments under Bankruptcy Code §365(d)(3) is only 60 days from the order for relief unless the court extends the time period for acceptance or rejection of the lease on a motion made during the 60-day time period. Otherwise the lease is deemed rejected at the end of the 60-day period and, at least according to the court in Duckwall-Alco Stores, supra, all obligations owed to the landlord under Bankruptcy Code §365(d)(3) are fixed as of that date. IV. LANDLORD’S DUTY TO REPAIR AND MAINTAIN A. [7.16] General Rule: Landlord Has No Duty To Repair Gibbons v. Hoefeld, 299 Ill. 455, 132 N.E. 425 (1921), is the case that established the Illinois common-law rules with respect to a landlord’s duty to repair a tenant’s premises. Under Gibbons, a landlord has an obligation to make newly constructed premises tenantable. However, once the landlord has fulfilled this obligation, the landlord has no further duty to repair unless it is otherwise contractually obligated to do so. 132 N.E. at 427.



Absent an agreement to the contrary, Illinois courts today continue to apply this old common-law rule that a landlord has no duty to make repairs to the demised premises. See Forshey v. Johnston, 132 Ill.App.2d 1106, 271 N.E.2d 81, 82 (4th Dist. 1971). Any duty of the landlord to repair the premises arises only by agreement between the landlord and the tenant. Even under such circumstances, a landlord’s covenant to make repairs is independent of the tenant’s obligation to pay rent under the lease. City of Chicago v. American National Bank, 86 Ill.App.3d 960, 408 N.E.2d 379, 381, 42 Ill.Dec. 1 (1st Dist. 1980); Zion Industries, Inc. v. Loy, 46 Ill.App.3d 902, 361 N.E.2d 605, 608 – 610, 5 Ill.Dec. 282 (2d Dist. 1977); Hendricks v. Socony Mobil Oil Co., 45 Ill.App.2d 44, 195 N.E.2d 1, 6 – 7 (2d Dist. 1963). Unless the landlord undertakes the duty to repair, under the common law, the tenant must make repairs to the premises. 24 I.L.P. Landlord and Tenant §321 (1980). The rationale behind this common-law rule is that a tenant in possession of the demised premises is deemed to have superior knowledge of its condition. Hardy v. Montgomery Ward & Co., 131 Ill.App.2d 1038, 267 N.E.2d 748, 752 (5th Dist. 1971). Hardy is discussed in more detail in §7.20 below. For a further statement of the general common-law rule, see A.O. Smith Corp. v. Kaufman Grain Co., 231 Ill.App.3d 390, 596 N.E.2d 1156, 173 Ill.Dec. 277 (3d Dist. 1992) (landlord and tenant disputed responsibility for repair of premises and for damage to premises and tenant’s property stored in premises). The landlord’s liability to the tenant for some of the damage and expenses incurred by the tenant and lack of liability for other damage in Kaufman Grain are discussed in greater detail in §7.25 below. B. [7.17] Exceptions to General Rule of No Duty To Repair Exceptions to the common-law rule that the landlord has no duty to repair a tenant’s premises exist in a number of situations. First, if a landlord voluntarily undertakes to repair, the tenant is relieved of this obligation. Second, if the lease does not expressly delegate responsibility for structural repairs to the tenant, the landlord is obligated to perform such repairs. Third, the landlord remains obligated to complete repairs in common areas over which the landlord retains control. These three exceptions are discussed in §§7.18 – 7.22 below. A fourth exception to the common-law rule, under which a landlord is obligated to repair a latent defect or a known defect fraudulently concealed from a tenant, is considered in §7.25 in the context of a landlord’s tort liability to third parties. 1. [7.18] Landlord’s Express Covenant To Repair A landlord and a tenant may contract around the general rule that a landlord has no duty to make repairs. Such “covenants supersede any implied or common law covenants and become the measure of liability and duty for the respective parties.” McGann v. Murry, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342, 31 Ill.Dec. 32 (3d Dist. 1979) (landlord satisfied its express covenant with respect to initial sealcoating of parking lot, but tenant failed thereafter to properly maintain lot in good condition and thus was liable to landlord for damages after tenancy was terminated). See also Hardy v. Montgomery Ward & Co., 131 Ill.App.2d 1038, 267 N.E.2d 748, 751 (5th Dist. 1971) (tenant sued landlord for damage to its property caused by falling plaster and for cost to repair fallen plaster); Madigan Brothers, Inc. v. Melrose Shopping Center Co., 198 Ill.App.3d 1083, 556 N.E.2d 730, 145 Ill.Dec. 112 (1st Dist. 1990) (tenant sued landlord for breach of



contract when roof of leased premises collapsed due to water damage). It is not unusual in a commercial lease to divide the responsibility for repair and maintenance of the demised premises between the landlord and the tenant, depending on the nature of the demised premises, the type of building housing the demised premises, the number of tenants present in the building, the existence of common areas, and the type of maintenance or repair over which the landlord wishes to retain control. A landlord, however, is not liable for a promise to repair made after the execution of the lease unless that promise is supported by separate consideration. Such a promise is considered an unenforceable “bare” contract, and the landlord will not be liable for the failure to fulfill such a promise. Forshey v. Johnston, 132 Ill.App.2d 1106, 271 N.E.2d 81, 82 (4th Dist. 1971) (when tenancy was from year to year by operation of law without any written or oral evidence of agreement to repair by landlord, and landlord had made no repairs for prior nine years of tenant’s tenancy, there was no obligation on part of landlord to repair fallen plaster). In contrast, when an original builder-landlord contracted with the tenant to provide a premises meeting the requirements of certain plans and specifications for the building that were attached to the lease, the landlord could not escape its contractual liability by assigning the lease to a third party. Intaglio Service Corp. v. J.L. Williams & Co., 95 Ill.App.3d 708, 420 N.E.2d 634, 51 Ill.Dec. 220 (1st Dist. 1981). In Intaglio, the court noted that complete acceptance of the demised premises could result in the tenant’s “waiver of all patent defects, but it is obvious, both from the terms of the lease itself and the subsequent conduct of the parties, that the acceptance of the property was not expected or intended to relieve the [landlord] from its duty either to complete the work pursuant to the contract or to repair defects.” 420 N.E.2d at 639. Thus, a landlord must fulfill its contractual undertaking to perform in a specified manner, whether by task or by reference to particular standards. An example of an agreement to perform work to a particular standard is commonly found in commercial lease work letters, pursuant to which the landlord often agrees to provide for improvements to the demised premises using materials that meet “building standards.” 2. [7.19] Tenant’s Remedies upon Landlord’s Breach of Express Covenant To Repair Several remedies are available to a commercial tenant under Illinois law if the landlord breaches its express covenant to repair. These remedies include abandoning the premises if they are rendered untenantable, bringing an action for damages, making the repairs and either deducting the cost of those repairs from the rent or suing the landlord for the costs, or suing the landlord to recover damages measured by the difference between the rental value of the premises if they had been in repair and the rental value of the premises while out of repair. American National Bank & Trust Company of Chicago v. K-Mart Corp., 717 F.2d 394, 398 (7th Cir. 1983). Some commercial leases contain language obligating a tenant to pay rent “without any set-off, abatement, counterclaim, or deduction whatsoever.” Such language may limit the availability of some of the legal remedies described above that otherwise might be available to a tenant seeking relief as a result of the landlord’s breach of its covenant to repair.



In K-Mart Corp., the tenant sought recovery of expenses it incurred to repair and maintain the roof and parking lot of the demised premises when the landlord breached its covenant to provide such repairs. The tenant also sought damages equal to the diminution of the value of the demised premises. The Seventh Circuit rejected the landlord’s contention that the remedies stated in the lease were the tenant’s exclusive remedies against the landlord, noting that the lease did not state that the remedies specified in the lease were mandatory or exclusive. The lease did clearly state that the tenant had no duty to make any repairs the landlord was required to make. The lease also expressly limited the landlord’s recourse against the tenant, from which the court inferred that when the parties intended to limit their remedies against each other, the lease so stated. 717 F.2d at 398 – 399. If the landlord breaches its covenant to repair, the landlord will be liable for the resulting damages suffered by the tenant. Such damages are calculated “on the difference between the rental value of the premises if kept in a condition of repair required by the landlord’s covenant and the rental value in the condition in which they actually are.” Zion Industries, Inc. v. Loy, 46 Ill.App.3d 902, 361 N.E.2d 605, 612, 5 Ill.Dec. 282 (2d Dist. 1977) (holding neither tenant, which failed to pay its rent, nor landlord, which was unable to fix leaky roof, performed its respective lease obligations, but trial court’s award of damages to tenant based on lost business and damage to customer’s property was reversed for determination based on proper standard). In egregious circumstances, a breach of the landlord’s covenant to repair may be deemed a constructive eviction if a tenant abandons the premises. See American National Bank & Trust Company of Chicago v. Sound City, U.S.A., Inc., 67 Ill.App.3d 599, 385 N.E.2d 144, 145 – 146, 24 Ill.Dec. 377 (2d Dist. 1979). Both Zion Industries and Sound City are discussed in §7.7 above. A general discussion of the topic of constructive eviction is also contained in §§7.5 – 7.9 above. When the lease gives the tenant the right to terminate the lease on account of a breach by the landlord of its agreements under the lease, the tenant’s exercise of that right will be honored. See Castellano v. Wal-Mart Stores, Inc., 373 F.3d 817, 822 (7th Cir. 2004) (holding tenant “was well within its contractual rights in terminating the lease for lessor’s failure to maintain the roof”). 3. [7.20] Landlord’s Obligation To Make Structural or Nonstructural Repairs Even though the tenant is generally obligated to make repairs under the common law, Illinois common law does obligate the landlord to make structural repairs unless that obligation is expressly assumed by the tenant. “A general covenant of the tenant to repair, or to keep the premises in repair, merely binds him to make the ordinary repairs reasonably required to keep the premises in proper condition; it does not require him to make repairs involving structural changes.” Hardy v. Montgomery Ward & Co., 131 Ill.App.2d 1038, 267 N.E.2d 748, 751 (5th Dist. 1971). See also Kallman v. Radioshack Corp., 315 F.3d 731 (7th Cir. 2002) (holding when sub-sublessee failed to properly maintain roof and failed to maintain parking lot and heating and cooling units, and repairs were inadequate and accelerated deterioration of roof, thereby leading to condition that could not be repaired, successor landlord entitled to recover cost of replacement). Often a commercial lease will expressly divide the parties’ responsibilities between structural repairs and nonstructural repairs or between specified types of repairs. However, not every attempt to specify the parties’ respective responsibilities will prevent disputes over whether a given repair involves structural or nonstructural portions of the building.



In distinguishing between structural repairs, which are a landlord obligation, and nonstructural repairs, which are a tenant obligation, the Hardy court defined “structural components” of a building as “floors, joists, rafters, walls and partition studs, supporting columns, [and] foundations.” 267 N.E.2d at 751. Thus, plaster falling from the ceiling was considered to be nonstructural. As a result, the landlord was not liable for the tenant’s property damage, for injuries to the tenant or to others on the premises, or for repairs necessitated by the falling plaster. Id. Responsibility for damage caused by falling plaster was also disputed in Baxter v. Illinois Police Federation, 63 Ill.App.3d 819, 380 N.E.2d 832, 20 Ill.Dec. 623 (1st Dist. 1978), and the court reached the same result as in Hardy. In Baxter, the court held that the landlord was not liable for damage to the tenant’s merchandise caused by the falling plaster even though the tenant had only recently occupied the premises. 380 N.E.2d at 834. A contrary rule applies when the repair at issue is clearly structural. Despite a lease provision imposing on the tenant the obligation to make “all additions, improvements, alterations and repairs,” the court in Expert Corp. v. LaSalle National Bank, 145 Ill.App.3d 665, 496 N.E.2d 3, 4, 99 Ill.Dec. 657 (1st Dist. 1986), held that such broad language did not obligate the tenant to repair or replace a structurally defective wall on the verge of collapse. In applying the common-law rule, the court stated that landlords are responsible for repairs “of a substantial or structural nature” or “made necessary by extraordinary or unforeseen future events not within the contemplation of the parties at the time the lease was executed.” 496 N.E.2d at 5. Use of the word “repair” in the lease did not mean “reconstruction.” Id. Predicting what will be considered a structural repair or an ordinary, nonstructural repair is not always easy. The installation of a heating system has been held to be a structural repair. See Kaufman v. Shoe Corporation of America, 24 Ill.App.2d 431, 164 N.E.2d 617 (3d Dist. 1960). The repair of an underground water main has been held to be an ordinary repair for which the tenant was responsible even though it required excavation of a parking lot and reconstruction of an exterior brick planter. Mandelke v. International House of Pancakes, Inc., 131 Ill.App.3d 1076, 477 N.E.2d 9, 87 Ill.Dec. 408 (1st Dist. 1985). In Mandelke, however, the court’s opinion may have been based more on the lease language, which specifically obligated the landlord to maintain only the roof and exterior walls of the building, rather than on the distinction between a structural repair and a nonstructural repair. 477 N.E.2d at 12. Thus, the determination as to which party is responsible for a particular repair will revolve around whether a repair is substantial or structural in nature and what types of repairs were contemplated or specified in the lease as being the responsibility of the tenant or the landlord at the time the lease was executed. Absent a lease provision placing the burden of structural repairs on the tenant, such repairs are the obligation of the landlord. One might predict that if the lease term is short, a landlord is less likely to be able to impose the obligation of structural repairs on a tenant than if the lease term extends beyond the useful life of most structural components of a building. However, even with a long lease term, placing the burden on the tenant may be difficult, but as seen in Kallman, supra, even if the lease obligates the tenant only to repair and not to replace certain portions of the premises, a breach of the obligation to maintain and repair, thereby leading to a need to replace certain items sooner than might otherwise have been anticipated, it is



possible the tenant may become responsible to replace those items. In Kallman, the successor landlord sued the guarantor of the sub-sublessee on the grounds the sub-sublessee had failed to properly maintain the roof, parking lot, and heating and cooling equipment. The original tenant had subleased the premises, and although the court does not quote the sublease, under that sublease, the subtenant was apparently assigned the obligation to repair these items, and when the evidence showed the condition of these items at the time the sub-subtenant (Color Tile) declared bankruptcy demonstrated that the only reason they were in the condition they were in was because Color Title had failed to repair them or so poorly repaired them, Color Tile had breached the lease. As a result, Color Tile’s guarantor, Radioshack Corporation, was held responsible for the costs to replace the roof, parking lot, and heating and cooling equipment. 315 F.3d at 739 – 740. In Sandelman v. Buckeye Realty, Inc., 216 Ill.App.3d 226, 576 N.E.2d 1038, 160 Ill.Dec. 84 (1st Dist. 1991), the landlord and the tenant disagreed as to which one of them had the obligation to repair and replace the roof of the demised premises under a long-term (70-year) lease. Under Illinois law, such a repair is generally considered an “extraordinary” or “structural” repair, the expense and responsibility of which are borne by the landlord, unless the lease otherwise clearly shifts the burden to the tenant. See Hardy, supra. While stating that it was applying the general rule, the Sandelman court noted that a tenant’s covenant to maintain the premises in “good repair” did not obligate the tenant to undertake structural repairs. Further, the dictionary definition of “repair” did not encompass the concept of “replacement.” 576 N.E.2d at 1040. Consequently, the court held the landlord liable for replacement of the roof. The Sandelman court did not discuss whether the length of the lease term should have any impact on the determination as to which party bears the responsibility for the cost of the roof replacement. However, the trial court did consider this factor and determined that the lease at issue did not plainly shift the burden of responsibility for this type of repair from the landlord to the tenant even though replacement of a roof is a foreseeable, and hence not an extraordinary, occurrence during a 70-year lease term. Id. Thus, when considering long-term leases exceeding the useful life of any improvements on the land (or major components of such improvements), landlords and their counsel should draft “repair” provisions carefully to allocate responsibility properly for anticipated (as well as unanticipated) structural or other major repairs or replacements if they wish to place the responsibility on their tenants. 4. [7.21] Improvements Made on Landlord’s Behalf At common law, a landlord is not liable to a tenant for the value of any improvements the tenant voluntarily makes to the leased premises. Lewis v. Real Estate Corp., 6 Ill.App.2d 240, 127 N.E.2d 272, 277 (1st Dist. 1955) (lessee’s right to reimbursement for improvements exists only when there is specific arrangement). However, if a landlord agrees with the tenant that it will make an improvement or ratifies the tenant’s action in making an improvement for the landlord’s benefit, an agency relationship arises, and the landlord is obligated to pay for the improvements or to reimburse the tenant for the value of those improvements. Johnston v. Suckow, 55 Ill.App.3d 277, 370 N.E.2d 650, 653, 12 Ill.Dec. 846 (5th Dist. 1977) (landlord must pay tenant investigation expenses and attorneys’ fees and indemnify tenant when landlord authorized work on leased premises but failed to pay third party for work and third party sued tenant).



5. [7.22] Landlord’s Duty To Maintain Common Areas When a landlord undertakes contractually to provide rights in common to multiple tenants, the landlord has an obligation to maintain those rights equally among all interested tenants. In the commercial context, problems often arise in a shopping center when multiple tenants have common and competing interests in continuous, undisturbed, and equitable maintenance of parking facilities and mall areas. A landlord will be liable to any tenant for any encroachment or interference with these rights. The landlord’s conduct may also be enjoined by a tenant because such rights in common are an important factor in inducing a prospective tenant to execute a lease. Illinois caselaw also establishes that a tenant obtains an irrevocable easement in common areas identified in a lease unless the landlord reserves a right to change common areas. These rules have been articulated in several cases. In The Fair v. Evergreen Park Shopping Plaza of Delaware, Inc., 4 Ill.App.2d 454, 124 N.E.2d 649 (1st Dist. 1954), a landlord constructed a glass bay window addition to a new tenant’s demised premises that projected into a mall area. The court remarked that “[t]he right of ingress and egress upon and over the property . . . is essential to the full beneficial use and enjoyment of the demised premises. . . . It is an easement appurtenant to the demised premises and passes by a lease without any additional words.” 124 N.E.2d at 654. In successfully enjoining the landlord from maintaining the bay window, the complaining tenant argued that the window gave a distinct competitive advantage to a new tenant in the shopping center by providing greater advertising area and store facade prominence at the expense of the complaining tenant. 124 N.E.2d at 656. In Madigan Brothers, Inc. v. Melrose Shopping Center Co., 123 Ill.App.3d 851, 463 N.E.2d 824, 79 Ill.Dec. 270 (1st Dist. 1984), a tenant successfully enjoined its landlord from erecting a restaurant or other building in the shopping center’s parking lot. The lease specifically gave the tenant an easement in the parking lot during the lease term, and an exhibit of the parking area was attached. Under these facts, the court held that only an explicit and specific grant or reservation by the landlord of a right to rearrange the common areas would have rendered the tenant’s lease easement “moveable.” 463 N.E.2d at 828. In Walgreen Co. v. American National Bank & Trust Company of Chicago, 4 Ill.App.3d 549, 281 N.E.2d 462 (1st Dist. 1972), the tenant successfully enjoined the landlord’s construction of a Fotomat kiosk in the parking lot of a shopping center because the lease of the premises gave the tenant a right to use a minimum square footage and number of parking spaces and did not reserve to the landlord the right to expand the shopping center into the area in which the parking lot was located. The court held that the landlord’s conduct breached the tenant’s lease and violated the tenant’s appurtenant easement. Since “deprivation of a property right, the elimination of parking spaces, and the potential disruption of travel constitute[d] an irreparable injury,” the tenant was entitled to an injunction. 281 N.E.2d at 468. See also Meadowdale Shopping Center, Inc. v. Meadowdale Lanes, Inc., 89 Ill.App.2d 250, 231 N.E.2d 466 (2d Dist. 1967) (abst.) (bowling alley tenant entitled to injunction barring landlord from constructing proposed theatre on shopping center parking lot under lease that granted tenant right to uninterrupted use of entire shopping center’s parking, driving, and walking areas and precluded landlord from constructing additional buildings on parking lot without providing additional parking spaces to compensate for new building).



The court in Mutual of Omaha Life Insurance Co. v. Executive Plaza, Inc., 99 Ill.App.3d 190, 425 N.E.2d 503, 507, 54 Ill.Dec. 638 (2d Dist. 1981), ruled that the lease language at issue created “an easement appurtenant by express contract.” The lease provided that the tenant and its employees and others having business with the tenant had the right in common with others occupying space in the premises to use the parking area provided by the landlord. The court held that the landlord could not substantially reduce or alter that easement, and the landlord’s attempt to reserve a portion of the parking lot to the exclusive use of a new tenant violated the plaintiff-tenant’s right to park anywhere in the lot. According to the court, a “grant of an easement appurtenant . . . is a proper subject of mandatory injunction even if only minor interference is shown.” Id. A somewhat related issue was considered in Goldblatt Brothers, Inc. v. Addison Green Meadows, Inc., 8 Ill.App.3d 490, 290 N.E.2d 715 (1st Dist. 1972). In Goldblatt, the tenant relied on a particular lease provision as the basis for its claim that the landlord had granted it an exclusive easement in the common areas. The provision relied on by the tenant required the landlord to construct a parking lot to accommodate 1,000 cars for the free use of customers, employees, suppliers, and invitees of the shopping mall. The tenant, a general merchandise store, argued that the landlord violated the exclusive nature of this provision by permitting customers of an adjacent competitor to use the parking lot. The court acknowledged that the lease granted the tenant an easement for the use of the parking lot, but it held that the provision did not grant the tenant an exclusive easement. According to the court, the plain language of the grant and the absence of the term “exclusive” did not create an ambiguity that required an interpretation by the court. 290 N.E.2d at 720. Factors such as nonuse of the easement, lack of particular words granting an easement, failure to mark parking spaces, or an unrecorded deed and plot plan could not deprive a tenant of an easement if the intention of the parties indicated a grant of easement. Pacemaker Food Stores, Inc. v. Seventh Mont Corp., 117 Ill.App.3d 636, 453 N.E.2d 806, 813, 72 Ill.Dec. 931 (2d Dist. 1983) (shopping center landlord enjoined from converting tenant’s parking easement into roadway). In a reversal of the more typical roles seen in the other cases cited above in which the tenant was suing the landlord for breach of the lease covenants, the landlord in LaSalle Bank National Ass’n v. Moran Foods, Inc., 477 F.Supp.2d 932 (N.D.Ill. 2007), went on the offensive by seeking a declaratory judgment it had the right to construct another building on a corner of the shopping center despite the language of the tenant’s lease that gave the tenant “the absolute right to prohibit Lessor from constructing any buildings in the Shopping Center in any locations other than the building locations shown [on] Exhibit A.” 477 F.Supp.2d at 937. The landlord lost its attempt to unilaterally modify the lease, when it could not provide any credible evidence that the tenant had approved the new building plan, and also lost its claim the tenant tortiously interfered with the landlord’s contractual or prospective arrangements with tenants for the new building when it could provide no evidence the tenant had any contact with either entity. 477 F.Supp.2d at 939 – 940. To make matters worse for the landlord, the court also held the tenant was entitled to summary judgment on its counterclaim for breach of contract. 477 F.Supp.2d at 935, 941. The



court had little sympathy for the landlord’s pleas that the tenant should be required to be reasonable in granting or withholding its consent to the landlord’s request to construct another building stating

Plaintiffs, as the lessors, agreed to condition the initiation of future construction on the property during the ten-year term of the Lease on [the tenant’s] approval. This was intended to protect [the tenant’s] visibility, parking, and signage, which does not offend public policy. Any burden plaintiffs claim on their ownership as a result of the Lease was their own doing. 477 F.Supp.2d at 938 – 939.

Further, by choosing to sue the tenant claiming the right to construct a building on the common areas of the shopping center, a claim that the landlord lost, the LaSalle landlord may have unintentionally encouraged or invited the tenant to assert a claim for damages arising out of another independent breach of the lease by the landlord. The landlord had already allowed another party (his wife) to construct a gas station on an adjoining lot that was not part of the shopping center and, thus, theoretically not subject to the provision of the lease giving the tenant the right to consent. Unfortunately for the landlord, a survey commissioned by the tenant showed the gas station’s pumps encroached on to the common areas of the shopping center by about 16 feet and the canopy over the pumps encroached (or overhung) the common areas by about 29.5 feet. This allowed the tenant to claim the landlord violated the provisions of the lease prohibiting the landlord from granting “any rights with respect to the Common Facilities or permit[ting] the use thereof by persons other than the tenants and occupants of the Shopping Center” and from changing the common areas “in any manner without the prior written consent of Lessee.” 477 F.Supp.2d at 941. The tenant also claimed this breach by the landlord violated the covenant of quiet enjoyment in the lease, which granted the tenant the right to terminate the lease. Id. The landlord did not dispute the existence of the breach by reason of the encroachments; it only disputed the materiality, and therefore termination was not an appropriate remedy. 477 F.Supp.2d at 942. Fortunately for the landlord, the court held there was a genuine dispute regarding the damages, if any, suffered by the tenant as a result of the gas station encroachments and did not grant the tenant’s motion for summary judgment on this issue. Id. The lesson for the landlord in LaSalle, and for other landlords in similar situations, is quite clear — do not violate the provisions of a lease with respect to a shopping center tenant’s rights to the common areas. Retail tenants are particularly sensitive to such issues as they depend on visibility and access to keep generating high sales volume, and they often demand clauses such as those found in the LaSalle lease. In LaSalle, the tenant claimed its sales declined while the gas station was being constructed and continued to decline after it was completed and that the gas pumps impacted the visibility, parking, and access to its store. 477 F.Supp.2d at 936. Retail leases and restrictive provisions demanded by tenants are discussed in Chapter 1 of this handbook. C. Landlord’s Tort Liability for Property Damage and Injury to Tenants and Third

Parties 1. [7.23] General Rule: No Liability for Personal Injury or Property Damage As a general rule, after a landlord relinquishes control and possession of the premises to a tenant, the landlord is not liable to its tenant or to any third parties for damages to or injuries



caused by the tenant’s negligence or arising from a defective condition of the premises that are under the tenant’s control during the term of the lease. Watts v. Bacon & Van Buskirk Glass Co., 20 Ill.App.2d 164, 155 N.E.2d 333, 336 – 337 (3d Dist. 1958). See also Gilley v. Kiddel, 372 Ill.App.3d 271, 865 N.E.2d 262, 309 Ill.Dec. 899 (2d Dist. 2007); Bourgonje v. Machev, 362 Ill.App.3d 984, 841 N.E.2d 96, 107, 298 Ill.Dec. 953 (1st Dist. 2005); Coshenet v. Holub, 80 Ill.App.3d 430, 399 N.E.2d 1022, 35 Ill.Dec. 733 (2d Dist. 1980) (landlord not liable for personal injuries if building is leased entirely to one tenant and lease specifically requires tenant to make repairs); Olin L. Browder, The Taming of a Duty — The Tort Liability of Landlords, 81 Mich.L.Rev. 99, 116 – 118 (1982). Thus, the rule of caveat emptor “still remains a part of landlord-tenant law” in Illinois. Dapkunas v. Cagle, 42 Ill.App.3d 644, 356 N.E.2d 575, 580, 1 Ill.Dec. 387 (5th Dist. 1976). But see Demos v. Ferris-Shell Oil Co., 317 Ill.App.3d 41, 740 N.E.2d 9, 251 Ill.Dec. 179 (1st Dist. 2000) (discussed in §7.24 below). Likewise, there are cases holding the landlord is not liable for injuries suffered by third parties as a result of torts committed by their tenants. See, e.g., Klitzka v. Hellios, 348 Ill.App.3d 594, 810 N.E.2d 252, 259, 284 Ill.Dec. 599 (2d Dist. 2004) (landlord not liable for injuries to neighborhood child suffered in attack by tenant’s dog when landlord had no control over area where attack occurred — inside tenant’s premises). There are many cases holding that the landlord under a residential lease is not liable for personal injury to its tenants arising out of defects in the premises. See, e.g., Lamkin v. Towner, 138 Ill.2d 510, 563 N.E.2d 449, 150 Ill.Dec. 562 (1990); Henstein v. Buschbach, 248 Ill.App.3d 1010, 618 N.E.2d 1042, 188 Ill.Dec. 472 (1st Dist.), appeal denied, 153 Ill.2d 559 (1993); Laster v. Chicago Housing Authority, 104 Ill.App.3d 540, 432 N.E.2d 1185, 60 Ill.Dec. 286 (1st Dist. 1982). In Henstein, even though the plaintiff alleged in her original complaint that the landlord promised to install “suitable screens” and proposed to amend her complaint to allege that the landlord promised “to install screens properly mated with the existing . . . frame window system,” the appellate court upheld the trial court’s dismissal of her complaint and denied the plaintiff’s motion to vacate the dismissal order. 618 N.E.2d at 1043. In its discussion, the Henstein court relied on the general rule set out in Lamkin, an earlier Illinois Supreme Court case. The Lamkin court held a residential landlord was not liable for injuries suffered by children who fell from their apartment windows when there was no evidence to suggest the landlord retained any control over tenants’ premises or contracted to keep any portion of the premises that was under tenants’ control in repair. 563 N.E.2d at 453. According to the Henstein court, the landlord had not agreed to provide the apartment with childproof screens or sufficient safeguards against a child falling from a window merely by agreeing to provide suitable aluminum screens. 618 N.E.2d at 1043 – 1045. The Henstein court read the Lamkin opinion as requiring the landlord to have expressly contracted “to provide restraints on windows sufficient to protect a child from falling” in order to fall outside the general common law relieving landlords from liability. 618 N.E.2d at 1045, citing Lamkin, 563 N.E.2d at 449. Thus, the Henstein court found that the landlord’s promises, as alleged by the plaintiff, did not rise to the level required to fit within the Lamkin exception. 618 N.E.2d at 1045. In a similar case, an apartment complex management company was held not to owe a duty to a tenant to protect her child from falling through an opened, screened window despite the



company’s awareness that at least three children had previously fallen through windows in the same building. Best v. Services for Cooperative & Condominium Communities, 256 Ill.App.3d 462, 629 N.E.2d 123, 195 Ill.Dec. 815 (1st Dist. 1993) (following Lamkin, supra). Similarly, even though common law requires a local public entity to maintain public property in a reasonably safe condition, the Chicago Housing Authority was held not liable to repair a broken window lock in one of its apartments and thus not liable to the tenant for injuries suffered by her child who fell out of the unlocked window. McCoy v. Chicago Housing Authority, 333 Ill.App.3d 305, 775 N.E.2d 168, 266 Ill.Dec. 606 (1st Dist. 2002) (because Chicago Housing Authority followed pattern of not making repairs to its tenants’ apartments and tenant’s lease contained no agreement to provide repairs, Chicago Housing Authority had no duty to repair, and tenant had no reasonable basis to expect Chicago Housing Authority to repair, broken window lock). For application of this general rule to other types of injuries suffered by minor children, see Gengler v. Herrington, 219 Ill.App.3d 6, 579 N.E.2d 412, 161 Ill.Dec. 864 (2d Dist. 1991) (landlord not liable in suit on behalf of tenant’s child burned by hot tap water), and Vesey v. Chicago Housing Authority, 145 Ill.2d 404, 583 N.E.2d 538, 164 Ill.Dec. 622 (1991) (landlord not liable for injuries sustained by tenant’s child burned by unprotected steam pipe in premises). Following the same principles as McCoy and Lamkin, on a motion for summary judgment filed by the landlord, the Gilley, supra, court held the landlord was not liable for injuires suffered by a visitor to the tenant’s premises when she slipped and fell down stairs in the premises. 865 N.E.2d at 264. Not only did the lease specifically require the tenant to maintain and repair the premises, but also the defects in the stair the plaintiff argued had caused her to slip and fall had been repaired by the tenant, and there was no evidence the landlord actually had performed any repairs in the premises. 865 N.E.2d at 269. There are fewer recent cases in the commercial context. The best general statement of the legal principles with respect to the general rule and exceptions to the rule relating to a landlord’s liability for personal injury or property damage can be found in Wright v. Mr. Quick, Inc., 109 Ill.2d 236, 486 N.E.2d 908, 911, 93 Ill.Dec. 375 (1985), although the case involved a claim by an employee of a tenant’s sublessee and was not a suit against a landlord directly. Wright is discussed in §7.28 below. See also Wells v. Great Atlantic & Pacific Tea Co., 171 Ill.App.3d 1012, 525 N.E.2d 1127, 121 Ill.Dec. 820 (1st Dist. 1988) (a property owner generally owes no duty to remove snow or ice that accumulates naturally on the premises). See also discussion in §7.27 below regarding the Snow and Ice Removal Act, 745 ILCS 75/0.01, et seq., adopted in 1990. Even though most of the cases cited above involve residential tenancies, the opinions may prove instructive to counsel advising the commercial landlord. In addition, two cases have applied the general rule as articulated in Wright in the context of commercial leases. See Buente v. Van Voorst, 213 Ill.App.3d 116, 571 N.E.2d 513, 156 Ill.Dec. 729 (3d Dist. 1991); Almendarez v. Keller, 207 Ill.App.3d 756, 566 N.E.2d 441, 152 Ill.Dec. 754 (1st Dist. 1990) (negligence action by minor employee of commercial tenant injured by allegedly dangerous meat grinder on leased premises against landlord). In Buente, supra, the general rule was applied by the court to dismiss a negligence action brought by an employee of a commercial tenant against the tenant’s landlord for injuries the



employee sustained in a fall from a scaffolding he was standing on while trying to replace some ceiling tiles on the premises. The court found the plaintiff had not pled any facts to suggest that any of the exceptions to the general rule applied, nor were any facts alleged to show that the landlord had charge of the work that led to the plaintiff’s injury. 571 N.E.2d at 514. In Almendarez, supra, the mere fact the landlord had keys to the premises and a fuse box for the entire building was located in the tenant’s premises was not sufficient as a matter of law to show that the landlord retained control over the tenant’s premises. 566 N.E.2d at 444. Likewise, a lease provision that allowed the landlord to terminate the lease if the meat market tenant conducted any unlawful practice on the premises did not make the landlord liable to the injured minor who had been unlawfully employed by the tenant. There was no evidence that the landlord had control over the meat market sufficient to discover the minor’s illegal employment and terminate it. Thus, the landlord was entitled to summary judgment in its favor. 566 N.E.2d at 445. Both Buente and Almendarez involved claims arising out of defects or dangerous items of equipment or personal property placed in the premises by the tenant rather than defects or dangerous conditions in the premises or the buildings themselves. However, the opinions in both cases relied heavily on the earlier cases cited above discussing the common law with respect to a landlord’s obligation to repair a tenant’s premises. There are a number of exceptions to the general rule that a landlord is not liable to third parties on the premises after control is transferred to the tenant. These exceptions are discussed in §§7.24 – 7.27 below. The application of the general principles in the context of the relationship between a tenant and its subtenant is also briefly discussed in §7.28 below. Limitations on a landlord’s ability to exculpate itself from all liability to third parties imposed by statute and prior caselaw, including those leases in which the landlord relinquishes all control of the premises to the tenant or transfers its interest in the premises to a new landlord, are discussed in §§7.30 – 7.33 below. An emerging area of the law, the landlord’s liability for the criminal acts of third parties, another of the exceptions to the general rule that a landlord is not liable to third parties, is discussed in detail in §§7.34 – 7.39 below. The opinion in Rowe v. State Bank of Lombard, 125 Ill.2d 203, 531 N.E.2d 1358, 126 Ill.Dec. 519 (1988) (landlord’s failure to maintain adequate control over master keys to tenants’ premises was breach of landlord’s duty to take reasonable precautions to prevent unauthorized entries), which is discussed in §7.38 below, contains a general statement with regard to the landlord’s liability for the criminal acts of third parties. 2. [7.24] Exception to General Rule for Injuries Within Tenant’s Premises When

Landlord Retains Control Despite the general rule that the tenant, not the landlord, is liable for injuries sustained by third parties due to the disrepair of the leased premises that are under a tenant’s control, a landlord’s continued use and maintenance of leased premises may raise a genuine issue of material fact as to whether the landlord actually relinquished control and possession of the premises to the tenant. If the landlord failed to do so, it may become liable for injuries to third parties. See Demos v. Ferris-Shell Oil Co., 317 Ill.App.3d 41, 740 N.E.2d 9, 251 Ill.Dec. 179 (1st



Dist. 2000); Guerino v. Depot Place Partnership, 273 Ill.App.3d 27, 652 N.E.2d 410, 209 Ill.Dec. 870 (2d Dist. 1995); Kuhn v. General Parking Corp., 98 Ill.App.3d 570, 424 N.E.2d 941, 54 Ill.Dec. 191 (1st Dist. 1981). See also Sons v. Taylor, 219 Ill.App.3d 923, 579 N.E.2d 1281, 162 Ill.Dec. 467 (5th Dist. 1991) (genuine issue existed as to extent and nature of repairs that had been previously performed and as to respective obligations of occupants and owners to conduct repairs and maintenance when no written lease existed; trial court erred in granting summary judgment to owners in suit by appliance service technician who fell through stairs of residence while on service call). In Guerino, supra, one of the tenant’s employees was injured when he opened a gate on the premises. He sued his employer and the landlord. 652 N.E.2d at 412. On appeal, the court held that the landlord’s repair of the premises created a genuine issue of material fact as to whether the landlord relinquished control and possession of the premises. This precluded summary judgment in the landlord’s favor. 652 N.E.2d at 413. Although the lease obligated the tenant to repair and maintain the premises, it also permitted the landlord to enter and make repairs to the premises. Under the lease, the tenant agreed to indemnify the landlord from any claims arising out of the lease or occupancy of the premises. During the lease term, however, the landlord had made improvements to the yard and the building and paid $15,000 for other repairs on the premises. 652 N.E.2d at 412. In Kuhn, supra, a tenant’s employee who was injured in a fall on broken floor tile established that the landlord retained control over the floor of the demised premises and thus was responsible for the repair of the broken tile even though a lease provision placed the duty to repair on the tenant. 424 N.E.2d at 945 – 946. Evidence of the landlord’s control, as determined by the court, included a building policy pursuant to which the building manager would arrange for repairs of the type in question and the fact that the building manager had completed the procedures necessary to repair the tile but had not yet completed the repair prior to the employee’s injury. The court held that the landlord’s control over the floor tiles and its failure to repair could be the basis for the plaintiff’s injuries and the trial court properly denied the landlord’s and its managing agent’s motion for a directed verdict on the issue of liability. 424 N.E.2d at 946. In Demos, supra, the appellate court acknowledged the general rule in Illinois that a landlord “is not liable for injuries caused by the dangerous or defective conditions on the premises leased to a tenant.” 740 N.E.2d at 14 (citing Rowe v. State Bank of Lombard, 125 Ill.2d 203, 531 N.E.2d 1358, 126 Ill.Dec. 519 (1988), discussed in §7.38 below). However, in this case, the court agreed with the plaintiff’s arguments that although the tenant “assumed control over the day-to-day operations at the station, Shell [Oil Company] voluntarily assumed the duty of safety with regard to the Ferris station.” 740 N.E.2d at 16. The factors relied on by the court were that Shell required the tenant to obtain its permission before purchasing equipment for use on the premises, Shell’s representatives worked closely with the dealers on safety and environmental issues, Shell provided training, made weekly or monthly inspections for unsafe conditions, Shell required dealers to install free air machines (like the one involved in the plaintiff’s injuries), and Shell required warning decals on equipment that could be dangerous (such a decal was on the equipment involved in the plaintiff’s injuries). 740 N.E.2d at 15 – 16. Nevertheless, Shell was held not liable to the plaintiff because there was not sufficient evidence Shell breached its duty of



care to the plaintiff and “therefore, could not have proximately caused the injuries.” 740 N.E.2d at 18. Rather, the evidence showed that the plaintiff’s injuries, caused when a tire he was filling with air from the station’s free air machine exploded, would not have occurred “if in fact the tire had been properly mounted and the tire and rim properly fitted.” Id. Based on the foregoing authorities, a landlord should protect itself against the possibility of control and possession being raised as an issue of fact by not remaining involved in the maintenance of the tenant’s demised premises to such an extent that it appears the landlord has not relinquished control and possession of the premises. Assuming control and possession of the premises have passed to the tenant, the landlord’s and the tenant’s respective liability for injuries or property damage will follow their respective obligations to repair or maintain the premises set out in the lease or under the common law. Thus, a tenant in possession is liable for injuries to third parties resulting from its failure to keep the premises in repair when required to do so under the lease. Wright v. Mr. Quick, Inc., 109 Ill.2d 236, 486 N.E.2d 908, 909, 93 Ill.Dec. 375 (1985). However, a landlord may not be excused from liability to an injured third party, even for injuries within the tenant’s demised premises, if the injury arises out of the failure to correct code violations. See Lombardo v. Reliance Elevator Co., 315 Ill.App.3d 111, 733 N.E.2d 874, 248 Ill.Dec. 199 (1st Dist. 2000). The landlord’s liability for injuries to third parties caused by code violations and Lombardo are discussed in §7.26 below. 3. [7.25] Exception to General Rule for Injuries Caused by Latent Defects,

Landlord’s Failure To Repair, Concealment of Defects, or Negligent Repairs Even when the landlord has relinquished possession and control of the premises to its tenant, there are four exceptions to the general rule of landlord non-liability that have been cited frequently. Thus, a landlord will be liable for injury to third parties or to its tenant if a. a latent defect exists at the time the premises are leased and the defect is known or should

have been known to the landlord in the exercise of reasonable care and could not have been discovered on a reasonable examination of the premises by the tenant;

b. the landlord fraudulently conceals a known dangerous condition from a tenant; c. the defect causing the harm, in law, amounts to a nuisance; or d. the landlord promises the tenant at the time the lease is entered into that it will repair the

premises. Thorson v. Aronson, 122 Ill.App.2d 156, 258 N.E.2d 33, 34 – 35 (2d Dist. 1970); Hendricks v. Socony Mobil Oil Co., 45 Ill.App.2d 44, 195 N.E.2d 1 (2d Dist. 1963). See also Baxter v. Illinois Police Federation, 63 Ill.App.3d 819, 380 N.E.2d 832, 835, 20 Ill.Dec. 623 (1st Dist. 1978) (landlord is not responsible for injuries sustained on demised premises by reason of defective condition unless landlord possessed actual knowledge of defect and failed to disclose its existence to tenant and defect could not have been discovered by tenant on reasonable inspection “at least in the absence of an express agreement by the landlord to make repairs”). But see Giger v. Mobil Oil Corp., 823 F.2d 181, 182 – 183 (7th Cir. 1987) (tenant knew at time of contract that ice



formed in catch basin due to improper drainage; accordingly, this was not latent defect creating landlord liability for third party’s fall on ice); A.O. Smith Corp. v. Kaufman Grain Co., 231 Ill.App.3d 390, 596 N.E.2d 1156, 1160, 173 Ill.Dec. 277 (3d Dist. 1992) (when lease made tenant responsible for “all repairs, ordinary and extraordinary,” and there was no evidence landlord was aware of problems with downspouts that allegedly caused water damage to tenant’s crops stored in warehouse, no exception to general rule that tenant has duty to inspect premises to determine safety and suitability and landlord’s liability for latent defects exception applied and landlord was not liable for such damage); Housh v. Swanson, 203 Ill.App.3d 377, 561 N.E.2d 321, 149 Ill.Dec. 43 (2d Dist. 1990) (tenant’s actual knowledge of loose antenna wire meant no issue of fact existed as to whether latent defect exception to general rule applied, and landlord was not liable for injuries to third party caused by loose antenna wire). Other cases have also held the landlord liable for its negligence in making repairs and for injuries caused as a result of its negligence or failure to repair. See Kamp v. Preis, 332 Ill.App.3d 1115, 774 N.E.2d 865, 266 Ill.Dec. 426 (5th Dist. 2002); Kaufman Grain, supra; O’Rourke v. Oehler, 187 Ill.App.3d 572, 543 N.E.2d 546, 135 Ill.Dec. 163 (4th Dist. 1989). A landlord who retains control over common areas, rents space in a building to multiple tenants, or makes repairs pursuant to a contractual or voluntary undertaking has a duty to exercise ordinary or reasonable care in completing any repairs even when the tenant is obligated to make repairs under the lease. Watts v. Bacon & Van Buskirk Glass Co., 20 Ill.App.2d 164, 155 N.E.2d 333, 336 – 337 (3d Dist. 1958). In Kaufman Grain, supra, while the landlord was not responsible under the lease to maintain or repair the building sprinkler system, it voluntarily disabled the system by turning it off at a remote location. As a result, it assumed a duty to perform the work in a nonnegligent manner and was liable to the tenant for the damages it suffered as a result of having negligently failed to drain the pipes, which later froze and burst, causing damage to the tenant’s grain stored in the building. 596 N.E.2d at 1161 – 1162. In O’Rourke, supra, the facts at trial, based on the testimony of the farm owner-landlord and the tenant, clearly showed that the landlord had always been responsible for the maintenance and repair of the farm buildings, had contracted with a painting company to paint some of the farm buildings, and had previously authorized the tenant to replace bare outside electrical wires. Thus, the court found there was a question of fact as to whether the landlord had knowledge of the corroded, bare, overhead wires that were the apparent cause of the electrocution death of the painting company’s employee, and the trial court erred in granting summary judgment to the landlord. 543 N.E.2d at 552. In Watts, supra, the plaintiffs were injured when a door that had been installed at the entrance to a drugstore by the landlord and that was made of untempered glass shattered when they opened it. The door had been replaced initially during a remodeling project conducted by the landlord and had already been broken once by someone striking the glass in the door. The court ruled that the plaintiffs were entitled to a new trial as to the landlord’s negligence when the evidence showed the landlord knew that the particular type of glass door installed was not suitable. Also, the landlord, by voluntarily installing and repairing the door, became responsible to perform the work



in a manner that would guard against reasonably foreseeable or probable injury naturally flowing from the work. Thus, the trial court had erred in directing a verdict for the landlord. 155 N.E.2d at 337. In Kamp, supra, a guest of an apartment tenant was injured when an outside second-floor deck on which the guest was standing collapsed. 774 N.E.2d at 869. The guest sued the landlord, claiming the landlord negligently allowed the deck to become unsafe and negligently allowed it to be used either without warnings as to maximum occupants or while it was insufficiently attached or supported. 774 N.E.2d at 873. After the jury found the landlord liable, the landlord filed a motion for a judgment notwithstanding the verdict or a new trial, both of which requests were denied, and the landlord appealed. 774 N.E.2d at 870. On appeal, the Fifth Circuit court did not discuss the Illinois law with respect to a landlord’s duties and liabilities arising out of the condition of the leased premises. Rather, it focused on the standards for setting aside jury verdicts or ordering a new trial, holding the evidence did not so “overwhelmingly favor [the landlord] that a contrary verdict [in favor of the tenant’s guest] would never stand.” 774 N.E.2d at 877. Kamp appears to be a case in which neither the court nor the parties’ arguments focused on the general rules with respect to the liability of landlords to their tenants or third parties arising out of an alleged defective condition in the premises or the exceptions to those general rules. Instead, because the landlord (two individuals) owned a construction company that had initially constructed the apartment building and deck, the defense’s arguments for the judgment notwithstanding the verdict or new trial appeared to have relied heavily on the various state statutes of limitation on liability for defects in construction the landlord argued prevented the guest from bringing a claim against the landlord, rather than on any other bases for the landlord to avoid liability, and when the court held those statutes of limitation were inapplicable under the facts, there was little basis for denying liability. 744 N.E.2d at 872 – 874. Thus, while Kamp is a more recent case than the others cited, it may be of little precedential value for determining the liability of other landlords to their tenants or guests when there are defective conditions in the premises that cause injury. For a further discussion of a landlord’s liability for negligent repairs and other negligent acts and omissions see §§7.30 – 7.33 below. See also Jordan v. Savage, 88 Ill.App.2d 251, 232 N.E.2d 580, 586 (1st Dist. 1967) (landlord liable for negligent performance of oral promise to repair banister along stairway to tenant’s premises). But see Lamkin v. Towner, 138 Ill.2d 510, 563 N.E.2d 449, 150 Ill.Dec. 562 (1990) (landlord not liable for injuries sustained by children who fell from windows in premises), and the other cases cited in §7.23 above. 4. [7.26] Exception to General Rule for Injuries Resulting from Code Violations Another exception to the general rule of landlord immunity applies to “injury result[ing] from the violation by the landlord of a statute or ordinance which prescribes a duty for protection and safety of persons or property.” 24 I.L.P. Landlord and Tenant §363, p. 427 (1980). However, the individual claiming the protection of the statute or ordinance must be within the class of persons intended to be protected. Mangan v. F.C. Pilgrim & Co., 32 Ill.App.3d 563, 336 N.E.2d 374 (1st Dist. 1975). Furthermore, when the landlord is not in control of the premises, a cause of action under an ordinance cannot normally be pursued against the landlord. Coshenet v. Holub, 80 Ill.App.3d 430, 399 N.E.2d 1022, 1024, 35 Ill.Dec. 733 (2d Dist. 1980); Dapkunas v. Cagle, 42 Ill.App.3d 644, 356 N.E.2d 575, 597, 1 Ill.Dec. 387 (5th Dist. 1976).



Nevertheless, a landlord can become liable for the foreseeable consequences of its negligence in the maintenance or control of the premises in violation of applicable codes or ordinances. In Chem-Pac, Inc. v. Simborg, 145 Ill.App.3d 520, 495 N.E.2d 1124, 99 Ill.Dec. 389 (1st Dist. 1986), a landlord owned adjoining buildings, which shared a common firewall, and leased one building to a tenant. The vacant building was subsequently cited for municipal building code violations, and the landlord was ordered to make all necessary repairs in order to bring the building into compliance. The landlord also apparently had noticed that trespassers had access to the vacant building, and yet it failed to hire a watchman to guard the building, as required by city ordinance. A fire occurred in the vacant building, presumably started by trespassers using some type of fire accelerant. The fire spread to the leased building and destroyed the demised premises. The court determined there was sufficient evidence to support the jury’s determination that the fire was a result of the landlord’s negligence and awarded damages to the tenant. The court further stated that the landlord could not impose a duty of maintenance on the tenant of the adjoining building when the tenant was not obligated to maintain the vacant building either by contract or common law. 495 N.E.2d at 1126. Likewise, in Lombardo v. Reliance Elevator Co., 315 Ill.App.3d 111, 733 N.E.2d 874, 248 Ill.Dec. 199 (1st Dist. 2000), a landlord was liable to the employee of a bank tenant who was injured by a lift that fell from the street level to the basement when a defective cable snapped while the employee was riding on it. The court found the landlord liable despite the bank’s contractual responsibility with the landlord to repair and maintain the lift and the fact that a village inspector had noted that the cable should be replaced within a month on an inspection report mailed to the bank but not to the landlord following an inspection done a year earlier. 733 N.E.2d at 877 – 878. It was undisputed that the bank had not replaced the defective cable, that the landlord had never been given actual notice of the defective cable, and that a subsequent inspection by a new inspection company hired by the village had not noted the cable was defective. While the court held that the landlord was on constructive notice of the defect and thus was liable to the injured employee, the court also stated that the failures by the tenant and the inspector to notify the landlord of the defect were grounds for the landlord’s counterclaim against them and ordered a new trial on that counterclaim. 733 N.E.2d at 882 – 883. Similar reasoning has also been followed in leases involving residential properties. The fact that a landlord was not in possession and control of the premises when a fire killed and injured several people was no defense when evidence showed that the landlord had violated various building ordinances, thereby incurring a duty to its tenants. See Jones v. Polish Falcons of City of Chicago Heights, 244 Ill.App.3d 348, 614 N.E.2d 397, 185 Ill.Dec. 263 (1st Dist. 1993). In Jones, the Polish Falcons owned a two-story brick building that historically had been used for various social events (dances, weddings, and club meetings). In 1980, the Chicago Heights building inspector reported that the building violated various building code ordinances and was unfit for human habitation. Despite this report, the Polish Falcons permitted a woman to live in the building for $600 a month. The woman later permitted two friends to move into the building, one with her five children. Six months later, the building caught fire and burned to the ground, killing three children and injuring several others. 614 N.E.2d at 398 – 399.



The Jones court held that when an owner violates an ordinance, it is no defense that the owner has neither possession nor control of the premises. 614 N.E.2d at 401, citing Dini v. Naiditch, 20 Ill.2d 406, 170 N.E.2d 881 (1960) (case involving injury to firefighter while performing his duties). The court reasoned that

the violation of a statute or ordinance designed for the protection of human life or property is prima facie evidence of negligence, and . . . the party injured thereby has a cause of action, provided that he comes within the purview of the particular ordinance or statute, and the injury has a direct and proximate connection with the violation. . . .

Municipal ordinances proscribing the continued use of a structure which violates building codes have consistently been held to be designed for the protection of human life. [Citations omitted.] 614 N.E.2d at 400, citing Dini, supra; Mangan, supra.

See also Kalata v. Anheuser-Busch Cos., 144 Ill.2d 425, 581 N.E.2d 656, 661, 163 Ill.Dec. 502 (1991) (sufficient evidence existed that proximate cause of injury to tenant’s employee was lack of second handrail required by City of Chicago Code, and “violation of a statute or ordinance designed to protect human life or property is prima facie evidence of negligence”). A potential future issue for landlords is the impact the recent amendments to the National Electric Code (NFPA 70) adopted by the National Fire Protection Association in 2002 and remaining in effect in the 2005 National Electric Code (NEC) (available at www.nfpa.org/freecodes/free_access_document.asp) requiring abandoned cable be removed from a building to reduce the risk of fire. Under §770.2 of the NEC, “Abandoned Optical Fiber Cable” is defined as “[i]nstalled optical fiber cable that is not terminated at equipment other than a connector and not identified for future use with a tag.” If a tenant’s lease does not require it to remove all cabling it installs at the end of its lease, the landlord may be faced with the obligation to remove any accessible portion of the cabling left by the tenant from ducts, plenums, or other horizontal or vertical risers and air-handling spaces. See NEC §770.3(A). According to the definitions in the NEC, “accessible” means “[c]apable of being removed or exposed without damaging the building structure or finish or not permanently closed in by the structure or finish of the building.” NEC, art. 100. If the landlord fails to require the tenant to remove the cabling any new tenant does not use, it may face potential liability of the type illustrated by the cases cited in this section if abandoned cabling it fails to remove is found to be the source of a later fire. The NEC standards are not law in Illinois unless adopted as part of a municipal or other applicable governmental agency’s code. Most states, Illinois not among them, have adopted the NEC that contains this requirement regarding abandoned cable. Some municipalities in Illinois may automatically make NEC standards a part of their building code, and others may adopt all or parts of any changes to the NEC after study. Section 18-27-110.12(e) of the City of Chicago Building Code (the City of Chicago has its own Building Code and does not automatically adopt the NEC) does contain the following:

(e) Abandoned Electrical Equipment. All raceways, cables, boxes, and equipment abandoned as a result of new work shall be removed in dwelling and commercial occupancies.



Thus, it would appear this issue exists already in the City of Chicago. Landlords in other communities should verify whether the most current version of the NEC has been adopted in the communities in which they have buildings. For some suggested language for a landlord’s form leases to put the burden of removal on tenants, see Ruth A. Schoenmeyer and Michelle M. McAtee, Surrender Dorothy: Restoration Obligations in Office Leases, 23 Prac. Real Est.Law. 17, 22 – 23 (May 2007). 5. [7.27] Exception to General Rule for Injuries Occurring in Common Areas In some circumstances, landlords may be liable for injuries to tenants and their invitees or other third persons occurring within the common areas of the landlord’s building. Factors such as the provisions of the lease and the common-law duties of landlords will be considered by the court in determining whether the landlord is liable. In Williams v. Alfred N. Koplin & Co., 114 Ill.App.3d 482, 448 N.E.2d 1042, 70 Ill.Dec. 164 (2d Dist. 1983), the plaintiff, an employee of a building tenant, sued the landlord for injuries sustained in a fall on a stairway. The plaintiff alleged that the landlord acted in a negligent manner when it cleaned only a narrow path through the snow down the middle of the stairs, thereby making the handrails inaccessible. In discussing a landlord’s duty of reasonable care with respect to maintenance of common areas, the court reviewed the common law governing snow removal and found that, absent an agreement to the contrary in the lease, a landlord has no obligation to shovel snow from sidewalks or to remove natural accumulations of snow and ice from common areas under its control. If no duty exists, then no liability exists. 448 N.E.2d at 1046. See also Chisolm v. Stephens, 47 Ill.App.3d 999, 365 N.E.2d 80, 84, 7 Ill.Dec. 795 (1st Dist. 1977) (landlord’s practice for previous 15 years of cleaning snow and ice from sidewalk in front of home leased by tenant did not establish continuing duty to remove natural accumulation of ice before tenant left for work in morning; duty is to perform each particular clearing of ice and snow with ordinary care, and landlord was not liable for injuries suffered by tenant who slipped and fell on ice before landlord had attempted to clear it). According to the Williams court, a “landlord’s duty is not to insure the safety of his tenants, but to exercise reasonable care.” 448 N.E.2d at 1045 – 1046. Thus, to incur liability for snow removal, a landlord must either exacerbate a natural condition or perform negligently a voluntary undertaking. 448 N.E.2d at 1046. In Williams, because the plaintiff established that the landlord’s snow removal made the handrails inaccessible, which contributed to her fall on the first step, the appellate court reversed the trial court’s order of summary judgment for the landlord, determining that a material fact as to the landlord’s negligence existed. 448 N.E.2d at 1047. Since the date of the Williams decision and others like it, Illinois enacted the Snow and Ice Removal Act that became effective September 6, 1990. Although it appears to have codified the principles from earlier cases involving slips and falls on sidewalks abutting residential properties, it would not be of any assistance to the landlord in Williams, as the tenant’s fall was on the steps. The Snow and Ice Removal Act provides:

Sec. 1. It is declared to be the public policy of this State that owners and others residing in residential units be encouraged to clean the sidewalks abutting their



residences of snow and ice. The General Assembly, therefore, determines that it is undesirable for any person to be found liable for damages due to his or her efforts in the removal of snow or ice from such sidewalks, except for acts which amount to clear wrongdoing, as described in Section 2 of this Act. Sec. 2. Any owner, lessor, occupant or other person in charge of any residential property, or any agent of or other person engaged by any such party, who removes or attempts to remove snow or ice from sidewalks abutting the property shall not be liable for any personal injuries allegedly caused by the snowy or icy condition of the sidewalk resulting from his or her acts or omissions unless the alleged misconduct was willful or wanton. 745 ILCS 75/1, 75/2.

Caselaw in the residential landlord-tenant arena since the adoption of the Snow and Ice Removal Act have centered around what constitutes a “sidewalk” and what constitutes “willful or wanton” conduct. See Bremer v. Leisure Acres-Phase II Housing Corp., 363 Ill.App.3d 581, 842 N.E.2d 1151, 1154, 299 Ill.Dec. 799 (3d Dist. 2006) (senior housing community landlord entitled to summary judgment on grounds slip and fall on private walkway connecting building to parking lot; term “sidewalk” as used in Snow and Ice Removal Act “applies to any sidewalk that reaches or touches the residence, or that borders the residential property in general”); Yu v. Kobayashi, 281 Ill.App.3d 489, 667 N.E.2d 106, 108, 217 Ill.Dec. 313 (2d Dist. 1996) (stoop directly outside door that was part of continuous walkway from tenant’s front door to parking lot was part of sidewalk; thus, tenant’s claim was barred by Snow and Ice Removal Act). While the statute only covers snow and ice accumulations on sidewalks near residential units, the few commercial landlord-tenant cases that have addressed the same subject have not necessarily held landlords are liable for injuries to persons slipping and falling on snow or ice the landlords have attempted to remove. See Evans v. United Bank of Illinois, N.A., 226 Ill.App.3d 526, 589 N.E.2d 933, 937, 168 Ill.Dec. 533 (2d Dist. 1992) (discusses issue of whether shopping center landlord retained control of parking lot and thereby incurred liability for injuries sustained by plaintiff who fell as result of ice and snow in parking lot and holding summary judgment was not proper when there were questions of fact as to areas over which landlord retained control); Hiller v. Harsh, 100 Ill.App.3d 332, 426 N.E.2d 960, 963, 55 Ill.Dec. 635 (1st Dist. 1981) (landlord liable for injuries sustained by plaintiff when she fell down stairs of premises, as landlord owed plaintiff duty of reasonable care to keep common areas reasonably safe regardless of whether plaintiff was invitee or licensee of tenant). See also Bloom v. Bistro Restaurant Limited Partnership, 304 Ill.App.3d 707, 710 N.E.2d 121, 123 – 124, 237 Ill.Dec. 698 (1st Dist. 1999) (in suit by patron for injury suffered when struck by ice falling from building as she exited restaurant, restaurant tenant owed patron duty to provide safe means of ingress and egress from its premises, and factual question existed as to whether ice that fell from building was a natural accumulation or formed because of defectively designed or hazardous building protrusions, thereby precluding summary judgment in favor of either landlord or tenant). But see Kalata v. Anheuser-Busch Cos., 204 Ill.App.3d 351, 562 N.E.2d 320, 322 – 324, 149 Ill.Dec. 856 (1st Dist. 1990) (reversing trial court judgment in favor of tenant’s employee against landlord for injuries caused by slip on ice that had accumulated on landing where there was no evidence as to whether accumulation was natural or unnatural, caused directly or indirectly by landlord or by defective



condition, or was even known to landlord), rev’d, 144 Ill.2d 425 (1991) (sufficient evidence existed that proximate cause of injury to tenant’s employee was lack of second handrail required by City of Chicago Code and violation of code designed to protect human life or property’s prima facie evidence of negligence). In Sears, Roebuck & Co. v. Charwil Associates Limited Partnership, 371 Ill.App.3d 1071, 864 N.E.2d 869, 873 – 874, 309 Ill.Dec. 628 (1st Dist. 2007), the landlord was held liable for $2 million of a $17.25 million judgment against the tenant (Sears) by a customer of a Sears automotive service operation who was hit while walking in the ring road common areas of the mall by another Sears customer’s auto being driven by a Sears employee. What may seem like an absurd result (a landlord being obligated to indemnify a tenant against the negligence of the tenant’s employee) was the result of the language of the lease. First, the lease obligated the landlord to “obtain and maintain . . . liability insurance having limits for bodily injury or death of not less than Two Million Dollars ($2,000,000.00) for each person. Five Million ($5,000,000.00) for each occurrence and Two Hundred Fifty Thousand ($250,000.00) for property damage, and insuring the indemnity agreement.” 864 N.E.2d 871. Second, Sears was to “be named insured, on this policy.” Id. Finally, the landlord committed “to be responsible for, indemnify Tenant, its directors, officers, agents and employees against, and save Tenant, its directors, officers, agents and employees harmless from, all liabilities from any and all damages, claims or demands that may arise from or be occasioned by the condition, use or occupancy of all Common Areas . . . by the customers, invitees, licensees and employees of Landlord, Tenant and Landlord’s other tenants and all other occupants.” Id. According to the trial court, a finding with which the appellate court agreed, this lease language was clear and unambiguous and the broad indemnification language covering any and all damages was broad enough to include indemnification for Sears’ own negligence. Because the injured customer’s injuries arose out of “the condition, use or occupancy” of the common area, the landlord was entitled to indemnification for the damages the injured customer suffered. 864 N.E.2d at 873. To make matters worse for the Sears landlord, its commercial general liability insurance contained an automobile exclusion barring coverage, and the landlord had no other insurance that did apply, which meant it had no coverage for the loss. 864 N.E.2d at 874. “If the parties had intended otherwise, they could have provided exclusions in the lease to limit insurance coverage.” Id. The court distinguished between a promise to indemnify and a promise to obtain insurance. A promise to indemnify is a promise “to assume all responsibility and liability for any injuries or damages,” while a promise to obtain insurance is simply an agreement “to procure insurance and pay premiums. . . . [U]nder an agreement to obtain insurance, the promisor bears no responsibility in the event of an injury or damages once the insurance is obtained.” [Citations omitted.] 864 N.E.2d at 875. The lease at issue in Sears contained both a promise to indemnify and a promise to insure, but because Sears had voluntarily dismissed its count for breach of the indemnification provisions, the only remaining issue for the court was whether the landlord had breached its obligation to insure by not procuring the required insurance (the insurance it had procured did not cover the accident in question). 864 N.E.2d at 875. On the issue of the breach of the covenant to procure insurance, the appellate court affirmed the trial court’s finding that the landlord breached its duty to indemnify Sears using the agreed-on vehicle of insurance to fund the promise, thereby



causing Sears to suffer damages of $2 million. 864 N.E.2d at 876. The good news for the landlord was that it was not responsible for the full $17.5 million judgment against Sears. While not a case involving a claim arising out of a landlord-tenant relationship, Luu v. Kim, 323 Ill.App.3d 946, 752 N.E.2d 547, 256 Ill.Dec. 667 (1st Dist. 2001), is instructive regarding the potential liability of landlords to invitees to a shopping center generally. In Luu, a minor child was injured by a conveyor belt in a shopping center storage room used by tenants under a separate rental agreement when he ventured into an open doorway and up the stairs into the storage room. 752 N.E.2d at 548. In granting the defendant landlord’s motion for summary judgment, the trial court held that “as a matter of law Billy Luu was a trespasser at the time and location of the accident and that defendant-landlords owed no duty to [Billy] other than to refrain from willful and wanton conduct and that there existed no legal proximate cause between the conduct of defendants and the injuries sustained by Billy.” 752 N.E.2d at 551. The appellate court affirmed the trial court’s order on the grounds there were no “facts that indicate that [defendant landlords] knew or should have known that children frequented the second-floor storage room of the mall or operated the conveyor belt.” 752 N.E.2d at 553. Dicta in Luu, which suggested (as a procedural matter) that an appellate court should not reverse a grant of summary judgment by the trial court unless it found an abuse of discretion, was not an accurate statement of the standard of review under Illinois law, according to a later First District Appellate Court panel in Independent Trust Corp. v. Hurwick, 351 Ill.App.3d 941, 814 N.E.2d 895, 902, 286 Ill.Dec. 669 (1st Dist. 2004). Because the Luu court correctly stated its review should be de novo and it went on to discuss the facts in the record extensively, and the Hurwick decision did not involve a landlord-tenant substantive issue, the comments in Hurwick with respect to Luu are unlikely to have any significant effect on the holding in Luu. 6. [7.28] Sublessor’s Tort Liability to Third Parties In Wright v. Mr. Quick, Inc., 109 Ill.2d 236, 486 N.E.2d 908, 93 Ill.Dec. 375 (1985), a sublessor (a fast food franchisor) was found not liable for injuries sustained by an employee of the sublessee (a franchisee of the sublessor) in a fall in the parking lot of the premises because the sublessor had no duty to repair under the sublease. The court held that the general rule of landlord immunity applied to the lessee in its capacity as sublessor, even though as a lessee under the prime lease the sublessor did have a duty to repair the premises. 486 N.E.2d at 911. The court found that the prime lease simply allowed the prime landlord a contractual remedy in the event the premises were not properly maintained. The prime lease did not impose additional tort liability to third parties on the lessee when acting as a sublessor. 486 N.E.2d at 909. 7. [7.29] Comment The discussion in §§7.23 – 7.28 above illustrates how important it is for attorneys who represent landlords to advise their clients to obtain adequate liability insurance. Even if the landlord is ultimately found not liable for injuries suffered by third parties or the injured employees of its tenants, landlords frequently find themselves defendants in suits by such persons and need to have their defense costs paid. A landlord should obtain its own liability insurance coverage, be named as an additional insured on the tenant’s policy, or both.



The lessons learned for commercial landlords from Sears, Roebuck & Co. v. Charwil Associates Limited Partnership, 371 Ill.App.3d 1071, 864 N.E.2d 869, 309 Ill.Dec. 628 (1st Dist. 2007), discussed in §7.27 above are also clear. First, do not agree to broad indemnification provisions for the benefit of the tenant or third parties; at a minimum, exclude the negligent and willful misconduct of the tenant and its agents, employees, and contractors. Had the landlord done that, the case would have been decided much earlier and no doubt in favor of the landlord. Second, make sure the landlord understands what the landlord’s commercial general liability insurance will cover, as many indemnification obligations the landlord assumes, if very broad like those in Sears, will not be covered by insurance. Thus, the landlord should work with its insurance advisor to identify what the most likely risks of injury to third parties in the common areas are and determine whether those types of risks are covered under various types of insurance that may be available. If coverage is not available, either by way of endorsements to the landlord’s commercial general liability insurance coverage or by obtaining a separate policy, the landlord will then understand it could be at risk if it agrees to a “bare” indemnification provision. A landlord should also insist in its leases that its tenants indemnify the landlord for their own negligence and that of their employees, agents, and contractors, even when the negligent conduct occurs outside the premises in the common areas of the building, shopping center, or land. The leases should also require the tenants to periodically provide evidence of insurance coverage, and the landlord must determine whether the lease requirements are actually being met by conducting reviews of the insurance evidence provided. Reliance solely on certificates of insurance provided by tenants as evidence that the tenant has the appropriate coverage in place is risky. See Camastro v. Cincinnati Insurance Co., 199 W.Va. 305, 484 S.E.2d 188 (1997) (landlord had no reasonable expectation that tenant’s insurance would remain in effect after lease expired, especially in light of disclaimer on part of insurance company of duty to notify landlord when insurance policy that appeared on certificate of insurance was canceled by tenant prior to expiration date); American Country Insurance Co. v. Kraemer Brothers, Inc., 289 Ill.App.3d 805, 699 N.E.2d 1056, 232 Ill.Dec. 871 (1st Dist. 1998) (general contractor not entitled to rely on certificate of subcontractor’s insurance as evidence of coverage). A complete discussion of the issues raised with frequently provided standard forms of insurance certificates and the problems arising out of unjustified reliance by certificate holders on the information contained in certificates of insurance is beyond the scope of this chapter. V. LANDLORD EXCULPATORY CLAUSES AND STATUTORY

PROHIBITIONS ON EXONERATION A. [7.30] Statutory Prohibition on Exoneration for Landlord’s Negligence and Caselaw

Interpretation By statute in Illinois, a lease provision exonerating the landlord from liability for injuries to persons or property as a result of the negligence of the landlord or its agents, servants, or employees is unenforceable. See §1 of the Landlord and Tenant Act, 765 ILCS 705/1, et seq. This statute, which became effective September 17, 1971, provides:

[E]very covenant, agreement, or understanding in or in connection with or collateral to any lease of real property, exempting the lessor from liability for damages for



injuries to person or property caused by or resulting from the negligence of the lessor, his or her agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable. Id.

The Landlord and Tenant Act has been used as a basis to dismiss a landlord’s counterclaim seeking indemnity from its automobile service station tenant in a personal injury action by an individual who fell on the concrete pavement at the service station. See McMinn v. Cavanaugh, 177 Ill.App.3d 353, 532 N.E.2d 343, 344, 126 Ill.Dec. 658 (1st Dist. 1988). The lease at issue in McMinn contained an indemnity clause that provided that the tenant would indemnify, hold harmless, and defend the landlord against all claims and damages for all injuries or deaths arising from the tenant’s use and occupancy of the premises. The indemnity clause was also supported by a lease provision obligating the tenant to procure a contractual liability endorsement to its liability insurance policy insuring its indemnity obligation to the landlord. The court rejected the landlord’s argument that the lease provision was a permissible indemnity agreement rather than an impermissible exculpation clause running afoul of the anti-exoneration provisions of the Landlord and Tenant Act. The court acknowledged there was a distinction between an indemnity (which defines who will pay compensation) and an exculpation (which defines whether compensation will be paid). However, the court held that if an indemnity clause like the one at issue here were enforced, it would effectively permit landlords to avoid paying claims for their negligence, and this was a result that the legislature intended to prohibit. 532 N.E.2d at 345. Thus, McMinn stands for the proposition that the Landlord and Tenant Act forbids both exculpatory clauses intended to exempt the landlord from liability for its (or its agents’) own negligent acts and indemnity agreements seeking recovery from the tenant for any injuries or deaths caused by the negligent acts of the landlord or its agents. This ruling may be the result of poor drafting, as the lease provision at issue and the landlord’s legal arguments appear to have mixed the legitimate landlord concern for indemnity against claims arising out of its tenant’s negligent acts with the hold-harmless concept that potentially relieves the landlord from liability for its own negligent conduct. A subsequent case, Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 294 Ill.App.3d 150, 689 N.E.2d 199, 228 Ill.Dec. 327 (1st Dist. 1997), which followed the McMinn holding and is discussed in §7.33 below, further confirms the importance of carefully drafting such lease provisions. At least one subsequent Illinois court has refused to extend the application of the Landlord and Tenant Act to a breach of contract claim against a commercial landlord, holding that the statute prohibits only exculpation of a landlord from its (or its agents’) negligence. See Madigan Brothers, Inc. v. Melrose Shopping Center Co., 198 Ill.App.3d 1083, 556 N.E.2d 730, 145 Ill.Dec. 112 (1st Dist. 1990) (tenant sued landlord for breach of contract when roof of leased premises collapsed due to water damage). A more recent residential tenant case involving certified questions posed by a trial court to the Fourth District Appellate Court of Illinois, Whitledge v. Klein, 348 Ill.App.3d 1059, 810 N.E.2d 303, 284 Ill.Dec. 650 (4th Dist. 2004), is important to note here because the underlying



cause of action was an insurance subrogation case involving several tenants’ rental policy insurers seeking recovery of amounts paid under the policies issued to the tenants. On the questions posed, the court held the Landlord and Tenant Act precludes enforcement of lease provisions that provide the landlord “is not responsible for [damage to the tenant’s personal] property in case of accident” in situations in which the damage was caused by the negligence of the owner or property manager even when the tenant purchased rental insurance and recovered its loss under the policy. 810 N.E.2d at 304, 307. The court also held the tenants’ insurers should be afforded the same protection as the tenants under the Landlord and Tennant Act, as they stand in the shoes of the tenant; to hold otherwise would allow the landlord to avoid liability for its own negligence. 810 N.E.2d at 307. The effect the Whitledge opinion might have on clauses in leases waiving the tenant’s rights of subrogation is discussed in §7.45 below. The Whitledge court also spent considerable time defending and agreeing with the McMinn rationale for concluding the Landlord and Tenant Act also prohibits enforcement of clauses requiring the tenant to indemnify the landlord for its own negligence, primarily because the landlord argued its lease clause was an attempt to require the tenant to indemnify the landlord and therefore was not barred by the Landlord and Tenant Act. 810 N.E.2d at 306 – 307. When adopted, the Landlord and Tenant Act provided that it applied prospectively only. Thus, exculpatory clauses contained in leases executed prior to the statute’s effective date (September 17, 1971) are valid and enforceable. Caselaw enforcing landlord exculpatory or exoneration clauses in leases executed prior to the effective date of the Landlord and Tenant Act is discussed in §7.31 below. B. [7.31] Caselaw Prior to Statutory Prohibition on Landlord’s Exoneration Prior to the enactment of the Landlord and Tenant Act, Illinois caselaw permitted a landlord to exculpate itself from its own negligence by contract with the tenant. See Annot., 49 A.L.R.3d 321, 331 (1973). Opinions after the effective date of the Landlord and Tenant Act, when applying exculpation or exoneration clauses in leases executed prior to the effective date of the Act, have also enforced such clauses. See Bruno v. Gabhauer, 9 Ill.App.3d 345, 292 N.E.2d 238, 240 (1st Dist. 1972) (residential tenant’s complaint for damages when he was injured in fall over broken iron grate was properly dismissed when lease provided landlord was not liable for any damage or injury occasioned by failure of landlord to keep premises in repair); Zion Industries, Inc. v. Loy, 46 Ill.App.3d 902, 361 N.E.2d 605, 5 Ill.Dec. 282 (2d Dist. 1977); J.B. Stein & Co. v. Sandberg, 95 Ill.App.3d 19, 419 N.E.2d 652, 50 Ill.Dec. 544 (2d Dist. 1981). In Jackson v. First National Bank of Lake Forest, 415 Ill. 453, 114 N.E.2d 721 (1953), a tenant sought damages for injuries received in a fall down a flight of stairs that was allegedly caused by the landlord’s negligent maintenance of a banister. The lease relieved the landlord from liability for damages or injuries to the tenant’s person or property caused by the landlord’s failure to repair. The court held in favor of the landlord, noting the validity of such provisions in “business leases.” 114 N.E.2d at 726. According to the court, the provision was not against public policy but was simply a “private affair” between private parties, and nothing in the established social relationship between the landlord and the tenant suggested that such a provision should be void. Id. See also Strauch v. Charles Apartments Co., 1 Ill.App.3d 57, 273 N.E.2d 19 (2d Dist.



1971). For a more extensive review of the social impact of exculpatory clauses, see Simmons v. Columbus Venetian Stevens Buildings, Inc., 20 Ill.App.2d 1, 155 N.E.2d 372 (1st Dist. 1958) (absent showing of negotiation with regard to exculpatory clause or expressed tenant dissatisfaction with such clause, provision is valid and enforceable). In J.B. Stein & Co., supra, the landlord was held not liable for a tenant’s property damage from a fire allegedly caused by an overloaded building electrical system. The lease contained a broad exculpatory clause that exonerated the landlord from liability for damage to the tenant’s person or property even if it occurred as the result of the landlord’s negligence. Although the fire occurred after the Landlord and Tenant Act became effective, the court held the lease fell outside the purview of the statute because it had been executed prior to the enactment of the statute. The tenant had extended the lease term after the effective date of the statute, but because it was a lease extension and not a new lease, the court held the statute did not invalidate the lease exculpatory clause. 419 N.E.2d at 657. Similarly, in Zion Industries, supra, a case in which the lease at issue was executed in 1966, the court noted that the Landlord and Tenant Act did not nullify a lease provision that exculpated the landlord from damages caused by water on the roof. However, the court did note that because the tenant’s counterclaim for damages was based on a breach of covenant rather than an allegation of negligence, the controversy was actually beyond the scope of the statute. 361 N.E.2d at 611. See also Madigan Brothers, Inc. v. Melrose Shopping Center Co., 198 Ill.App.3d 1083, 556 N.E.2d 730, 145 Ill.Dec. 112 (1st Dist. 1990) (tenant’s suit against landlord for breach of contract when roof of leased premises collapsed due to water damage was not precluded by Landlord and Tenant Act). The distinction between breaches of covenants and claims for negligence drawn by the Zion Industries court may have been eroded by Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 294 Ill.App.3d 150, 689 N.E.2d 199, 228 Ill.Dec. 327 (1st Dist. 1997), discussed in §7.33 below. C. [7.32] Effect of Landlord’s Relinquishment of All Control over Premises to Tenant Even if a landlord gives complete control of the demised premises to a tenant, thereby relinquishing to the tenant all duties and obligations with respect to the operation and maintenance of the premises, it cannot completely exempt itself from liability. The Landlord and Tenant Act still applies to the negligent acts or omissions of the landlord and its agents, servants, and employees, without regard to the general rule that a tenant in possession and control of demised premises is liable for all personal injury and property damage occurring thereon (absent one of the other recognized exceptions of the type discussed in §§7.23 – 7.29 above). Giger v. Mobil Oil Corp., 823 F.2d 181, 182 – 183 (7th Cir. 1987). For a further discussion of the general rule that the landlord is not liable for personal injury or property damage occurring within a tenant’s premises, see §7.23 above. D. [7.33] Comment The decision in Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 294 Ill.App.3d 150, 689 N.E.2d 199, 228 Ill.Dec. 327 (1st Dist. 1997), which followed McMinn v. Cavanaugh, 177 Ill.App.3d 353, 532 N.E.2d 343, 126 Ill.Dec. 658 (1st Dist. 1988), discussed in §7.30 above,



makes it critical for all landlords to review the language in their leases under which their tenants agree to indemnify them against losses, costs, damages, and expenses. In Economy, the court held a particular lease clause void and against public policy and refused to enforce it. The lease clause at issue required the tenant to indemnify the landlord for any penalties, damages, or charges imposed for violations of any laws or ordinances, regardless of whether they were occasioned by the neglect of the tenant or those under the tenant, as well as from any losses, costs, damages, or expenses arising out of accidents or other occurrences on the leased premises or out of any failure by the tenant to comply with and perform the terms and provisions of the lease. What is most troubling about Economy is the context in which the court’s decision was made. The case involved a landlord’s claim for indemnification arising out of a suit by one of the landlord’s own employees who was injured while on the leased premises. According to the court, the complaint did not contain any detail on how the employee was injured and whose negligence caused the employee’s injury. Further, the court stated that it was not important whether the landlord was seeking to be indemnified for its own negligence. In addition, the court declined to follow the landlord’s argument that only when a lease’s language unequivocally states that it is intended to indemnify the landlord against its own negligence should it be voided. Instead, the court held that when a lease clause violates the provisions of the Landlord and Tenant Act, which the court held was true of the lease clause at issue in the case, the clause is void for all purposes and cannot be enforced. 689 N.E.2d at 202 – 203. Under the court’s reasoning, even if the facts in Economy had demonstrated that the landlord’s employee’s injury was caused by the tenant’s failure to properly maintain the premises and no negligence on the part of the landlord was involved, the court would likely have held that the landlord was unable to recover any losses, damages, or expenses it had incurred. Thus, in order to avoid similar problems in the future, landlords should consider modifying their lease exculpatory and indemnification clauses to provide that they are not intended to exculpate or indemnify the landlord against its own negligence or that of its agents, servants, or employees. Otherwise, they risk losing the right to enforce indemnification clauses against negligent tenants. Neither Economy nor McMinn, which was relied on by the Economy court, were Illinois Supreme Court cases. Thus, it is possible a different Illinois district appellate court would disagree with the Economy and McMinn opinions or that a future Illinois Supreme Court case could overrule the Economy decision. However, unless and until that occurs, landlords should take note and modify their standard lease language. An earlier First District Appellate Court case refused to extend the application of the Landlord and Tenant Act to breach of contract claims against landlords, holding that the statute prohibits only exculpation of a landlord from its (or its agents’) negligence. See Madigan Brothers, Inc. v. Melrose Shopping Center Co., 198 Ill.App.3d 1083, 556 N.E.2d 730, 145 Ill.Dec. 112 (1st Dist. 1990) (tenant sued landlord for breach of contract when roof of leased premises collapsed due to water damage). The Economy court did not cite the Madigan Brothers opinion, but it specifically rejected the landlord’s argument that the lease indemnification provision could be enforced because the landlord had filed a contract action rather than a negligence action. According to the Economy



court, the same lease provision cannot be simultaneously void under a negligence action and not void under a breach of contract action. 689 N.E.2d at 201. Thus, in Illinois, it appears that, at least in the First District, landlords will no longer be able to rely on Madigan Brothers as a basis to argue that a contractual indemnification provision should be enforced. VI. [7.34] LANDLORD’S OBLIGATION TO PROTECT TENANT AGAINST

CRIMINAL ACTS OF THIRD PARTIES Unlike some situations in which there are differences between a commercial landlord’s duties and obligations to its tenants and those of a residential landlord, there is little difference between the two types of premises when it comes to the criminal acts of third parties and the landlord’s obligation to protect its tenants. A. [7.35] General Rule: Landlord Has No Obligation Given the general rule that a landlord is not liable for injuries to persons or property occurring on a tenant’s premises, as discussed in §7.23 above, it is not surprising that under Illinois law a landlord generally has no duty to keep the premises safe from criminal activity. Although the earliest Illinois caselaw addressing a landlord’s obligation to protect tenants against the criminal acts of third parties generally arose in the context of residential leases, the same principles developed in the residential cases are equally applicable to commercial leases. “Illinois has long refused to impose upon one party a duty to protect a second party from the intentional or criminally reckless acts of a third party in the absence of a special relationship between the first and second parties. . . . A special relationship has not been found in the usual landlord/tenant relationship.” Whalen v. Lang, 71 Ill.App.3d 83, 389 N.E.2d 10, 11, 27 Ill.Dec. 324 (3d Dist. 1979). See also Bourgonje v. Machev, 362 Ill.App.3d 984, 841 N.E.2d 96, 298 Ill.Dec. 953 (1st Dist. 2005) (landlord has no duty to repair and maintain exterior lighting for building for safety of its tenants, absent special relationship that did not exist in this case); Trice v. Chicago Housing Authority, 14 Ill.App.3d 97, 302 N.E.2d 207 (1st Dist. 1973) (landlord had no duty to protect tenants from criminally reckless acts of third parties and so was not liable for fatal injury to tenant’s son caused when television set, allegedly thrown over railing from above, hit him on head); Jackson v. Shell Oil Co., 272 Ill.App.3d 542, 650 N.E.2d 652, 208 Ill.Dec. 958 (1st Dist. 1995) (oil company that leased gas station did not have duty to service station attendant who suffered gunshot wound when premises were leased to and under control of tenant, which was expressly responsible for maintenance and safety conditions under dealer agreement). Consistent with this general rule, the Northern Illinois District federal court held in Ohio Casualty Group v. Dietrich, 285 F.Supp.2d 1128 (N.D.Ill. 2003), that neither the landlord nor the other tenant (Globe Custom Woodwork) in a commercial building owed any duty to protect the other tenant (Stepco) from the criminal acts of an arsonist who deliberately started a fire in the Globe Custom Woodwork portion of the building. Rather, the only duty owed by the landlord and Globe Custom Woodworking to Stepco was “to maintain the portions of the building under their respective control in a reasonably safe condition.” 285 F.Supp.2d at 1131. The suit was brought as a subrogation claim by Stepco’s insurance company that had paid Stepco’s losses, and the only basis for a claim of negligence on the part of the defendants was the insurance company’s claim



that the Globe Custom Woodwork premises, which consisted of a “metal-clad, wood-framed shed addition” to the main building, provided a path for the fire to spread. 285 F.Supp.2d at 1130. The court found it was not reasonably foreseeable nor likely that a suburban building would be the subject of arson and unfair to place a burden on landlords to make buildings so fire resistant they would withstand a 12-hour fire, particularly when the building had been regularly inspected by the fire department without being cited for any violations, and the type of fire wall the insurance company claimed should have been on the premises would have withstood only a 3 – 4 hour fire. 285 F.Supp.2d at 1130 – 1131. In Whalen, supra, the plaintiff, a tenant of a commercial building, sued the landlord for severe injuries suffered in an attack by a trespasser in the building’s parking lot. The court affirmed the lower court’s dismissal on the grounds that the plaintiff failed to state a cause of action. Absent an allegation of a special relationship between the tenant and the landlord, an allegation of a dangerous condition of the premises creating the loss, or an allegation of an affirmative, negligent act by the landlord causing the loss, the court found that no duty existed on the part of the landlord to ensure the tenant’s safety. 389 N.E.2d at 11. The court specifically distinguished the facts in Whalen from those in Mims v. New York Life Insurance Co., 133 Ill.App.2d 283, 273 N.E.2d 186 (1st Dist. 1971), and Stribling v. Chicago Housing Authority, 34 Ill.App.3d 551, 340 N.E.2d 47 (1st Dist. 1975), which are discussed in §§7.36 and 7.37 below, stating that those cases did not alter or expand the general rule. The Whalen court viewed the Stribling decision as one in which the tenant’s injury had been caused by a condition of the premises, not because the landlord-tenant relationship created a duty on the part of the landlord to protect its tenants from the criminal acts of third parties. The Whalen court also distinguished Mims on the grounds that in Mims there was an actively negligent act on the part of the landlord’s maintenance man who left the tenant’s door unlocked, and the tenant’s loss was a reasonably foreseeable consequence of that negligent act. 389 N.E.2d at 11 – 12. For additional caselaw in support of the general rule, see N.W. v. Amalgamated Trust & Savings Bank, 196 Ill.App.3d 1066, 554 N.E.2d 629, 143 Ill.Dec. 694 (1st Dist. 1990) (failure to repair door lock does not create duty on part of landlord to protect tenants from criminal activities on premises); Morgan v. 253 East Delaware Condominium Ass’n, 231 Ill.App.3d 208, 595 N.E.2d 36, 171 Ill.Dec. 908 (1st Dist. 1992) (providing doorman for purpose of screening visitors to building does not give rise to duty to protect tenants from criminal activities on premises); B.C. v. J.C. Penney Co., 205 Ill.App.3d 5, 562 N.E.2d 533, 150 Ill.Dec. 3 (1st Dist. 1990) (no duty of care owed to customer by retail tenant or by construction company for criminal acts of third party); Rabel v. Illinois Wesleyan University, 161 Ill.App.3d 348, 514 N.E.2d 552, 112 Ill.Dec. 889 (4th Dist. 1987) (in its capacity as landlord, university did not contractually agree or promise to provide protection to its tenants for intentional or criminal acts of third party occurring on university campus). But see Dargis v. Paradise Park, Inc., 354 Ill.App.3d 171, 819 N.E.2d 1220, 289 Ill.Dec. 420 (2d Dist. 2004) (when landlord unlawfully and publicly evicted summer campsite trailer tenant, landlord had duty to protect tenant’s personal property against risk of theft and damage, which were foreseeable); Shea v. Preservation Chicago, Inc., 206 Ill.App.3d 657, 565 N.E.2d 20, 151 Ill.Dec. 749 (1st Dist. 1990) (tenant allegations landlord negligently failed to repair and maintain interior security door and safety lock sufficient to state claim in negligence against landlord for attack on tenant by intruder); Rowe v. State Bank of Lombard, 125 Ill.2d 203, 531 N.E.2d 1358, 126 Ill.Dec. 519 (1988) (landlord’s failure to maintain adequate control over master keys to tenants’ premises was breach of landlord’s duty to take reasonable precautions to prevent unauthorized entries).



Three of the foregoing cases provide greater insight into the current status of Illinois law with respect to the nature of a landlord’s obligation to protect commercial tenants and their employees against the criminal conduct of third parties on the premises. In Amalgamated Trust & Savings Bank, supra, the court noted that a condition of the premises may give rise to landlord liability for tenant injuries sustained in a criminal attack. According to the court, caselaw based on such rationale merely applied “basic principles of proximate cause where the landlord breaches his duty to maintain the common areas of the building in a reasonably safe condition.” 554 N.E.2d at 635. In Shea, supra, the court stated that “a landlord has no general duty to protect tenants from third-party criminal attacks” and “the proper inquiry is to consider all relevant circumstances in order to determine whether the landlord had assumed a duty, under the facts of each particular case, to protect a tenant from reasonably foreseeable third-party criminal attacks.” [Emphasis in original.] 565 N.E.2d at 24, 25. Rather than imposing a general duty, the court must determine “whether the circumstances demonstrate that the landlord, by retaining access to or control over the premises, assumed a duty to protect tenants against reasonably foreseeable third-party criminal attacks.” 565 N.E.2d at 24. In Dargis, supra, although the landlord claimed its “Seasonal Site Contract” was not a lease, it had all of the elements of a lease: “(1) a definite agreement as to the extent and bounds of the property; (2) a definite and agreed term; and (3) a definite and agreed rental price and manner of payment.” 819 N.E.2d at 1230. As a result, it was not a license terminable at any time at the will of the landlord, and when the landlord’s written notice of “Termination of Contract” was delivered with a demand the tenant vacate the premises in two hours, it was not lawful. 819 N.E.2d at 1225, 1229. Because the criminal acts by third parties (damage to and theft of the tenant’s personal property) were reasonably foreseeable when the landlord’s wrongful eviction was done publicly and the landlord allowed the tenant’s property to remain unsecured for 12 days, the landlord was as liable as it would have been had the landlord created the risk. 819 N.E.2d at 1231. B. [7.36] Exception to General Rule When Landlord Breaches Affirmative Duty The landlord will be held liable to the tenant when the landlord has an affirmative duty to perform some act that is breached or performed negligently, thereby causing the occurrence of criminal activities or harm to the tenant on the demised premises. In Mims v. New York Life Insurance Co., 133 Ill.App.2d 283, 273 N.E.2d 186 (1st Dist. 1971), the landlord’s agent left a tenant’s apartment door unlocked and ajar while inspecting the apartment. When the tenant returned to the apartment to find the landlord’s agent conducting the apartment inspection, the tenant also discovered that a fur coat and money were missing. The court held the landlord liable for the theft because the landlord had a duty to guard against the foreseeable consequences of its agent’s negligent act. 273 N.E.2d at 187. In Kolodziejzak v. Melvin Simon & Associates, 292 Ill.App.3d 490, 685 N.E.2d 985, 226 Ill.Dec. 530 (1st Dist. 1997), a wrongful death action was brought against a property management company that operated a strip mall after a loss prevention specialist from one of the stores in the mall was fatally wounded by a gunshot from an alleged shoplifter. The management company



had contracted with a security company to oversee security at the mall. The court noted the general rule that a landlord does not have a duty to protect its tenants from criminal attacks by third parties, and the exception to the general rule that when a landlord voluntarily undertakes to provide security services, it assumes a duty not to be negligent in the undertaking. 685 N.E.2d at 987. The court held that the management company was not negligent because it fulfilled the only duty it undertook, which was to review the daily log reports of the security company. Further, the court ruled that the management company did not fail to fulfill a duty to hire additional security guards because the security company had suggested a need for additional security only in the summer, not in November when the shooting took place. 685 N.E.2d at 989. The court noted that there was no evidence that any action or inaction on the part of the management company was the proximate cause of the death. Even if a violent incident on the premises was foreseeable, this fact alone did not impose a duty on the management company because the costs of imposing such a duty would be burdensome. 685 N.E.2d at 990. C. [7.37] Exception to General Rule When Landlord Has Knowledge of Criminal Activity If a landlord has been notified of criminal activity resulting in loss to tenants, the landlord will be liable to a tenant for a subsequent loss arising out of further criminal activity if that criminal activity might not have occurred had the landlord taken action to prevent it. In Stribling v. Chicago Housing Authority, 34 Ill.App.3d 551, 340 N.E.2d 47 (1st Dist. 1975), the tenants were the victims of three separate break-ins by thieves who entered adjacent empty apartments and broke through the common walls into the tenants’ apartment. The tenants had previously notified the landlord of the presence of unauthorized persons in the vacant apartments and requested that the landlord secure the apartments against such unauthorized occupancy. The landlord failed to respond to the tenants’ complaints. The court held the landlord liable for the two subsequent burglaries. The court reasoned that after the tenants’ report to the landlord of the original burglary and the manner of its occurrence, the subsequent burglaries became foreseeable. 340 N.E.2d at 50. Thus, the general rule applied to protect the landlord from liability for the first criminal act. Thereafter, a duty to prevent the same crime from occurring in the same manner arose, and when the landlord failed to act, the landlord became liable. Conversely, not all prior incidents of similar criminal activity automatically impose a duty on the landlord to protect in all cases. See Shea v. Preservation Chicago, Inc., 206 Ill.App.3d 657, 565 N.E.2d 20, 24 – 25, 151 Ill.Dec. 749 (1st Dist. 1990); Taylor v. Hocker, 101 Ill.App.3d 639, 428 N.E.2d 662, 57 Ill.Dec. 112 (5th Dist. 1981) (prior knowledge of crimes against property, such as shoplifting and other thefts, and one incident in which customer struck store manager were not sufficient to give rise to duty on part of shopping store owner to protect customer from assault in shopping mall parking lot). The views expressed by the courts in N.W. v. Amalgamated Trust & Savings Bank, 196 Ill.App.3d 1066, 554 N.E.2d 629, 143 Ill.Dec. 694 (1st Dist. 1990), and Shea, supra, which are discussed in §7.35 above, and the other cases cited in §7.35 above and in this section suggest that Illinois law imposes a duty on the commercial landlord to protect tenants and, consequently, liability for failure to do so only when a landlord’s direct actions result in or are a substantial contributing factor to a tenant’s injury or another one of the exceptions discussed in §§7.36 – 7.38 applies. Consistent with this conclusion, in Jackson v. Shell Oil Co., 272 Ill.App.3d 542, 650



N.E.2d 652, 208 Ill.Dec. 958 (1st Dist. 1995), an oil company that leased a gas station did not have a duty to a service station attendant who suffered a gunshot wound. The premises were leased to and under the control of the tenant, which was expressly responsible for maintenance and safety conditions under its dealer agreement with the oil company, and the defendant oil company was specifically prohibited from exercising control over or directing the attendant’s employer’s business or the attendant’s duties. 650 N.E.2d at 656 – 657. D. [7.38] Exception to General Rule When Landlord Voluntarily Assumes Obligation Several standards have been enunciated by Illinois courts regarding a landlord’s voluntary decision to provide security from criminal acts on the demised premises. A landlord who volunteers to provide security to protect its property or tenants from criminal acts on demised premises must act with due care. See Smith v. Lyles, 822 F.Supp. 541, 544 (N.D.Ill. 1993); Comastro v. Village of Rosemont, 122 Ill.App.3d 405, 461 N.E.2d 616, 619 – 620, 78 Ill.Dec. 32 (1st Dist. 1984); Pippin v. Chicago Housing Authority, 78 Ill.2d 204, 399 N.E.2d 596, 35 Ill.Dec. 530 (1979); Nelson v. Union Wire Rope Corp., 31 Ill.2d 69, 199 N.E.2d 769 (1964). If a landlord’s provision of security guards during specified hours actually increases the incidents of criminal activity after those specified hours, a landlord has a duty to resolve such a problem. Cross v. Chicago Housing Authority, 74 Ill.App.3d 921, 393 N.E.2d 580, 30 Ill.Dec. 544 (1st Dist. 1979). However, by contractually agreeing to provide security devices or security personnel in a lease, the landlord does not necessarily guarantee tenants or third parties absolute safety from criminal activity on the premises unless the landlord also has promised to protect tenants from criminal harm. Taylor v. Hocker, 101 Ill.App.3d 639, 428 N.E.2d 662, 57 Ill.Dec. 112 (5th Dist. 1981); Carrigan v. New World Enterprises, Ltd., 112 Ill.App.3d 970, 446 N.E.2d 265, 68 Ill.Dec. 531 (3d Dist. 1983). See also Kolodziejzak v. Melvin Simon & Associates, 292 Ill.App.3d 490, 685 N.E.2d 985, 226 Ill.Dec. 530 (1st Dist. 1997) (defendant property management company not liable in wrongful death action when it hired security company to provide security at strip mall it managed and acted with due care in that undertaking); Figueroa v. Evangelical Covenant Church, 879 F.2d 1427 (7th Cir. 1989) (church operating university campus, including parking lot that was used by day care center tenant of adjoining property as parking lot for parents dropping off or picking up children, was not liable for criminal assault on parent that was not foreseeable even though it voluntarily provided its own security for lot and campus). But see Shea v. Preservation Chicago, Inc., 206 Ill.App.3d 657, 565 N.E.2d 20, 151 Ill.Dec. 749 (1st Dist. 1990), discussed in §7.35 above. In Shea, supra, the court noted that nothing in the record suggested that landlords commonly provided interior safety doors and locks in most apartment buildings. However, by providing them in this particular building, the landlord was in the best position to guard against risks associated with such devices being in disrepair and thereby “assumed a duty to protect plaintiff against reasonably foreseeable third-party criminal attacks proximately caused by the defendants’ failure to repair and maintain the interior security door and safety lock.” 565 N.E.2d at 25. While the case procedurally involved the reversal of a decision by the trial court to dismiss the tenant’s negligence count against the landlord, the court thoroughly discussed the facts in the case and



distinguished them from other cases in which the landlords were not held liable. According to the court, a number of those other cases involved a “large expanse of land and buildings, such as a shopping mall or a university, where the cost of more extensive security measures may have been prohibitive to the landowner.” 565 N.E.2d at 26 (citing Rabel v. Illinois Wesleyan University, 161 Ill.App.3d 348, 514 N.E.2d 552, 112 Ill.Dec. 889 (4th Dist. 1987) (university campus); Taylor, supra (shopping mall parking lot); Figueroa, supra (university campus, including parking lot)). The court in Smith, supra, held that while the Chicago Housing Authority owed its tenants a duty to select a security company with reasonable care, the landlord’s liability extended only to the extent of its undertaking. Accordingly, although the Housing Authorities Act imposed oversight and training duties on landlords who organized their own police force, it did not require that the landlord oversee the training or establish minimum standards for the selection or training of the employees of a security company with whom it voluntarily contracted. 822 F.Supp. at 544. The Illinois Supreme Court’s opinion in Rowe v. State Bank of Lombard, 125 Ill.2d 203, 531 N.E.2d 1358, 126 Ill.Dec. 519 (1988) (personal injury and wrongful death action arising from assault on tenant’s employees by intruder), includes a thorough statement of the legal principles discussed in this section. Briefly, unless there is a “special relationship” between the landlord and the tenant, a landlord has no duty to protect its tenants or others from criminal activities on the premises. 531 N.E.2d at 1364. The Rowe court held that, even though the landlord possessed a master key to all demised premises, investigated tenant complaints of unauthorized personnel on the premises, and forbade installation of locks on tenant premises without permission, such actions did not constitute an assumption of a duty to protect tenants and their employees from criminal acts. Nonetheless, because the evidence in Rowe suggested that the landlord failed to maintain adequate control over the master keys, which enabled an intruder to commit a violent crime on the premises, the court imposed on the landlord a duty “to take reasonable precautions to prevent foreseeable unauthorized entries” with such keys or to “warn those rightfully on the premises of the danger.” 531 N.E.2d at 1368. The case was remanded to the lower court for further proceedings. E. [7.39] Comment The law in the area of a landlord’s liability for criminal activity occurring in a tenant’s premises or in the common areas of the building or complex where the tenant’s premises are located is still evolving. Smith v. Lyles, 822 F.Supp. 541, 544 (N.D.Ill. 1993), Cross v. Chicago Housing Authority, 74 Ill.App.3d 921, 393 N.E.2d 580, 30 Ill.Dec. 544 (1st Dist. 1979), and Shea v. Preservation Chicago, Inc., 206 Ill.App.3d 657, 565 N.E.2d 20, 151 Ill.Dec. 749 (1st Dist. 1990), cited in §7.38 above, did not involve leases of commercial property. Also, there is no statute that applies to commercial landlords like the Housing Authorities Act that applied to the public housing landlords in Smith and Cross. However, it is possible the analysis in Smith, Cross, and Shea could be extended to subject even commercial landlords to greater liability than would otherwise be true if they choose to develop their own security forces instead of contracting with an existing security company, or if as the result of providing some enhanced security, more criminal activity occurs at times when the added security is absent. Certainly under Rowe v. State Bank of Lombard, 125 Ill.2d 203, 531 N.E.2d 1358, 126 Ill.Dec. 519 (1988), discussed in §7.38



above, if a commercial landlord negligently manages its own means of access to its tenants’ premises in a manner that permits unauthorized entry by third parties, it is likely to be held liable for the acts of those third parties. Landlords may find it difficult to balance the desire and need to respond to reports of criminal activity with the desire not to assume any more liability than is necessary. While the landlord is not held to a standard that guarantees no criminal activity will occur, or that none that does occur will result in injury or loss to a tenant or its employees or invitees, it is difficult to predict what a court will find was sufficient after the fact. The tragic events of September 11, 2001, in New York City, while not involving acts against which a landlord could reasonably be expected to protect its tenants, have led to enhanced security precautions in many larger commercial buildings in many cities, including the Sears Tower and other office buildings in Chicago. Much has been written in the popular press regarding the new procedures for the identification of all visitors and the installation of metal detectors and even airport scanning machines for briefcases and bags. It remains to be seen whether those enhanced security precautions will result in greater liability to landlords if those security measures fail and one of the building tenants or its employees is criminally assaulted or their property is damaged as a result of the failure. VII. [7.40] PROPERTY DAMAGE It is a rare commercial lease today that does not contain a provision regarding each party’s responsibilities or liabilities upon the occurrence of an event that renders the demised premises temporarily or permanently untenantable. Often, however, disputes arise as to the proper interpretation of such a provision. Illinois courts apply the legal rules governing the construction of contracts in general and examine the entire lease to discern the intent of the parties and to determine which party should properly bear the burden of the loss. Cerny-Pickas & Co. v. C.R. Jahn Co., 7 Ill.2d 393, 131 N.E.2d 100 (1955); Lewis v. Real Estate Corp., 6 Ill.App.2d 240, 127 N.E.2d 272, 276 (1st Dist. 1955); Annot., 15 A.L.R.3d 786, 806 (1967). When a lease fails to assign responsibility for damage or destruction, common-law principles will apply. Bennett I. Berman, The Anatomy of Fire and Casualty Clauses in a Commercial Lease, 55 Chi.B.Rec. 86 (1973). A. [7.41] Fire The most common events leading to litigation between landlords and their tenants on the subject of responsibility for loss of or damage to property occur by reason of fires. Under Illinois common law, neither the landlord nor the tenant has an obligation to restore the premises in the event of destruction by fire, absent an agreement to the contrary between the parties, but the tenant remains liable for the rent. Lewis v. Real Estate Corp., 6 Ill.App.2d 240, 127 N.E.2d 272, 276 (1st Dist. 1955). However, a tenant is obligated to restore damage to the premises caused by a fire when the tenant covenants under the lease to make repairs and to return the premises to the landlord in the same condition as when the premises were let. Id. See also Ely v. Ely, 80 Ill. 532 (1875). In contrast, lease provisions that require the tenant to return the premises in good condition, ordinary wear and tear and loss by fire excepted, will generally operate to release a



tenant from liability for damages to the premises or the building caused by a fire without regard to whether the fire was caused by the tenant’s negligence, unless the lease states otherwise. Cerny-Pickas & Co. v. C.R. Jahn Co., 7 Ill.2d 393, 131 N.E.2d 100, 103 (1955). In Lewis, supra, the tenant sought damages from the landlord for the loss through fire of an addition to the demised premises that had been erected by and was owned by the tenant. The landlord, pursuant to the lease, elected not to restore the premises and terminated the lease. In interpreting the lease, the court said the lease provision regarding the destruction of the premises modified what otherwise would have been the tenant’s common-law duty to restore the premises, which arose by virtue of the tenant’s covenants to repair and deliver up the premises. 127 N.E.2d at 276. Because the lease did not expressly obligate the landlord to reimburse the tenant for the loss and because the building probably benefited the tenant alone, the landlord was not liable to the tenant. 127 N.E.2d at 278. In other words, the tenant should have insured its interest in its newly constructed building. The common-law rule that a tenant is liable for its own negligence will not be enforced, however, when an exculpatory clause appears in the lease. Ford v. Jennings, 70 Ill.App.3d 219, 387 N.E.2d 1125, 1127, 26 Ill.Dec. 295 (3d Dist. 1979) (summary judgment in favor of tenant on landlord’s claim for damages when building was destroyed by fire affirmed when lease surrender clause required tenant to yield up premises in as good condition as at time of lease “loss by fire . . . excepted” and fire was caused by employee of tenant’s sublessee). Landlords should be aware that a surrender clause in a lease directing the tenant to yield up the premises upon termination of the lease in the same condition of repair as of the date of execution of the lease, excluding loss by fire and reasonable wear and tear, may mean the landlord will assume the risk of loss of the premises. The only exception to this general rule will be if there is another express provision in the lease or the court finds that the parties intended to make the tenant liable for its negligence in a loss by fire. Such exculpatory clauses are broadly interpreted under Illinois law, but in the absence of any such clause, the general rule still applies. See Fire Insurance Exchange v. Geekie, 179 Ill.App.3d 679, 534 N.E.2d 1061, 128 Ill.Dec. 616 (3d Dist. 1989) (citing Cerny-Pickas, supra, to hold landlord’s insurer could maintain subrogation action against negligent tenant who caused fire when lease was oral and both landlord and tenant maintained insurance). A sublessee cannot rely on a clause in the original lease or the prime lease allowing the tenant to return the premises without repairing damage caused by fire to escape liability for its negligence to the owner of the demised premises. “In the absence of either the consent of the owner or privity of contract, the sublessee cannot rely upon an exculpatory provision in the original lease to bar liability for his negligence as against the owner of the leased property.” Ford, supra, 387 N.E.2d at 1128. In such circumstances, the landlord can recover from the sublessee amounts by which it was damaged on account of the sublessee’s own negligence even if the tenant is not liable to the landlord. In Ford, the court reversed the trial court’s summary judgment in favor of the sublessee and remanded the case for further proceedings. 387 N.E.2d at 1128 – 1129.



1. [7.42] Situations in Which Landlord Bears Risk of Loss In the following cases, casualty loss provisions were interpreted to place the burden of a fire loss on the landlord. The seminal case interpreting surrender clauses remains Cerny-Pickas & Co. v. C.R. Jahn Co., 7 Ill.2d 393, 131 N.E.2d 100 (1955). The lease at issue contained a surrender clause that contained an exception for loss by fire and ordinary wear, obligated the tenant to repair, excluding injury by fire or other cause beyond the tenant’s control, and obligated the landlord to purchase fire insurance on the premises. Although the court said the absence of express language imposing liability on the tenant for its negligence did not necessarily relieve the tenant of liability, the court held that the intent of the parties, as discerned from the lease, indicated the tenant was not liable for the destruction of the premises regardless of whether its negligence caused the fire. Rather, the court found that the parties contemplated that the landlord’s insurance would provide the sole compensation for fire loss by any cause. The lease did not provide that the tenant would be liable for its negligence in a fire loss, and the court determined that the unqualified use of the word “fire” meant fires of any origin. Thus, the landlord bore the entire loss. 131 N.E.2d at 103. The same rule of law was applied in Stein v. Yarnall-Todd Chevrolet, Inc., 41 Ill.2d 32, 241 N.E.2d 439 (1968). As in Cerny-Pickas, the Stein court’s analysis viewed the lease as a whole. This lease contained a surrender clause that contained an exception for wear and tear, damage by fire, or other casualty beyond the tenant’s control. According to the Stein court, the Cerny-Pickas holding established that when a landlord relies on fire insurance to make itself whole, the tenant, in effect, pays the insurance premium as part of its rent. Although the lease did not obligate either party to purchase fire insurance, common business practice, according to the court, dictated that the landlord protect its commercial property through fire insurance. Thus, the court held that the parties intended that the tenant would not be liable for damages resulting from a fire caused by the tenant’s negligence, thereby placing the loss on the landlord. 241 N.E.2d at 443. See also American National Bank & Trust Co. v. Edgeworth, 249 Ill.App.3d 52, 618 N.E.2d 899, 188 Ill.Dec. 329 (1st Dist. 1993) (residential tenant could not be held liable for negligently causing fire damage to building when landlord obtained fire insurance, as landlord must look to its insurer for reimbursement; it would be incongruous to require landlord and tenant to carry insurance when tenant pays for insurance out of its rent). In Sheridan v. Comp-U-Motive, Inc., 168 Ill.App.3d 451, 522 N.E.2d 800, 119 Ill.Dec. 138 (2d Dist. 1988), the lease failed to specify whose responsibility it was to carry fire insurance on the premises. When the premises were destroyed by fire, “[t]he yield-back clause with its unconditioned fire loss exception [became] a complete affirmative defense” because the landlord had waived the tenant’s breach of a lease covenant that prohibited the use or storage of flammable fluids on the premises. 522 N.E.2d at 803. The issue presented in One Hundred South Wacker Drive, Inc. v. Szabo Food Service, Inc., 60 Ill.2d 312, 326 N.E.2d 400 (1975), was slightly different. The landlord contended that the yield-up clause did not exempt the tenant from liability for damages to the entire building as a result of the tenant’s negligence. In examining the lease, the court determined that, because the yield-up clause referred only to the demised premises, the lease did not contemplate liability for



damage to the rest of the building. 326 N.E.2d at 402 – 403. Nevertheless, because the lease contemplated that the landlord would carry insurance on the entire building, the court held that the yield-up clause released the tenant from liability for fire loss damages to both the demised premises and the building caused by its negligence. 326 N.E.2d at 403. In Continental Casualty Co. v. Polk Brothers, Inc., 120 Ill.App.3d 395, 457 N.E.2d 1271, 75 Ill.Dec. 712 (1st Dist. 1983), the landlord’s insurer sought recovery against the tenant under its right of subrogation when the tenant’s negligence caused a fire that destroyed the demised premises. The court ruled that even though the yield-up clause failed to specifically exclude fire damage, it “merely raise[d] ambiguity” as to the parties’ intent. 475 N.E.2d at 1276. The court ruled in favor of the tenant, holding that when lease terms indicate an express or implied intent that the landlord carry fire insurance, the landlord shoulders the burden of such a loss. The court said “the key factor in determining whether the parties intended to exculpate lessee negligence is the allocation of insurance burdens as evidenced by the terms of the lease.” Id. The Illinois Supreme Court affirmed the Cerny-Pickas, supra, rationale in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314, 597 N.E.2d 622, 173 Ill.Dec. 648 (1992). In Dix, the landlord’s insurer sought a right of subrogation against the tenant after a fire occurred while the tenant performed certain improvements to the property with the landlord’s permission. The court examined the residential lease as a whole and determined that, while it did not contain a “yield-back” clause, the lease did contemplate that the tenant would insure only its personal property. While the lease exculpated the landlord from fire damage, this provision presumably applied only to the tenant’s personal property. Consequently, regardless of the tenant’s alleged negligence, the landlord’s insurer could not recover from the tenant. 597 N.E.2d at 625 – 626. Essentially, the Illinois Supreme Court adopted the view that, unless otherwise stated in the lease, a tenant is a coinsured with its landlord because part of the tenant’s rent payments can be attributed to the landlord’s insurance premium. 597 N.E.2d at 626. A somewhat similar question was considered with a different result in Regent Insurance Co. v. Economy Preferred Insurance Co., 749 F.Supp. 191 (C.D.Ill. 1990). Regent also involved a suit by a landlord’s insurer, this time when it sought arbitration of a subrogation claim against the tenant’s insurer. Noting that Illinois law considers a tenant to be a coinsured of its landlord absent an express agreement to the contrary, the court construed Cerny-Pickas, supra, and its progeny to stand for the principle that “the tenant is only a co-insured when there is something in the lease which can be interpreted as exonerating him from his own negligence” (i.e., a yield-up or yield-back clause). 749 F.Supp. at 195. In Regent, the court determined that the landlord and its tenant were not coinsureds when the lease did not contain a specific exculpation provision addressing losses due to fire. Thus, the landlord’s insurer possessed a valid subrogation claim against the tenant’s insurer. Id. Dix and Regent appear contradictory and indicate the unsettled state of Illinois law until Dix. In developing its rationale and rendering its opinion in Dix, the Illinois Supreme Court did not consider Regent, casting doubt on the precedential value of Regent under Illinois law. Indeed, the district court in the Regent opinion acknowledged that the Illinois Supreme Court had not yet addressed the issue before it. 749 F.Supp. at 192. Thus, Dix represents the current state of Illinois law with respect to allocating the risk of fire loss caused by a tenant’s alleged negligence absent lease provisions clearly allocating that risk.



2. [7.43] Situations in Which Tenant Bears Risk of Loss A number of other cases have held the tenant liable for damage to its premises and the remainder of the landlord’s building. Applying the reasoning of the court in Continental Casualty Co. v. Polk Brothers, Inc., 120 Ill.App.3d 395, 457 N.E.2d 1271, 75 Ill.Dec. 712 (1st Dist. 1983), discussed in §7.42 above, the court in Artoe v. Cap, 140 Ill.App.3d 980, 489 N.E.2d 420, 95 Ill.Dec. 199 (1st Dist. 1986), imposed liability on the tenant for damages as a result of a fire. Under the Artoe tenant’s lease, unlike the lease in Continental Casualty, the tenant was expressly required to carry fire and extended coverage insurance on the building. 489 N.E.2d at 428. In First National Bank of Elgin v. G.M.P., Inc., 148 Ill.App.3d 826, 499 N.E.2d 1039, 102 Ill.Dec. 259 (2d Dist. 1986), the court construed the lease to hold a tenant liable for damage resulting from a fire caused by the tenant’s negligence. The lease at issue did not contain a surrender clause, but it did contain a clause that required the tenant to maintain the premises in the same condition as when they were received (normal wear and tear excepted). It also contained an indemnification clause that protected the landlord from damages arising out of any accidents occurring on the premises and a clause that exempted the tenant from liability for structural repairs and other major electrical and plumbing repairs unless such repairs were necessitated by the tenant’s negligence. The lease also provided that, in the event of a fire, the landlord could either terminate the lease or repair the premises. The circumstances surrounding the execution and delivery of the lease were also unique, as the lease was drafted by the tenant. Despite the rare opportunity for the tenant to act in its favor, a majority of the lease provisions seemed to contemplate that the tenant would be liable for its negligence, and other provisions were uncertain as to the landlord’s obligation to carry insurance on the premises. The court determined, based on the uncertainties in the lease, that the parties intended that the tenant would be liable for fire loss caused by its own negligence. 499 N.E.2d at 1040 – 1041. Similarly, the tenant was found liable for damages caused by a fire in Fire Insurance Exchange v. Geekie, 179 Ill.App.3d 679, 534 N.E.2d 1061, 128 Ill.Dec. 616 (3d Dist. 1989) (overruling Anderson v. Peters, 142 Ill.App.3d 182, 491 N.E.2d 768, 96 Ill.Dec. 489 (3d Dist. 1986)). Geekie reaffirmed the established common law rule in Illinois that “in the absence of an express agreement to the contrary, a tenant is liable for damages to the leased premises resulting from his failure to exercise due care.” 534 N.E.2d at 1062. In this case, which involved an oral lease creating a residential tenancy, the court found no evidence indicating intent to exculpate the tenant from liability for damages due to fire caused by the tenant’s negligence. Id. In Troccoli v. L&B Products of Illinois, Inc., 189 Ill.App.3d 319, 545 N.E.2d 219, 136 Ill.Dec. 695 (1st Dist. 1989), while a landlord’s forcible entry and detainer action was pending against a “holdover” tenant, the demised premises were destroyed by fire. The landlord filed suit against the tenant for damages as a result of the fire. The tenant sought to take advantage of the holdover clause of the lease, which provided for a specified amount of liquidated damages (which the tenant was paying on a daily basis pursuant to court order), claiming that the holdover clause released the tenant from liability for the fire. However, the court found that the tenant was not a holdover tenant but a tenant at sufferance and consequently could not take advantage of the liquidated damages provision of the holdover clause. Thus, the tenant was liable for damages to the landlord as a result of the fire. 545 N.E.2d at 221.



B. [7.44] Other Loss Events Issues involving damage to demised premises as a result of events other than fire, such as water damage or storm damage, appear to be litigated rarely in Illinois. The lease at issue in one case, Arling v. Zeitz, 269 Ill.App. 562 (1st Dist. 1933), contained an exculpatory clause that released the landlord from liability for damage sustained by the tenant due to the landlord’s failure to keep the premises in repair. The exculpatory clause also specifically released the landlord from liability for injury caused by defective plumbing, water pipes, water leaks, and the like. The Arling court found the clause valid, and the landlord was permitted to raise it as a defense to any claim of liability for such losses. The court noted, however, that such a clause would not exculpate the landlord from liability when the loss was caused by the landlord’s own active or passive negligence or acts or omissions when the landlord knew a defect existed. 269 Ill.App. at 566 – 568. The decision in Arling, while decided many years before the enactment in Illinois of the Landlord and Tenant Act, is consistent with the requirements of the Landlord and Tenant Act and caselaw under that Act which are discussed in §7.30 above. In Nylint Corp. v. Ingram, 11 Ill.App.3d 122, 296 N.E.2d 392 (2d Dist. 1973), the tenant sued the landlord to recover damages caused by storm water penetrating into the demised premises. The basis for the suit was a purported implied covenant that the landlord would keep the outer walls of the premises repaired. However, the lease contained a statement that the landlord would not carry insurance to protect the tenant from property damage due to water. The court ruled in favor of the landlord, noting that the express covenant, which placed on the tenant the burden of carrying insurance on its property for water damage, prevailed over any implied covenant that would hold the landlord liable for such damage. 296 N.E.2d at 393. In Wanland v. Beavers, 130 Ill.App.3d 731, 474 N.E.2d 1327, 86 Ill.Dec. 130 (1st Dist. 1985), the tenants recovered from their landlord damages they sustained when their apartment flooded as a result of inadequate drainage in and around the apartment building. When the tenants leased the apartment, the landlord failed to disclose its awareness of the latent defect that resulted in continuous flooding of the building and failed to disclose that the problem had been severe enough to prompt the city to initiate condemnation proceedings against the apartment building. The tenants’ recovery was based on the common-law duty of the landlord to disclose latent defects in the demised premises. 474 N.E.2d at 1329 – 1330. The landlord’s obligations with respect to latent defects are discussed in greater detail in §7.25 above. C. [7.45] Waiver of Subrogation Provisions Attorneys representing commercial landlords should draft and examine carefully those lease provisions that allocate the risk of property damage losses (often incorrectly referred to as “casualty losses”) between the landlord and the tenant in order to provide greater comfort that the landlord’s and tenant’s expectations as to their respective rights and obligations will be met if an insured or uninsured loss occurs. In many commercial leases today, landlords and tenants are agreeing to a so-called “waiver of subrogation” provision, in an effort to avoid legal issues such as those raised in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314, 597 N.E.2d 622, 173 Ill.Dec. 648 (1992), and Regent Insurance Co. v. Economy Preferred Insurance Co., 749 F.Supp. 191 (C.D.Ill. 1990), discussed in §7.42 above. Such provisions are intended to place the burden of an insured loss on the party obligated to insure such a loss and its insurer.



The following is a sample lease provision addressing the waiver of subrogation issue. Landlord and Tenant agree to have all fire and extended coverage and property damage insurance that may be carried by either of them to contain or be endorsed with a clause providing that any release from liability of or waiver of claim for recovery from the other party entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of that policy or the right of the insured to recover thereunder and providing further that the insurer waives all rights of subrogation that the insurer might have against the other party. Without limiting any release or waiver of liability or recovery contained in any other section of this Lease but, rather, in confirmation and furtherance thereof, each of the parties hereto waives all claims for recovery from the other party for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance policies. Notwithstanding the foregoing or anything contained in this Lease to the contrary, any release or any waiver of claims shall not be operative, nor shall the foregoing endorsements be required, in any case in which the effect of such release or waiver is to invalidate insurance coverage or the right of the insured to recover thereunder or to increase the cost thereof (provided that in the case of increased cost, the other party shall have the right, within ____ days following written notice, to pay such increased cost, thereby keeping such release or waiver in full force and effect). Whitledge v. Klein, 348 Ill.App.3d 1059, 810 N.E.2d 303, 304, 284 Ill.Dec. 650 (4th Dist. 2004), discussed in §7.30 above, involving a subrogation claim by the insurers of several tenants whose personal property was damaged or destroyed in a fire, might appear to question the enforceability of waivers of subrogation. However, there is no indication in the case that the leases actually contained a waiver of subrogation. Rather, the only language quoted from the leases and other documents provided to the tenants by the landlord is a statement to the effect that the landlord would not be responsible for the tenants’ property in case of an accident and that the tenant was responsible to “ensure Resident’s property and persons for whom Resident is or may be responsible.” Id. Thus, it appears there is no dispositive Illinois case addressing the enforceability of a waiver of subrogation clause in the context of a commercial or residential lease. Ohio Casualty Group v. Dietrich, 285 F.Supp.2d 1128 (N.D.Ill. 2003), discussed in §7.35 above, was a subrogation claim by a tenant’s insurer against the landlord, but the case focused on the cause of the fire, which was the act of an arsonist, and did not discuss the issue of the insurance company’s subrogation rights, nor did it mention whether the lease contained a waiver of subrogation. The issue of subrogation is also discussed in Chapters 1 and 3 of this handbook. For excellent, more detailed discussions on the issue of subrogation in commercial leases, see Myles Hannan, Using Property Insurance, Mutual Waiver, and Waiver of Subrogation Clauses in Commercial Leases (with Model Clauses), 17 Prac. Real Est.Law. 23 (Mar. 2001), and Alan M. Di Sciullo, A Guide to Subrogation in Commercial Leases, 20 Real Est.L.J. 299 (1992). See also Property Insurance Subrogation from A to Z, ABA National Institute, Section of Tort and Insurance Practice (1991).



VIII. [7.46] SECURITY DEPOSITS Illinois statutory law governing a landlord’s obligations with respect to tenant security deposits is applicable only to lessors of residential real property. See Security Deposit Interest Act, 765 ILCS 715/0.01, et seq. Very little Illinois authority exists on the subject of security deposits in commercial leases, generally suggesting that most lease provisions adequately address the entitlement of both the landlord and the tenant to the security deposit in the commercial context. Issues that might arise involving a tenant’s security deposit include (a) the landlord’s right to use the deposit, (b) the conditions under which the deposit must be returned to the tenant, and (c) the deductions the landlord may make from the security deposit. A commercial lease might contain a simple but broad covenant requiring the tenant to deposit with the landlord a certain sum as security for its full and faithful performance of every provision of the lease to be performed by the tenant. However, landlords that use a more extensive and specific provision, such as the following, should experience fewer disagreements with their tenants. Upon execution of this Lease, as additional security for the full and prompt performance by Tenant of all Tenant’s obligations under the Lease, Tenant has paid to Landlord the sum of $______________ (Security Deposit). The Security Deposit may be used, retained, or applied, in whole or in part, by Landlord for the purpose of curing any default or defaults of Tenant under this Lease. Landlord shall not, unless required by law, be obligated to keep the Security Deposit separate from its general funds or to pay interest thereon to Tenant. If Tenant has not defaulted or if Landlord has not used, retained, or applied the Security Deposit to cure any defaults, then the Security Deposit or any portion thereof not applied by Landlord shall be paid to Tenant within 30 days after the termination of this Lease or any extensions or renewals of the Lease. If the whole or any part of the Security Deposit is used, retained, or applied for the curing of any defaults, Tenant shall, within ten days after written demand, deposit with Landlord an amount equal to the amount used, retained, or applied so that Tenant shall at all times have on deposit with Landlord an amount equal to the original Security Deposit. The use, retention, or application of the Security Deposit or any part of it by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by law and shall not operate as a limitation on any recovery to which Landlord may be entitled. A. [7.47] Landlord’s Duty To Return Security Deposits Illinois law governing a commercial landlord’s duties and liabilities with respect to the return of a security deposit is sketchy. Auker v. Gerold, 67 Ill.App.2d 425, 214 N.E.2d 618 (5th Dist. 1966), establishes the basic principle that when the lease provision is unclear, a tenant’s money paid in advance of the lease term will be construed as security for the tenant’s performance under the lease. 214 N.E.2d at 624. In Auker, the lease at issue provided for the security deposit to be credited to the tenant during the last two years of the lease. The lease, however, was terminated prior to the last two years of the term as a result of the destruction of the premises by fire, and the landlord refused to return the security deposit to the tenant, arguing that the money was an advance rent payment that the landlord was entitled to retain. In dictum, the court remarked that a



tenant’s right to a return of its security deposit should be determined by “whether the money was paid to secure performance or was the contracting parties’ determination of liquidated damages.” 214 N.E.2d at 620. The Auker court discussed a series of old Illinois cases that established the following principles. First, unless the parties provide otherwise, payments to secure performance under a contract are adjusted on the basis of actual damages resulting from nonperformance. 214 N.E.2d at 622, citing Advance Amusement Co. v. Franke, 268 Ill. 579, 109 N.E. 471 (1915). Second, tenants are entitled to a refund of unearned advance rent payments absent “compelling considerations to the contrary.” 214 N.E.2d at 622, citing Virginia Amusement Co. v. Mid-City Trust & Savings Bank, 220 Ill.App. 147 (1st Dist. 1920). The Auker court noted the lease’s ambiguity as to whether the money was paid as a security deposit or as a rent advance, but it ruled that the tenant was nevertheless entitled to a return of the security deposit. “The lessee here was in no respect guilty of a nonperformance. The lessee was deprived of the possession and enjoyment for which this sum was to be reserved. The Illinois authorities are so firm in allowing a refund for a defaulting tenant that we feel it would be inconsistent to be less favorable to a nondefaulting tenant.” 214 N.E.2d at 624. In an older Illinois case, Cauley v. Northern Trust Co., 315 Ill.App. 307, 43 N.E.2d 147 (1st Dist. 1942), the tenant sought return of a security deposit held by the defendant in trust. Under the lease at issue, the tenant had been evicted for breach of a covenant to construct a new building. The court held that the tenant was not entitled to a refund of its security deposit. 43 N.E.2d at 155. The principles articulated in Auker, supra, were further interpreted in a later bankruptcy case, In re New World Institute, Inc., No. 89 A 1065, 1990 Bankr. LEXIS 369 (Bankr. N.D.Ill. Feb. 23, 1990) (debtor lessee sought return of security deposit alleging that landlord locked it out of leased premises and removed its personal property). In New World Institute, the bankruptcy court identified six principles with respect to security deposits: 1. A security deposit may be held for the purpose of prepaid rent or to secure tenant performance under the lease. 2. A non-defaulting tenant is more likely to recover its security deposit than a defaulting tenant. 3. If the security deposit is held by the landlord as prepaid rent, the tenant has no absolute right to its refund. 4. The lease must designate the security deposit as prepaid rent if the landlord so intends; otherwise, any security deposit will be construed as security for the tenant’s performance. 5. A security deposit held as security for tenant performance is recoverable upon lease termination. 6. The landlord can deduct actual damages, evidenced by appropriate documentation, from a deposit held as security for the tenant’s performance.



Because the lease at issue in New World Institute stated that the security deposit could not be deemed an advance payment of rent, the bankruptcy court held that the tenant would be entitled to a full refund of the deposit unless the landlord proved that it suffered damages which might be offset against the deposit by reason of the tenant’s breach of the lease. 1990 Bankr. LEXIS 369 at **5 – 7. Under the foregoing authorities, unless a lease clearly specifies the purpose of the security deposit and under what conditions the tenant is not entitled to its return, the tenant will be entitled to a refund of its security deposit upon the termination of the lease, less the landlord’s actual damages, if any, for nonperformance. Advance rent payments will likewise be refundable unless the lease clearly provides that such payments will be forfeited if the lease is terminated early as a result of a default by the tenant. Even when no landlord-tenant relationship was actually formed, at least one Illinois appellate court case has relied to some extent on the foregoing principles in determining whether the landlord was obligated to refund a sum paid by a prospective tenant to its prospective landlord. In Koutselas v. Certified Chemicals, Inc., 86 Ill.App.2d 89, 230 N.E.2d 293 (1st Dist. 1967) (abst.), a prospective tenant gave a landlord $2,000, but a lease between the parties was never executed. In this situation, the court held that the landlord was obligated to return the funds to the prospective tenant. According to the court, the evidence failed to show that the money was for any purpose other than a security deposit. B. [7.48] Assignments of Security Deposits A landlord who assigns its interest in a lease nevertheless remains liable to the tenant and the tenant’s assignee for the return of a security deposit upon the expiration of the lease term unless the landlord transfers the deposit to the landlord’s assignee. McDonald’s Corp. v. Blotnik, 28 Ill.App.3d 732, 328 N.E.2d 897, 900 (3d Dist. 1975). In McDonald’s, the appellate court held that a landlord that assigned its rights under a lease remained liable to its tenant’s assignees for the security deposit when the original landlord had not transferred the security deposit to the successor landlord. Id. The court reasoned that the landlord’s assignment did not release it from the obligation to return the security deposit, which was a personal obligation of the landlord as a pledgee, not as a landlord. The court concluded that the security deposit was given to the landlord as a pledgee for the landlord’s conditional benefit. Id. IX. [7.49] OPTIONS TO RENEW AND OPTIONS TO PURCHASE Frequently, a commercial landlord will grant a tenant an option to extend or renew its lease. Sometimes the landlord will grant a tenant an option to purchase the demised premises during the lease term on specified terms and conditions. Either type of option may provoke litigation regarding a landlord’s duty to honor the option when the existence of a valid lease or a tenant’s compliance with the conditions of the option are in question.



A. [7.50] Options To Renew or Extend Lease Unless a lease expressly provides an option to renew or extend its term, the tenant possesses no right to an extension or renewal. 24 I.L.P. Landlord and Tenant §121 (1980). Illinois caselaw differentiates between a lease renewal and a lease extension, the renewal being “a covenant to grant an additional term upon the condition specified,” and the extension being “not a mere right to an additional enjoyment of the term, but . . . a present demise for a future term.” J.B. Stein & Co. v. Sandberg, 95 Ill.App.3d 19, 419 N.E.2d 652, 656, 50 Ill.Dec. 544 (2d Dist. 1981). See Sutherland v. Goodnow, 108 Ill. 528, 534 – 535 (1884). A lease extension is considered a privilege that, when exercised, will create a present demise through the end of the extended term; a lease renewal is a present demise for the initial term with a privilege to obtain a new lease for an additional period of time. Sanni, Inc. v. Fiocchi, 111 Ill.App.3d 234, 443 N.E.2d 1108, 1114, 66 Ill.Dec. 945 (2d Dist. 1982). In Chicago Title & Trust Co. v. GTE Directories Corp., No. 94 C 5003, 1995 U.S.Dist. LEXIS 14331 (N.D.Ill. Sept. 29, 1995), the court rejected the theories of the original tenant, the defendant, that an agreement between the landlord and an assignee was a renewal and not an extension. First, the original tenant argued that since the lease gave the tenant the right to extend the lease, that right was reserved to the original tenant, which meant that when the lease was assigned, the assignee’s agreement was a renewal and not an extension. The court held that when a lease gives the tenant the right to extend the lease, that right may be transferred from the original tenant to subsequent tenants. 1995 U.S.Dist. LEXIS 14331 at *4. Thus, if a landlord wishes to grant a right to renew or extend the lease to the original tenant only, the landlord should explicitly state in the lease that the right is reserved to the original tenant. The court also relied on the language of the lease to discount the defendant’s argument that the lease contemplated renewals and not extensions. The court’s decision was based on the fact that the lease referred to a first extended term and a second extended term, the fact that the lessee had to give written notice at least one year prior to the expiration of the term, and the fact that the option did not require the execution of a new lease. 1995 U.S.Dist. LEXIS 14331 at *11. As a result, the original tenant was not released from liability and would have continuing obligations under the extension. 1995 U.S.Dist. LEXIS 14331 at *9. In J.B. Stein & Co., supra, whether the tenant had exercised an option to extend or an option to renew was critical to the court’s decision on the primary issue in the case — whether a lease clause exculpating the landlord from all liability was enforceable and thus barred the tenant’s claim against the landlord for damage to its property allegedly caused by a fire that resulted from an overloaded electrical wiring system. The option provision in the lease referred to the right as an option to renew or extend, but it required notice to exercise the option before the original lease terminated and provided that the renewal was to be on the same terms, covenants, and conditions as the original lease (with certain limited exceptions). The tenant’s notice stated it was exercising its option to extend, and the court determined that the original lease had been extended. Since the original lease had been executed before the effective date of the Landlord and Tenant Act, which voided such exculpatory clauses, but only prospectively, the court found the clause enforceable and barred the tenant’s recovery from the landlord. 419 N.E.2d at 657. The enforceability of exculpatory clauses in leases and the Landlord and Tenant Act are discussed in §§7.30 – 7.33 above.



With the exception of GTE Directories Corp. and J.B. Stein & Co., the distinction between an option to renew and an option to extend alone rarely gives rise to disputes between landlord and tenants. Rather, the focus of most litigation in this area is on a landlord’s refusal to recognize a tenant’s exercise of its option to renew or extend. For purposes of the discussion §§7.51 – 7.53 below, the term “option to renew” is used to describe either situation. 1. [7.51] Exercise of Option To Renew; Excusable Neglect The usual option to renew clause requires the tenant to exercise the option by a specified time before the expiration of the initial lease term and according to other express conditions. As a general rule, if a tenant fails to exercise the option in accordance with the conditions contained within the relevant lease, the landlord need not recognize the attempted exercise of the option. Dikeman v. Sunday Creek Coal Co., 184 Ill. 546, 56 N.E. 864 (1900). The most commonly litigated situation arises when a tenant exercises the renewal option after the option deadline. In Dikeman, the tenant, a coal mining company, neglected to exercise an option to renew a ten-year lease until six days after the option expired. Upon expiration of the lease term, the landlord brought a forcible detainer action for possession. The tenant sought equitable relief in the form of a judicial declaration extending the lease pursuant to the option. Because the option was conditioned on an exercise by a specified date, the court held that equitable relief was unavailable to relieve the tenant of the consequences of its “forgetfulness.” 56 N.E. at 865. The court did suggest, however, that some “just excuse for non-compliance” with the terms of an option, such as fraud, accident, or mistake, might justify equitable relief in another situation. Id. However, the tenant’s monetary investment and contractual obligations in its business did not warrant equitable relief, given the tenant’s negligence in exercising its option to renew. Id. More recently, Illinois courts have elaborated on the Dikeman court’s suggestion that certain circumstances might justify enforcement of a renewal option despite the tenant’s failure to comply with its terms. When equity requires, a tenant has been held in some cases to be entitled to specific performance of a lease provision granting it an option to renew the lease even if it did not strictly comply with the renewal provision. In Linn Corp. v. LaSalle National Bank, 98 Ill.App.3d 480, 424 N.E.2d 676, 53 Ill.Dec. 885 (1st Dist. 1981), a tenant made permanent property improvements of nearly $200,000, presumably with the intention of exercising two five-year options to renew contained in its lease. The tenant orally communicated its intent to exercise the option to the landlord, but failed to inform the landlord in writing by the date the option expired. When the landlord notified the tenant that the lease would expire at the end of the initial term due to the tenant’s failure to exercise the option in writing, the tenant filed a specific performance action against the landlord. The Linn Corp. court, in discussing Dikeman, supra, noted that although fairness usually requires strict compliance with the terms of the option, the expense of the tenant’s improvements and the landlord’s right to keep all the tenant’s improvements at the end of the term distinguished this case from Dikeman. 424 N.E.2d at 679. The Linn Corp. court excused strict compliance with the terms of the option because the tenant’s noncompliance was inadvertent, the landlord had oral notice of the tenant’s intention to renew as well as subsequent written notice, and the parties



could not have intended that such extensive improvements would be made merely for a two-year lease term. Id. The court said: “[T]he alleged facts in this case do not present the kind of case in which the value of the consideration given by the tenant for an option to renew is merely enough to compensate the lessor for the value of the time in which the option is to be held open [or] the kind of case in which the option to renew is merely a privilege with no corresponding right or privilege of the lessor.” Id. A somewhat similar factual situation arose, but with a different result, in Ceres Terminals, Inc. v. Chicago City Bank & Trust Co., 117 Ill.App.3d 399, 453 N.E.2d 735, 72 Ill.Dec. 860 (1st Dist. 1983). In Ceres Terminals, the tenant exercised the first of four successive five-year renewal options but failed to timely exercise the second five-year renewal option. The court stated: “Illinois law does permit equitable mitigation of late renewal options provided that special circumstances rising to the level of undue hardship to lessee are established.” 453 N.E.2d at 739. However, in holding that the tenant failed to show such hardship, the court noted that ordinary business expenditures were not the “economic detriment” necessary to invoke the equitable powers of the court. Id. In a later case, a tenant’s failed attempt to properly exercise its renewal option was excused in Gold Standard Enterprises, Inc. v. United Investors Management Co., 182 Ill.App.3d 840, 538 N.E.2d 636, 131 Ill.Dec. 261 (1st Dist. 1989). In this case, the lease required the tenant to notify its landlord whether it intended to renew the lease 90 days before the end of the lease term. The tenant was required to deliver the notice in person or by certified mail, postage prepaid. 538 N.E.2d at 637. The tenant mailed the notice in a timely fashion, but the letter had 20 cents postage due and was returned to the post office. The landlord received two notices from the post office advising it the letter was available to be picked up, but the landlord neglected to retrieve it. The post office marked the tenant’s notice “postage due” despite the fact that subsequent letters between the parties were delivered for the same amount of postage that the tenant used on its notice. 538 N.E.2d at 638. Despite the tenant’s failure to pay adequate postage, and therefore its failure to comply with the lease provision, the court held that equity relieved the tenant from the consequence of its failure since its failure resulted from an uncontemplated accident. 538 N.E.2d at 639. The decisions in Linn Corp., Ceres Terminals, and Gold Standard Enterprises suggest that a landlord may be compelled to honor a renewal option when a tenant has undertaken to perform beyond the mere payment of rent, will suffer a loss greater than the ordinary cost of conducting a business, or has inadvertently, but excusably, failed to comply with the terms of the renewal option. Absent such special circumstances, the general rule articulated in Dikeman would require the tenant to comply strictly with the terms of the lease or option before the landlord is required to honor an attempted exercise of the option. 2. [7.52] What Constitutes Valid Exercise of Option To Renew A tenant’s strict compliance with the terms of a renewal option constitutes a valid exercise of the option. However, what actions constitute a valid exercise of an option to renew are not always apparent. Although necessarily a fact-specific inquiry, a number of Illinois cases provide some guidance in determining whether an attempted exercise of a renewal option is valid.



When a lease provides a renewal option but fails to specify the manner in which to exercise the option, notice may be given orally, but an oral exercise of the option must occur during the original lease term. Kaybill Corp. v. Cherne, 24 Ill.App.3d 309, 320 N.E.2d 598, 608 (1st Dist. 1974). See also Anderson v. Dodsworth, 292 Ill. 335, 127 N.E. 43 (1920); Butz v. Butz, 13 Ill.App.3d 341, 299 N.E.2d 782 (5th Dist. 1973). In contrast, however, in Kurek v. State Oil Co., 98 Ill.App.3d 6, 424 N.E.2d 56, 53 Ill.Dec. 643 (1st Dist. 1981), a tenant’s notice to one of five land trust beneficiaries of its intent to exercise a renewal option was not effective to exercise the option because it did not satisfy the terms of the lease. The Kurek lease clearly required that the notice be sent to the land trustee. Furthermore, the beneficiary to whom the notice was sent could not act on behalf of the other beneficiaries to renew the lease pursuant to the option and lacked the requisite power of direction over the trustee. 424 N.E.2d at 59. A more recent case, Oliva v. Amtech Reliable Elevator Co., 366 Ill.App.3d 148, 851 N.E.2d 256, 303 Ill.Dec. 358 (1st Dist. 2006), addresses the issue of what constitutes a valid exercise of an option to extend a lease when the lease is silent on how the option is to be exercised. In Oliva, the landlords entered into a lease with Amtech agreeing to lease an office suite to Amtech for six years. Near the end of that lease term, the landlords “sent a letter to Amtech confirming that Amtech wished to extend its lease for a three-year term. The letter was to be considered a rider to the original lease and all terms of the new lease period would be ‘exactly the same as [Amtech’s] original lease’ except” as noted in the rider. 851 N.E.2d at 258. In addition to stating the rent for the following three-year term, the rider also contained a statement granting Amtech an additional three-year option at an increased rent for each of the three years. Amtech signed the rider and continued to occupy the premises for each of the three years of the first extension as stated in the rider. Upon expiration of the first three-year extension, Amtech began paying the increased rent for the first year of the three-year extension. Shortly before the end of the first year of the second extension, Amtech assigned the lease and extension to Otis Elevator Company (Otis), and when the second year of the second extension began, Amtech started paying rent at the rent called for in the rider. Three months later, Otis notified Amtech that Otis would be vacating the premises effective approximately two months later. In its notice, Otis claimed the lease had expired in August 2002 (the expiration of the first extension), and that Otis had been occupying the premises as a month-to-month tenant. 851 N.E.2d at 259. The landlords filed a suit for breach of contract against both Amtech and Otis, claiming Amtech had exercised the second option, and as Amtech’s assignee, Otis was liable for rent for the entire remainder of the second three-year extension. The trial court dismissed the claim, holding the landlords had failed to state a cause of action because the lease required Amtech to notify the landlords in writing of its exercise of the option and that Amtech gave no such written notice. Id. On appeal, the First District Appellate Court found that neither the lease nor the rider required Amtech to give written notice of its intention to exercise its option to extend the lease. The only mention of notices the court found in the lease stated merely “any notices required or permitted to be given under this Lease shall be effective only if given in writing.” 851 N.E.2d at 260. As a result, the question became “whether the law requires some type of written or verbal



notice of an exercise of an option to extend a lease where the agreement between the parties setting forth the option is silent regarding notice.” Id. The court held that the law did not. Rather, it held that when “a tenant has the privilege of extending the term of a lease as distinguished from renewing a lease, no notice of the tenant’s election is required in the absence of a stipulation requiring such notice, ‘merely remaining in possession being sufficient notice.’ ” 851 N.E.2d at 260 – 261, quoting Vincent v. Laurent, 165 Ill.App. 397, 403 (4th Dist. 1911). The Oliva court went on to note that any requirement in a lease that the tenant give notice to the landlord is for the benefit of the landlord and can be waived by acceptance of the higher rent, absent some evidence to the contrary. Further, while noting there was authority to the effect that a landlord’s acceptance of rent after expiration of a lease containing an option to renew and containing no provision as to how or when the option was to be exercised creates a year-to-year tenancy (citing Butz, supra), the court found because Amtech remained in possession and paid the increased rent, Amtech exercised its option to extend for the second three years. 851 N.E.2d at 261. The holdover provision of the lease was not helpful to Amtech because it stated a holdover would require payment of rent at the same rate as was being paid during the last year of the term, so when Amtech paid the higher rent called for in the rider, the landlords were reasonably entitled to assume it had exercised the option. 851 N.E.2d at 261 – 262. Finally, the court held there was no statute of frauds problem, as the lease and rider were sufficient writings to satisfy the statute of frauds requirements when coupled with the fact that Amtech remained in possession and paid the higher rent called for in the rider. As a result, the court reversed the trial court’s order dismissing the landlords’ complaint and remanded the case for further proceedings. 851 N.E.2d at 262 – 263. In at least one case, an assignee’s purported exercise of a renewal option was held invalid because the written notice of exercise appeared to have been written on the assignor’s behalf, not on behalf of the assignee. According to the court, the assignor had no right to exercise the option after the assignment. Cole v. Ignatius, 114 Ill.App.3d 66, 448 N.E.2d 538, 542, 69 Ill.Dec. 820 (1st Dist. 1983). For a further discussion of the effect of lease assignments on options to renew or extend, see §7.53 below. 3. [7.53] Effect of Lease Assignments on Options To Renew A long-established principle of Illinois law is that an option to renew will pass to the assignee upon a tenant’s assignment of the lease. Sutherland v. Goodnow, 108 Ill. 528, 534 (1884). In Sutherland, the tenant was granted an option to renew, provided the landlord did not sell the demised premises during the lease term. During the lease term, the landlord sold the property, and the tenant either sublet the demised premises or assigned the lease (the parties disagreed as to what occurred). The assignee or sublessee executed a lease agreement with the new landlord for a new lease term, but the original tenant attempted to exact a higher rent from its assignee or sublessee for the period of the lease renewal on the basis of the provisions in the original lease. The court held that the original tenant not only had no basis for such an attempted exaction, but also no longer possessed the option to renew. According to the court, if the original tenant assigned the lease, the option passed by assignment to the assignee, and if the original tenant sublet the premises, the original tenant’s interest in the lease renewal terminated on the landlord’s sale of the premises. 108 Ill. at 534 – 536.



A tenant cannot prevent its assignee from exercising a renewal option, and a landlord must honor a valid exercise of such an option. Danaj v. Anest, 77 Ill.App.3d 533, 396 N.E.2d 95, 33 Ill.Dec. 19 (2d Dist. 1979) (assignee of lease possessed only those rights contained in original lease; when lease contained renewal option, assignee obtained right to exercise that option). Similarly, in Bevelheimer v. Gierach, 33 Ill.App.3d 988, 339 N.E.2d 299, 303 (1st Dist. 1975), the court noted that although the original tenant lost its right to enforce a lease renewal by assigning the lease, an option to renew “runs with the land and is enforceable by the assignee.” In Bevelheimer, which involved a suit by a client against his attorney for failure to notify the client’s landlord of the client’s election to renew the lease, the assignee was a corporation formed by the original tenant, who became the sole shareholder of the corporation. Id. In Sanni, Inc. v. Fiocchi, 111 Ill.App.3d 234, 443 N.E.2d 1108, 66 Ill.Dec. 945 (2d Dist. 1982), the defendant, as executrix of an estate, leased retail space in a shopping center to a beauty salon operator. The lease, which subsequently passed in the distribution of the estate to a new landlord, prohibited the landlord from renting space in the shopping center to another beauty salon. Some years later, the defendant, who was also a residuary devisee of other property in the shopping center, leased a portion of that other property to another beauty salon despite the lease prohibition. The tenant sought an injunction to prevent the other beauty salon from remaining a tenant in the shopping center. The defendant attempted to argue that because the tenant had failed to give her notice of its exercise of its renewal option, the prohibition against competing beauty salons was no longer binding on her. The tenant, however, had sent notice of its intent to renew to its new landlord, who had executed a renewal of the lease. The court ruled that the tenant’s exercise of the option to renew was valid because the lease merely required notice to be sent to the current landlord, not the previous landlord. The court further held that the restrictive covenant remained in effect during the extended term of the lease and was binding on all devisees of the original landlord. 443 N.E.2d at 1114. B. [7.54] Options To Purchase Commercial leases sometimes contain options to purchase the demised premises conditioned on fulfillment of the terms of the option. An option to purchase is a “continuing and irrevocable offer [binding] the lessor to convey to the lessee upon compliance with the terms of the option.” Okey, Inc. v. American National Bank & Trust Co., 96 Ill.App.3d 987, 422 N.E.2d 221, 224, 52 Ill.Dec. 540 (1st Dist. 1981). An option to purchase is transferable. Keogh v. Peck, 316 Ill. 318, 147 N.E. 266, 269 (1925). A tenant must comply with the conditions of an option to purchase in order to exercise its right to purchase. Lake Shore Country Club v. Brand, 339 Ill. 504, 171 N.E. 494 (1930). A landlord’s duty to convey is, however, conditioned on the existence of a valid lease. Okey, supra, 442 N.E.2d at 224. In Sandra Frocks, Inc. v. Ziff, 397 Ill. 497, 74 N.E.2d 699, 702 (1947), the landlord terminated the lease because of the tenant’s failure to make timely rent payments. Thereafter, the tenant attempted to exercise an option to purchase contained in a rider to the lease. The court disagreed with the tenant’s contention that the option to purchase was an undertaking independent of the terms of the lease. The court held that the option was an “integral part of the lease” that terminated when the lease terminated. 74 N.E.2d at 703. The same rule was applied in Bond v. Long, 338 Ill.App. 1, 86 N.E.2d 585, 587 (4th Dist. 1949), a case in which the tenant attempted to



exercise a purchase option after the landlord terminated the lease for breach of a covenant. The court determined that the landlord owed no obligation to the tenant under those circumstances. Thus, the Illinois common law clearly provides that a tenant cannot exercise an option to purchase contained in a lease after expiration or forfeiture of the lease since the contractual right to the option no longer exists. Other rules governing options to purchase are discussed in Cities Service Oil Co. v. Viering, 404 Ill. 538, 89 N.E.2d 392 (1949) (tenant sought specific performance of purchase option under lease executed by landlord when landlord’s wife refused to convey and release her dower rights). Although the tenant is not obligated to purchase, the landlord is obligated to convey if the tenant exercises its purchase option. Under Illinois law, such an option does not lack mutuality. The agreement to pay rent or perform other acts is considered “sufficient consideration.” 89 N.E.2d at 401. On the other hand, a landlord “may not, by a breach of a covenant to convey, compel the continuance of the relation of landlord and tenant for the purpose of creating a breach of covenant to pay rent so as to enable him to declare the option forfeited.” 89 N.E.2d at 403. Thus, once a tenant validly exercises an option to purchase, a landlord cannot declare a forfeiture of the lease. Cole v. Ignatius, 114 Ill.App.3d 66, 448 N.E.2d 538, 544, 69 Ill.Dec. 820 (1st Dist. 1983). Noting that in the absence of language requiring a tenant to continue paying rent from the time the tenant exercises its option to purchase the property, at least one Illinois court has held that the tenant’s obligation ended once it became the equitable owner of the property. Industrial Steel Construction, Inc. v. Mooncotch, 264 Ill.App.3d 507, 637 N.E.2d 663, 202 Ill.Dec. 124 (1st Dist. 1994). In Mooncotch, the tenant exercised its option to purchase that was contained in the lease. The landlord and tenant were unable to reach agreement on the appraised value of the property until a court-appointed appraiser submitted a value. The court ruled that the tenant’s obligation to pay rent to the landlord ended once it became the equitable owner of the property, which occurred when the court-appointed appraiser submitted its appraised value of the property. 637 N.E.2d at 667. The court did not address the equity of the tenant’s continuing to occupy the premises without paying rent between the time the price was fixed and the closing, at which time the purchase price would have been payable to the landlord. Presumably, the court would also have held (had the issue been raised) that as the equitable owner the tenant was responsible for all costs associated with ownership of the premises (e.g., real estate taxes, insurance, utilities, maintenance, and repair and replacement costs). The court did not address this issue, nor did it discuss the effect on the obligation, if any, of the landlord to make principal and interest payments on any outstanding mortgage. Thus, Mooncotch illustrates the need for landlords to be sure any leases containing options to purchase specifically provide that the tenant remain obligated as a tenant to pay rent and otherwise perform all of its obligations under the lease until the closing occurs and the purchase price is paid. In Hindu Incense Manufacturing Co. v. MacKenzie, 403 Ill. 390, 86 N.E.2d 214 (1949), the court considered whether an option to purchase continues during a renewal term that resulted from an exercise of an option to renew. Noting that an option to purchase is an integral part of a lease and a lease is indivisible, the court ruled that an option to renew “under the same terms and conditions” would extend the option to purchase during the renewal period and would remain a valid obligation of the landlord. 86 N.E.2d at 215 – 216. The court said that in order to create an option to purchase independent of the lease, that intention must be expressly stated. Id.



In Artful Dodger Pub, Inc. v. Koch, 230 Ill.App.3d 806, 596 N.E.2d 39, 172 Ill.Dec. 760 (1st Dist. 1992), the tenants first exercised their option to purchase contained in the lease by means of a notice sent to the landlord by their counsel. That counsel later sent a second notice on behalf of the tenants, rescinding the option to purchase and electing to exercise the tenants’ option to renew the lease. The tenants claimed their counsel had no authority to send the second notice and within a few days sent another notice to the landlord withdrawing the second notice and advising the landlord they wanted to hold the landlord to the first notice exercising the option to purchase. 596 N.E.2d at 40. The court held the tenants had met all of the terms of the option to purchase (despite the landlord’s contention that the tenants had abandoned the option contract) and had not released the landlord from its obligation to close (despite their counsel’s erroneous interim notice), and the landlord was bound by the first option to purchase notice when it had not changed its position on the basis of the erroneous interim notice. 596 N.E.2d at 41. In Douglas Theater Corp. v. Chicago Title & Trust Co., 210 Ill.App.3d 301, 569 N.E.2d 88, 155 Ill.Dec. 88 (1st Dist. 1991), the owner of several parcels of land containing a fire-damaged building leased a portion of the land and building to one tenant and another portion of the land and building to a second tenant. The first tenant’s leased premises included a portion of the basement under the second tenant’s premises, and the second tenant’s leased premises included a portion of the building that encroached onto an adjoining city-owned alley. The second tenant’s lease also included an option to purchase, and upon its exercise of the option to purchase, the then landlord (who happened to be the same individual who operated the first tenant’s business) disputed the right of the second tenant to purchase the basement area leased to the landlord’s company and the portion of the public alley which by then had been vacated by the city. 569 N.E.2d at 91. The court found both parcels were unambiguously included in the option to purchase, although the second tenant’s purchase of the basement area was subject to the first tenant’s lease rights. 569 N.E.2d at 93 – 95. The appellate court also held the trial court properly reserved the issue of the second tenant’s claim for “equitable compensation” on account of the landlord’s breach of its obligation to convey the property under the lease. 569 N.E.2d at 97. The opinion did not address how the rent payable under the first tenant’s lease following the closing of the sale would be allocated between the landlord (which still owned the remainder of the premises leased to his own company) and the second tenant, nor did it address the issue of what would happen to the basement area once the first tenant’s lease expired. The facts did not indicate whether the basement area under the building was physically divided by a demising wall between the two parts of the building that would be owned by two separate parties after the sale. In White Hen Pantry, Inc. v. Rak Woo Cha, 214 Ill.App.3d 627, 574 N.E.2d 104, 158 Ill.Dec. 310 (1st Dist. 1991), a number of issues instructive to landlords and tenants in drafting options to purchase and rights of first refusal in leases were addressed, including whether an option to purchase remains in effect during the lease renewal terms. In White Hen Pantry, the lease contained both an option to purchase at a fixed price and a right of first refusal that required the landlord to give notice to the tenant of any bona fide offer to purchase it received during the lease term, but it allowed the tenant to purchase the property at the option price regardless of the amount offered to the landlord by the bona fide offeree. 574 N.E.2d at 107 – 108. After the tenant was notified by the landlord of an offer to purchase the property that the landlord had received from a different third party (the Chas), the tenant notified the landlord it wanted to exercise its right to buy the property. The tenant then entered into a contract to sell the property to a third



party (White Hen) and closed on that sale. At the tenant’s closing with White Hen, the tenant escrowed the funds necessary to complete the purchase of the property from the landlord. White Hen later sued the landlord for specific performance when the landlord failed to convey the property to the tenant so the tenant could convey the property to White Hen. White Hen also sued the Chas for declaratory relief from any claims by the Chas under their contract with the landlord. 574 N.E.2d at 106. The court enforced the lease option between the landlord and the tenant, holding it was properly exercised. The fact that some terms were missing in the lease option (e.g., provisions regarding time within which the option must be exercised after notice from the landlord of a third-party offer, proration of rent and taxes, payment of closing costs, and types of closing documents to be delivered, including the type of deed) was not fatal. According to the court, the types of terms that were missing from the lease were nonessential and could be supplied by implication from the circumstances or custom, including performance within a reasonable period of time. 574 N.E.2d at 108. A more recent case illustrates how problems can arise for a tenant that fails to faithfully perform all lease obligations and then also fails to properly exercise an option to purchase. It also illustrates some of the difficulties landlords have in administering their leases and providing timely notices of default. In Wolfram Partnership, Ltd. v. LaSalle National Bank, 328 Ill.App.3d 207, 765 N.E.2d 1012, 262 Ill.Dec. 404 (1st Dist. 2001), the tenant’s amended lease obligated it to deposit the full purchase price in escrow in order to exercise its option to purchase the property. 765 N.E.2d at 1016. When the tenant sent notice of its intent to exercise the option almost eight years after a lease amendment specifying how the tenant must exercise an option to purchase and escrow instructions to facilitate the sale were signed, the tenant failed to make any deposit into the escrow, and when notified by one of the landlord’s beneficiaries of that failure, the tenant only deposited $50,000 of the $250,000 required. Ongoing discussions and correspondence between the tenant and one of the owners continued for a number of months with no definitive written agreement signed by all owners agreeing to accept the lesser amount until the scheduled closing date, although some activities toward closing were undertaken by one of the landlord’s beneficiaries. 765 N.E.2d at 1017 – 1018. Thus, when another one of the beneficiaries sent a notice to the tenant of two breaches of the lease, the court was unable as a matter of law to conclude the tenant’s interest in the property had been converted from a tenancy to a vendee, which would have made the later notice of breach under the lease ineffective to result in a right to terminate. 765 N.E.2d at 1020 – 1021. As a result of the number of factual issues the appellate court identified, both on the tenant’s and the landlord’s side, the appellate court reversed the trial court’s grant of summary judgment on the issues of whether the uncured breach by the tenant (failure to provide a copy of a sublease to the landlord — the lease did not require the tenant to obtain the landlord’s consent to any sublease) was material (the landlord had notice the sublease existed for a number of years prior to declaring a default) and whether the landlord had waived its right to rely on that breach to declare a forfeiture of the lease and thereby terminate the option to purchase. 765 N.E.2d at 1027 – 1028. C. [7.55] Comment In granting an option to purchase, a landlord should give serious consideration to the circumstances under which it is willing to convey the property and draft the lease accordingly.



For instance, in a long-term commercial lease containing, perhaps, one or more options to renew, is the landlord more willing to part with the property sooner rather than later? Does the landlord wish to limit the purchase option to the original tenant, to increase the required purchase price over time, or to limit the option to purchase to the initial lease term if the tenant has an option to renew? Such considerations and others will dictate the terms of an option to purchase. A properly drafted option to purchase that reflects the parties’ intent will reduce the risk of any subsequent misunderstandings between the landlord and the tenant. The landlord might also want to consider specific provisions governing the time periods for performance by the tenant, prorations, responsibility for closing costs, and forms for closing documents to avoid disputes such as those that arose in White Hen Pantry, Inc. v. Rak Woo Cha, 214 Ill.App.3d 627, 574 N.E.2d 104, 158 Ill.Dec. 310 (1st Dist. 1991), discussed in §7.54 above. X. ENFORCEMENT OF TENANT COVENANTS AND OTHER LEASE

PROVISIONS A. [7.56] Effect of Landlord’s Failure To Enforce Lease Provisions In any commercial lease, certain conditions and covenants form the basis of the relationship between the landlord and the tenant. The conditions on which a landlord agrees to lease the premises, as well as the covenants a tenant makes for the benefit of the landlord, allocate to the tenant certain duties and liabilities. Nevertheless, if the landlord does not strictly enforce such conditions and covenants, the landlord may lose the protection otherwise afforded by such provisions. Jung v. Zemel, 189 Ill.App.3d 191, 545 N.E.2d 242, 245 – 246, 136 Ill.Dec. 718 (1st Dist. 1989) (landlord’s failure to object to subtenant, as well as landlord’s participation in negotiations between tenant and subtenant regarding possible sale of dry cleaning business, constituted waiver of lease provision requiring landlord consent to subletting). Landlords must recognize that any leniency in enforcing a lease condition or covenant may waive that condition or covenant. The general rule is that once the landlord waives the tenant’s breach, the landlord cannot later assert that breach as the basis for forfeiture. Garbaczewski v. Vanucci, 342 Ill.App. 367, 96 N.E.2d 653, 654 (1st Dist. 1950). A failure by the landlord to require proper certification or complain the certifications provided by the tenant were inadequate for three decades meant the landlord waived the requirement that the tenant provide certified statements of past gross sales to assist the landlord in properly calculating percentage rent, although the court expressly made no decision on whether the landlord’s waiver would preclude the enforcement of the obligation to provide certified statements on a going-forward basis. In re Kmart Corp., 286 B.R. 345, 347 (Bankr. N.D.Ill. 2002) (when lease permitted landlord to inspect Kmart’s records within six months after delivery of statement of gross sales, right to inspect was allowed only as to last lease year). The cases discussed in §§7.57 – 7.61 below highlight instances in which landlords have unwittingly relinquished rights of forfeiture and how they can reinstate or avoid such waivers. The most frequently litigated situations in which a landlord’s waiver of a tenant’s obligations is at issue have arisen in the context of the landlord’s acceptance of late payments of rent. The respective obligations and rights of landlords and tenants in that context are discussed in §§7.57 – 7.61 below. There are also cases in which failures by landlords to enforce other lease obligations



are at issue. The most frequently litigated of those other situations involve waivers by landlords of their rights to object to or approve assignments and subleases. These cases are discussed in §§7.62 – 7.71 below. The effect of a breach by the landlord of one of its lease covenants on the tenant’s obligations is discussed in §7.70 below, and the tenant’s rights if the landlord fails to properly terminate the tenancy are discussed in §7.71 below. Special circumstances do exist for certain types of landlords when the common law waivers will not apply. One such example is discussed in §7.72 below. 1. [7.57] Waiver by Acceptance of Late Rent Payments In Perretta v. Exchange National Bank (In re Perretta), 7 B.R. 103 (Bankr. N.D.Ill. 1980), the court held that the landlord’s acceptance of late rent payments waived the landlord’s right to prompt rent payments under the lease. As a result, the late payments could not be the basis for a forfeiture. Furthermore, the landlord was estopped on two separate grounds from alleging that the tenant’s violation of a non-assignment clause and nonpayment of real estate taxes were grounds to terminate the lease. First, the landlord did not inform the tenant that the actual occupant was unacceptable even though the landlord knew that the tenant signing the lease was not the actual occupant of the premises. Second, the landlord did not give the tenant notice of the amount of real estate taxes it owed. 7 B.R. at 105. In Okey, Inc. v. American National Bank & Trust Co., 96 Ill.App.3d 987, 422 N.E.2d 221, 52 Ill.Dec. 540 (1st Dist. 1981), a tenant attempted to exercise an option to purchase under a lease, but the landlord refused to convey because the tenant had breached the lease some years earlier by failing to pay rent when due, by voluntarily filing bankruptcy proceedings, and by subsequently making late rent payments. The court held that the landlord’s acceptance of back rent in the resolution of the bankruptcy case and subsequent acceptance of late rent payments estopped the landlord from asserting nonpayment as a bar to the tenant’s exercise of the option to purchase. Furthermore, because the parties continued in a landlord-tenant relationship governed by a valid lease, the tenant’s prior bankruptcy had not terminated the lease. 422 N.E.2d at 224. In Sixeas v. Fogel, 253 Ill.App. 579 (1st Dist. 1929), a landlord brought a forcible entry and detainer action against its tenant for the late payment of rent and separately gave the tenant notice of its intention to terminate the lease. The tenant had customarily paid the rent late, and the landlord had always accepted the late payment. Under these circumstances, the court found it would be manifestly unfair to forfeit the tenant’s rights under the lease when the landlord had induced the tenant to believe that strict compliance with the lease terms was not required. The court said: “[T]he law obligated the [landlord], before declaring a forfeiture, to give notice of his intention to insist upon a strict compliance with the terms of the lease with reference to the time the rent should be paid.” 253 Ill.App. at 581 – 582. 2. [7.58] Landlord’s Reinstatement of Previously Waived Right to Prompt Payment After a landlord has been lenient in enforcing a lease provision, the landlord may insist on strict compliance with that lease provision, but only by giving the tenant written notice of the landlord’s intent to enforce it. See Sixeas v. Fogel, 253 Ill.App. 579 (1st Dist. 1929). By so doing, the landlord should be able to preserve its right to forfeiture upon the occurrence of a subsequent



default, as well as its ability to pursue all other available legal arguments if the landlord-tenant relationship becomes the subject of a lawsuit. For instance, in LaSalle National Bank v. Khan, 191 Ill.App.3d 41, 547 N.E.2d 472, 474, 138 Ill.Dec. 305 (1st Dist. 1989), the court affirmed a judgment of possession for the landlord when the landlord notified the tenant, after six months of accepting the tenant’s late rental payments, that subsequent late payments would not be accepted and would be considered a breach of the lease. Similarly, in Fox v. Commercial Coin Laundry Systems, 325 Ill.App.3d 473, 757 N.E.2d 529, 530, 258 Ill.Dec. 840 (1st Dist. 2001), the lease called for percentage rent payments for a coin-operated tenant laundry to be paid “semi-annually” without more. Accordingly, the landlord was within his rights to send a notice to the tenant stating his understanding that payments would be due January and July 2 of each year, and stating he refused to accept any future late payments. Then, when the tenant failed to pay the next percentage rent portion when due, the landlord was also within its rights to send a five-day notice of termination, and when the tenant still failed to pay within that five-day period, the landlord was entitled to summary judgment as a matter of law in the landlord’s forcible entity and detainer action against the tenant. 757 N.E.2d at 532. In Rubloff CB Machesney, LLC v. World Novelties, Inc., 363 Ill.App.3d 558, 844 N.E.2d 462, 300 Ill.Dec. 464 (2d Dist. 2006), the landlord filed a complaint for possession of the premises against its coffee shop tenant when the tenant paid its January 2003 rent on January 3 (the Monday after January 1, which fell on a Saturday). Under the facts before it on the landlord’s and tenant’s motions for summary judgment, the trial court granted summary judgment to the landlord, and the tenant appealed. 844 N.E.2d at 464. Because the landlord had demanded strict compliance with the lease after numerous breaches by the tenant, including prior late payments, the appellate court held the late payment breach was material and affirmed the trial court’s grant of summary judgment in favor of the landlord. 844 N.E.2d at 469 (citing several cases allowing landlord to demand strict performance with lease after not previously demanding strict performance of its terms). The tenant’s other breaches of the lease were based on the failure to “operate its business ‘in a dignified manner consistent with the general high standard of merchandising in the [mall] and not in a disreputable manner.’ ” 844 N.E.2d at 464. Most likely the other prior breaches had some influence on the court, as they included such things as the tenant’s “owner allegedly making inappropriate sexual comments toward a minor girl who came into defendant’s coffee shop[,] . . . defendant’s owner allegedly imprisoning a family member in the back of defendant’s coffee shop,” allegedly yelling disparaging remarks about the defendant’s competitors, and allegedly harassing mall employees who bought food from competitors. 844 N.E.2d at 467. 3. [7.59] Waiver of Right to Prompt Payment Does Not Waive Tenant’s Obligation

To Pay A landlord’s acceptance of late rental payments does not act as a waiver of its right to enforce the rent provisions of the lease. Pros Corporate Management Services Inc. v. Ashley S. Rose, Ltd., 228 Ill.App.3d 573, 592 N.E.2d 609, 170 Ill.Dec. 173 (2d Dist. 1992). In Pros Corporate Management Services, the landlord, Louis Allen & Associates, Inc., conveyed the property to Louis Allen by warranty deed, thereby giving the grantee the right to recover unaccrued rents. 592 N.E.2d at 614. The issue was whether the grantee waived his right to enforce the provisions



of the lease when his agent accepted rental payments after the tenant breached the rent provisions. 592 N.E.2d at 615. The court held that the grantee did not waive his right to collect past due rents when his agent accepted rental payments for less than the full amount of past due rent. Therefore, the tenant remained obligated to pay such rent. At trial, there was testimony that the tenant was delinquent some months with rent payments and on one occasion made a lump-sum payment of four rent payments. 592 N.E.2d at 612. The tenant vacated the premises owing $13,042.22 in rent. The grantee’s agent subsequently mailed the tenant a rental statement advising it of the past due rent to which the tenant never responded. 592 N.E.2d at 611. The Pros Corporate Management Services court distinguished that case from Okey, Inc. v. American National Bank & Trust Co., 96 Ill.App.3d 987, 422 N.E.2d 221, 224, 52 Ill.Dec. 540 (1st Dist. 1981), discussed in §7.57 above, on the basis that Okey stands for the proposition that acceptance of late rent waives a landlord’s right to declare a forfeiture under a lease. However, according to the Pros Corporate Management Services court, Okey does not support the notion that a landlord waives its right to collect past due rent by accepting rental payments for less than the full amount of past due rent. 592 N.E.2d at 615. 4. [7.60] Waiver of Tenant’s Obligations Does Not Make Landlord Liable to Third

Parties Although a landlord’s failure to enforce lease provisions may adversely affect its rights against the tenant, it is unlikely this failure alone will expose the landlord to risk of liability to third parties. See Caswell v. Zoya International, Inc., 274 Ill.App.3d 1072, 654 N.E.2d 552, 211 Ill.Dec. 90 (1st Dist. 1995). Caswell brought suit against a store operator and store owner seeking damages for injuries she sustained when she fell through a trapdoor upon entering a store. 654 N.E.2d at 553. She claimed that the store operator breached the lease, which required the operator to obtain liability insurance, by failing to enforce that provision, and that, as a member of the general public, she was an intended third-party beneficiary of that provision. Id. The court concluded that the provision was intended only to protect the landlord and the tenant, and although the parties were aware that members of the general public would benefit from the lease provision, this awareness did not transform the plaintiff, as a member of the general public, from an incidental third-party beneficiary to an intended one. 654 N.E.2d at 554. As a result, the court dismissed the plaintiff’s claim, concluding that because she was not an intended third-party beneficiary under the lease, she lacked standing to raise the claim. The court based its holding on general principles of third-party beneficiary law under which a third-party beneficiary relationship arises when intended by the parties. Absent express language evidencing the intent to create a third-party beneficiary relationship, that relationship will not be found to exist. In this case, the court found no language in the lease from which one could infer that the plaintiff as a member of the general public was an intended beneficiary, and she could not seek damages for the landlord’s failure to enforce the tenant’s obligation to procure premises liability insurance. Id. The landlord’s tort liability to third parties is discussed in more detail in §§7.23 – 7.29 above.



B. [7.61] Effect of Non-Waiver Provisions Attorneys representing commercial landlords who have a history of accepting late payments from tenants should advise their clients to preserve any right of forfeiture under the lease by giving written notice to the tenant that the landlord intends to hold the tenant to the strict language of the lease. After giving such a notice, the landlord should wait a reasonable period of time before declaring a breach. A landlord might also protect itself by inserting a clause in the lease that provides that any waiver of forfeiture will not operate to waive a subsequent tenant forfeiture or breach of lease conditions. See, e.g., Justine Realty Co. v. American Can Co., 119 Ill.App.3d 582, 456 N.E.2d 871, 75 Ill.Dec. 50 (1st Dist. 1983) (landlord’s after-the-fact consent to multiple sublettings by tenant did not waive lease provision requiring tenant to obtain landlord’s consent prior to subletting when lease also provided that landlord’s waiver of tenant’s breach of lease covenants or conditions could not be construed as waiver of covenant or condition or of subsequent breaches). The following two examples illustrate these non-waiver provisions. No waiver of any condition expressed in this Lease shall be implied by any neglect of Landlord to enforce any remedy on account of the violation of such condition if such violation is continued or repeated subsequently, and no express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated.

[or] The Landlord’s waiver of or consent to any default or breach of any term, condition, or covenant of this Lease shall not be deemed a waiver of or consent to any subsequent default or breach of any term, condition, or covenant of this Lease. Of course, even such non-waiver provisions can be waived by the landlord’s acts or written waiver. See, e.g., Waukegan Times Theatre Corp. v. Conrad, 324 Ill.App. 622, 59 N.E.2d 308, 312 (2d Dist. 1945) (waiver of provision requiring written consent to assignments could be inferred by law from both landlord’s conduct and its agent’s oral statements, as could waiver of lease’s non-waiver clause); Fuchs v. Peterson, 315 Ill. 370, 146 N.E. 556 (1925) (oral waiver of lease provision requiring written notice of lease renewal two months prior to end of initial term). Similarly, a landlord that fails to follow lease provisions addressing termination and forfeiture of the lease upon a tenant’s default may lose the benefit that such provisions provide. Lease provisions waiving the statutory requirement that the landlord provide notice to the tenant of a default and termination of the lease are enforceable in Illinois. Sandra Frocks, Inc. v. Ziff, 397 Ill. 497, 74 N.E.2d 699, 703 (1947). However, the landlord’s failure to comply with the strict terms of such advantageous lease provisions will result in a waiver of the right to enforce them. In order to reenter the premises upon a tenant’s default, landlords should exercise particular caution to observe the requisite mechanisms, whether imposed by law or contractual agreement, to reenter the premises legally without incurring liability to the defaulting tenant.



In Sixeas v. Fogel, 253 Ill.App. 579 (1st Dist. 1929), the commercial lease at issue provided that the tenant expressly waived service of demand for rent and notice of the landlord’s intention to terminate the lease and to reenter the premises upon the tenant’s default and that any breach of the tenant’s covenants was a forcible detainer for purposes of Illinois statutory law. However, these provisions were found unenforceable as a result of the landlord’s voluntary service of notice to the tenant of its termination of the lease. Because the landlord failed to terminate the lease pursuant to the lease provisions, the landlord was required to observe the statute, which gave the tenant the right to tender back-due rent to the landlord within a specified number of days after the service of notice. Accordingly, when the tenant tendered the rent within the statutory time period, the landlord had no right to evict the tenant. 253 Ill.App. at 583. In Marling Group v. Gully’s, Inc. (In re Gully’s, Inc.), 8 B.R. 556 (Bankr. N.D.Ill. 1981), a landlord’s failure to notify its tenant of its intent to strictly enforce timely payment of rent resulted in a waiver of the landlord’s right to forfeiture without notice under the lease. The landlord’s notice of forfeiture did not comply with the statutory notice requirements contained in Article IX of the Code of Civil Procedure, 735 ILCS 5/9-101 et seq. (governing forcible entry and detainer), which requires landlords to provide tenants with a five-day notice demanding rent and a ten-day notice to quit. As a result, the landlord’s attempted forfeiture was ineffective. 8 B.R. at 557. See also Korte v. National Super Markets, Inc., 173 Ill.App.3d 1066, 528 N.E.2d 10, 123 Ill.Dec. 626 (5th Dist. 1988) (landlord’s written demand for possession failed to conform to lease provisions governing landlord’s right to forfeiture, thereby failing to terminate lease). Thus, landlords must strictly enforce the lease and comply with any lease provisions that provide the landlord a right to declare a forfeiture of the lease in a manner different from the statutory forcible entry and detainer requirements. Otherwise, landlords must comply with Article IX of the Code of Civil Procedure. Under 735 ILCS 5/9-209, after rent is due, a landlord may demand payment of the rent by notifying the tenant in writing that unless the tenant pays the amount due by the date specified in the notice, which must be not less than five days after service of the notice, the lease will be terminated. This is most often called a “five-day notice.” If the tenant fails to pay within the specified time period, the landlord may sue for possession in forcible entry and detainer pursuant to Article IX of the Code of Civil Procedure. A landlord may also choose to give its tenant a ten-day notice to quit or to terminate the tenancy after the tenant defaults in performing any of the terms of the lease. See 735 ILCS 5/9-210. A landlord’s rights and duties with respect to tenant breaches are covered more thoroughly in Chapter 8 of this handbook. C. [7.62] Assignment of Lease and Subletting of Premises Although assignment and subletting of commercial leases are addressed more extensively in Chapter 6 of this handbook, it is appropriate to discuss here how assignments and sublettings can affect a landlord’s duties and liabilities to the tenant. Under Illinois common law, a tenant has the right to assign or sublease at will. Cole v. Ignatius, 114 Ill.App.3d 66, 448 N.E.2d 538, 541 – 542, 69 Ill.Dec. 820 (1st Dist. 1983) (assignment is valid in absence of express restriction on



assignment). Landlords frequently attempt to limit this broad tenant right by including lease provisions specifically limiting the tenant’s right to assign or sublet. Edelman v. F.W. Woolworth Co., 252 Ill.App. 142, 145 (1st Dist. 1929). A landlord’s duties and liabilities under such provisions are most often disputed when the landlord fails to object to an assignment or when the landlord withholds its consent to assignment. Because the rules of law governing a landlord’s duties and liabilities in the implementation of lease provisions pertaining to whether a landlord has the right to withhold its consent to an assignment or a subletting are virtually identical, the rules applicable to assignments and those applicable to subleases are considered interchangeable for purposes of the discussion in §§7.63 – 7.66 below. 1. [7.63] Prohibition in Lease Against Assignment Under Illinois law, outright prohibitions against assignment are permissible and are not considered invalid restraints on alienation, although they are not favored. 24 I.L.P. Landlord and Tenant §83 (1980); Associated Cotton Shops, Inc. v. Evergreen Park Shopping Plaza of Delaware, Inc., 27 Ill.App.2d 467, 170 N.E.2d 35, 39 (1st Dist. 1960); Lee M. Smolen, Filling the Gap in a Real Property Lease, 35 DePaul L.Rev. 437, 451 (1985). Generally, a court will construe such a provision against the landlord. 24 I.L.P. Landlord and Tenant §83 (1980); Edelman v. F.W. Woolworth Co., 252 Ill.App. 142, 145 (1st Dist. 1929). In Edelman, the landlord failed to state expressly in the lease that it would not consent to a sublease to a business competitor of the landlord. Accordingly, the landlord was held to have unreasonably withheld its consent to an assignment to a competitor. 252 Ill.App. at 144 – 145. It is conceivable that in a context of equal bargaining power between a landlord and a tenant a court would not object to an absolute prohibition against assignment and subletting. Lease prohibitions against assigning and subletting vary widely in their scope. For example, the prohibition may be against (a) assignment, conveyance, mortgage, pledge, hypothecation, encumbrance, or other transfer of the lease, in whole or in part, or any interest therein; (b) any assignment by operation of law; (c) subleasing the premises in whole or in part; (d) the use or occupancy of the premises by any party other than the tenant, its agent, and its employees; or (e) any combination of the other four prohibitions. An assignment by operation of law could include an assignment effected by a merger of two entities, but to include a transfer of a controlling interest within the definition of an assignment (or to require the landlord’s consent to such an event) requires specific language to that effect. In Associated Cotton Shops, supra, the lease specifically allowed the landlord to terminate the tenant’s lease on 60 days’ notice if there was a transfer of a majority of the shares of a corporate tenant that resulted in a change in control. 170 N.E.2d at 37. The court noted this was an appropriate means by which the landlord could adequately protect itself from what would otherwise, in effect, be a substitution of the lessee, and the corporate lessee was bound by the provisions as written. 170 N.E.2d at 39. The landlord’s notice of its election to terminate the lease, which was given within 35 days after learning of the transfer of the stock, was within a



reasonable period of time after the transfer, and the landlord did not waive its right to give the notice when it accepted rent after the transfer but before sending its notice of termination. 170 N.E.2d at 40. Commonly, however, strict prohibitions against assignment or subletting in commercial leases are moderated by a provision reserving to the landlord, either in its sole discretion or without unreasonably withholding its consent, the right to approve a proposed assignment or sublease. A reservation of a right in the landlord to consent to any proposed assignment or sublease is for the landlord’s benefit only, but it can be waived by the landlord itself. Kaybill Corp. v. Cherne, 24 Ill.App.3d 309, 320 N.E.2d 598, 606 – 607 (1st Dist. 1974). In Kaybill, a landlord who leased tavern space to a husband and wife was held to have waived the right to consent to the tenants’ subsequent assignment of the lease to a corporation they formed. The court concluded that a covenant against assignment without the landlord’s consent may be waived by the landlord’s subsequent inconsistent conduct amounting to an estoppel. Id. The Kaybill decision is discussed in greater detail in §7.64 below. Although the reservation of the right in the landlord to approve a proposed assignment or sublease is for the landlord’s benefit only, the landlord is bound to the standards it writes for consents to an assignment or sublease. Thereafter the landlord cannot object to a proposed assignment or sublease if the tenant has met the appropriate requirements. Bolingbrook Equity I Limited Partnership v. Zayre of Illinois, Inc., 252 Ill.App.3d 753, 624 N.E.2d 1287, 1296, 191 Ill.Dec. 909 (1st Dist. 1993) (assignment valid when tenant properly complied with lease requirement of giving landlord notice of “intended assignment” setting forth nature of business organization and “effective date of the intended assignment”). Rather than rely on judicial discretion, however, if a landlord is aware of a particular circumstance in which it would refuse to consent to an assignment or sublease, it should protect its interests by an explicit statement to that effect in the lease. To protect its interests that exist regarding particular uses of the demised premises or the type of tenant that is acceptable to the landlord, a landlord could expressly condition its consent to an assignment or sublease on the tender of a substitute tenant meeting the same standards as the original tenant with respect to such matters as quality or uniqueness of business or merchandise, trade or industry name recognition, cost of merchandise, character, reputation, or financial capability. 2. [7.64] Landlord’s Failure To Object to Assignment An assignment in contravention of a lease provision is not void but voidable by the landlord. 24 I.L.P. Landlord and Tenant §104 (1980). See also Woods v. North Pier Terminal Co., 131 Ill.App.3d 21, 475 N.E.2d 568, 86 Ill.Dec. 354 (1st Dist. 1985). A landlord’s failure to object to an assignment can constitute a waiver of the lease’s restrictions on assignment. If the lease requires the landlord’s consent to an assignment, the landlord will be held to have waived its right to withhold consent to the assignment of a lease if it fails to object to a tenant’s lease assignment, accepts rent from the assignee, and treats the assignee as a tenant. See American National Trust Company of Chicago v. Kentucky Fried Chicken of Southern California, Inc., 308 Ill.App.3d 106, 719 N.E.2d 201, 209, 24 Ill.Dec. 340 (1st Dist. 1999) (landlord acquiesced to assignment by original tenant when it accepted monthly rent from assignee for five years, directed assignee to



sign real estate tax appeal affidavits stating assignee was then tenant, filed proof of claim for rent in assignee’s bankruptcy case, signed stipulation in bankruptcy proceeding naming assignee as tenant, and accepted payment under stipulation stating it was in full satisfaction of its claims under lease); Kaybill Corp. v. Cherne, 24 Ill.App.3d 309, 320 N.E.2d 598, 607 (1st Dist. 1974) (landlord may waive covenant against assignment by subsequent inconsistent conduct). In Woods, supra, the court found there had been a valid assignment despite the fact that the landlord, a municipality, had not formally executed its consent to the lease assignment as required by the Illinois Municipal Code and the terms of the lease. The assignor presented evidence of a lease assignment, correspondence from a city official expressing an intent to consent to the proposed assignment, and a city council resolution authorizing the city official to consent to the assignment. Because the city did not treat the leasehold as void or otherwise object to the assignment, the court held that the city had waived its right to consent. 475 N.E.2d at 570. See also American National Bank & Trust Company of Chicago v. Hoyne Industries, Inc., 738 F.Supp. 297 (N.D.Ill. 1990) (landlord’s failure to consent to assignment did not negate assignment or release defaulting tenant from its lease obligations), later proceeding, No. 88 C 7756, 1990 U.S.Dist. LEXIS 9453 (N.D.Ill. Jul. 30, 1990), aff’d, 966 F.2d 1456 (7th Cir. 1992) (Rule 53) (reported in full at 1992 U.S.App. LEXIS 13339). In Waukegan Times Theatre Corp. v. Conrad, 324 Ill.App. 622, 59 N.E.2d 308, 310 (2d Dist. 1945), the court held that a landlord waived the requirement that it consent in writing to any assignment of the lease when the landlord’s agent told the tenant “to go ahead [with the assignment,] and that it would be taken care of,” and thereafter the landlord’s agent knowingly accepted rent from the assignee. The court in Waukegan Times further held that a clause in the lease, which provided that the landlord’s acceptance of rent after learning of a tenant’s breach would not be construed as a waiver of the landlord’s right to act, did not prevent the landlord’s waiver of strict performance. A waiver of the written consent provision could be implied by law by both the landlord’s conduct and its agent’s oral statements, as could a waiver of the non-waiver clause. 59 N.E.2d at 312. The Waukegan Times court also relied on the fact that the landlord knew about several prior assignments of the lease but never told the tenant or any of the assignees that it would terminate the lease if the tenant failed to procure its consent in writing to any future assignment. In fact, the court found it significant that the landlord treated the lease as remaining in effect after the assignment at issue (by accepting rent from the assignees). The court also agreed with the assignee’s argument that the landlord was in no worse a position than if the assignee had obtained written consent to the assignment because the assignee had assumed and was fully prepared to comply with all of the terms of the lease, and the landlord had not attempted to declare the lease terminated until after the original tenant was declared bankrupt. 59 N.E.2d at 314. In Kaybill, supra, the landlord denied having consented to an assignment of the lease by individual lessees to a corporate tenant formed by the individuals. However, evidence at trial showed that the landlord had seen the name of the corporate tenant on a prominently displayed liquor license on the demised premises, had discussed the corporation with the individual tenants-assignors, and had accepted rent payments from the corporate assignee. Based on these facts, the court held that the landlord’s acceptance of rent from the assignee waived the landlord’s right to



forfeit the lease for breach of a non-assignment provision in the lease. By his inconsistent conduct, the landlord was estopped from denying the assignment’s validity. 320 N.E.2d at 607. In at least one case, these actions on the part of the landlord meant it waived its right to object to the assignee’s standing to sue it for a breach by the landlord of its covenant of quiet enjoyment under the lease when the assignee eventually sought injunctive relief in court to stop the landlord from continuing its work in the tenant’s space. See Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, 869 F.2d 1073, 1075 (7th Cir. 1989). Although the landlord in Infinity Broadcasting ultimately won on the merits of the tenant’s breach of the covenant of quiet enjoyment claim (which is discussed in §7.3 above), the landlord might have avoided the lawsuit in the first place had it properly objected to the assignment of the lease to the new tenant at the time it was proposed. Whether the landlord would have had such a right was not at issue in the case, however, due to the landlord’s delay in raising the objection. In Kentucky Fried Chicken, supra, the lease provided the original tenant remained primarily liable following the assignment. 719 N.E.2d at 206. Nonetheless, the trial court dismissed the landlord’s amended complaint seeking rent and real estate taxes from the owner for the remainder of the lease term and damages for failure to maintain the premises after the assignee filed for bankruptcy protection and the landlord had accepted a lump-sum payment from the assignee pursuant to a stipulation that released the assignee and all predecessors in interest. 719 N.E.2d at 206 – 207. According to the court, the original tenant was a predecessor in interest to the assignee, and had the landlord intended to preserve its claim against the original tenant, it could have expressly excluded the original tenant from the release it signed in the assignee’s bankruptcy proceedings or explicitly stated its action against the original tenant would survive the stipulation filed with the bankruptcy court. 719 N.E.2d at 212. The foregoing principles have also been followed in residential lease disputes. See, e.g., Wohl v. Yelen, 22 Ill.App.2d 455, 161 N.E.2d 339 (1st Dist. 1959). In Wohl, pursuant to an oral agreement between the landlord’s agent and the tenant regarding the tenant’s desire to sublease, the landlord’s agent furnished the tenant with a “For Rent” sign, which the tenant posted on the leased premises. Under these facts, the court held that the landlord was bound to accept the subtenant tendered by the tenant when the landlord had not claimed that the subtenant was financially irresponsible or otherwise unsuitable as a subtenant. 161 N.E.2d at 342. 3. [7.65] Unreasonable Withholding of Consent Frequently in lease provisions addressing the tenant’s right to assign or sublease, the landlord retains the right to consent to a proposed assignment or sublease but agrees its consent will not be withheld unreasonably. Even if no provision prohibits the landlord from unreasonably withholding its consent, “[i]t is well established in Illinois that where a lease forbids any sublease or assignment without the consent of the lessor, the lessor cannot unreasonably withhold his consent to a sublease.” Jack Frost Sales, Inc. v. Harris Trust & Savings Bank, 104 Ill.App.3d 933, 433 N.E.2d 941, 949, 60 Ill.Dec. 703 (1st Dist. 1982). Thus, even if a lease contains a provision against subletting or assignment without a landlord’s consent, Illinois law forbids a landlord from withholding its consent unreasonably if the tenant tenders a suitable subtenant or assignee to the landlord. Vranas & Associates, Inc. v. Family Pride Finer Foods, Inc., 147 Ill.App.3d 995, 498



N.E.2d 333, 101 Ill.Dec. 151 (2d Dist. 1986). A landlord’s duty to consent, however, is not triggered until a suitable proposed assignee or sublessee is tendered to the landlord. Jack Frost Sales, supra. See also Golf Management Co. v. Evening Tides Waterbeds, Inc., 213 Ill.App.3d 355, 572 N.E.2d 1000, 157 Ill.Dec. 536 (1st Dist. 1991) (because tenant tendered suitable sublessee, landlord’s refusal to consent to sublease was unreasonable). Disputes often arise as to what is a reasonable withholding of the landlord’s consent. This debate has led to the enunciation of certain standards of reasonableness in a number of Illinois cases. A proposed assignee or subtenant must meet certain “commercially reasonable standards,” and whether these standards are met will vary depending on the peculiar facts of each lease arrangement. Arrington v. Walter E. Heller International Corp., 30 Ill.App.3d 631, 333 N.E.2d 50, 58 (1st Dist. 1975) (“Where the lease contains provisions giving further meaning to the clause granting a person the power to withhold consent, then the standard by which reasonableness is judged is varied accordingly.”). However, at least one commentator has maintained that Illinois courts have not adopted a clear “standard for measuring the propriety of [a] landlord’s refusal to consent.” Murray S. Levin, Withholding Consent to Assignment: The Changing Rights of the Commercial Landlord, 30 DePaul L. Rev. 109, 132 (1980). The following cases illustrate some of the situations in which a landlord’s failure to consent was considered unreasonable and the standards articulated by the courts in reaching their decisions. In Vranas, supra, the court construed a lease provision that permitted the tenant to assign the lease only upon the landlord’s written consent (which the landlord was not to withhold unreasonably nor delay) in the context of the tenant’s desire to sell its business. The landlord’s refusal to consent to the tenant’s proposed assignment was held unreasonable and not based on a legitimate concern with the proposed assignee’s acceptability as a tenant. The Vranas court identified several factors composing the “commercially reasonable standard” as applied to a proposed assignment or subtenancy: financial resources and responsibility, proposed business, potential competitive impact of business on the landlord or other tenants, impact on commercial environment or surroundings, willingness to comply with lease terms, and the contemplation of the sale of the tenant’s business as reflected in the lease. 498 N.E.2d at 339. But see Reget v. Dempsey-Tegler & Co., 70 Ill.App.2d 32, 216 N.E.2d 500 (5th Dist. 1966) (in holding that landlord’s refusal to consent to sublease was not unreasonable, court identified credit history, capital, stable labor force present on premises, and proposed use of premises as valid considerations). In Jack Frost Sales, supra, the First District Appellate Court reversed a judgment for the tenant, finding that although the landlord either refused or failed to consent to an assignment, the evidence was insufficient to determine that the proposed assignee was commercially reasonable. The tenant had the burden of proving that the tendered assignee was “ready, willing and able” to accept the lease and met “reasonable commercial standards.” 433 N.E.2d at 949. In this case, the tendered assignee did not meet a reasonable standard of financial responsibility, being a corporation with stated capital of only $1,000, and the tenant failed to provide the landlord with the proposed assignee’s pertinent financial information. Furthermore, some evidence indicated that the proposed assignee sought an option to extend the term, which apparently was not available, thus raising a further question as to whether the proposed assignee was actually willing to accept the assignment absent an option to extend.



The issue was slightly different in Losurdo Bros v. Arkin Distributing Co., 125 Ill.App.3d 267, 465 N.E.2d 139, 80 Ill.Dec. 348 (2d Dist. 1984). The question was whether the landlord’s failure to respond to the tenant’s request for consent to a proposed sublease barred enforcement of the provision of the lease requiring the landlord’s prior consent. The court found the tenant’s repeated subletting of the premises without allowing the landlord time “to exercise any reasonable commercial judgment” as to whether the proposed subtenancy met commercially reasonable standards was a breach sufficient to justify an award of possession to the landlord on its forcible entry and detainer action. 465 N.E.2d at 143. The landlord’s failure to consent to the tenant’s requests to sublease was not unreasonable because the tenant in the first instance had defaulted due to the use of flammable materials on the property, in the second instance had provided the landlord only a 1-day notice of a proposed sublease, in the third instance had provided only an 11-day notice of a proposed sublease, and in all instances had substantially violated the use clause of the lease restricting the use of the premises to toy distribution. 4. [7.66] Withholding Consent in Exchange for Concessions A municipal corporation was found to have unreasonably withheld its consent to a sublease by attempting to condition its consent on a reappraisal of the property and renegotiation of the rent schedule established in the original lease. See Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary District of Greater Chicago, 131 Ill.App.2d 527, 266 N.E.2d 405, 408 (1st Dist. 1970). The court cited a New Jersey case that had found that “arbitrary considerations” of a landlord’s personal taste, sensibility, or convenience were inadequate to discharge the standard of reasonableness required of the landlord’s right of consent. 266 N.E.2d at 407, citing Broad & Branford Place Corp. v. J.J. Hockenjos Co., 132 N.J.L. 229, 39 A.2d 80, 82 (1944). Chanslor-Western Oil, supra, certainly suggests that a landlord’s attempt to condition its consent to an assignment or subletting on the exaction of greater rent is inappropriate under Illinois law, contrary to one commentator’s contention. See, e.g., Lee M. Smolen, Filling the Gap in a Real Property Lease, 35 DePaul L.Rev. 437, 451 (1985) (“A landlord is often able to obtain more favorable lease terms in exchange for allowing a tenant the right to assign a lease.”). Perhaps, as a practical matter, the case and commentator can be reconciled by the observation that some tenants and assignees may be willing to agree to more favorable lease terms in order to avoid the risk of litigation or to avoid delays in obtaining the landlord’s consent. In addition, some landlords expressly obligate the tenant to share any net revenues obtained under a sublease with the landlord by means of a provision to that effect in the original lease. The principle that a landlord cannot withhold consent in order to obtain greater rent is also supported by Toys “R” Us, Inc. v. NBD Trust Company of Illinois, No. 88 C 10349, 1995 U.S.Dist. LEXIS 14878 (N.D.Ill. Sept. 29, 1995). In Toys “R” Us, the court held that when a lease forbids any sublease or assignment without the consent of the landlord, the landlord cannot unreasonably withhold consent to a sublease regardless of whether the lease addresses the landlord’s reasonableness. 1995 U.S.Dist. LEXIS 14878 at *108. In order to have an action against the landlord under these circumstances, the tenant must prove that its subtenant was “ready, willing, and able to take over the lease” and “met reasonable commercial standards,” which include consideration of the subtenant’s financial responsibility, the type of business to be



conducted on the premises, and whether the business competes against that of the lessor or another lessee. Id., citing Golf Management Co. v. Evening Tides Waterbeds, Inc., 213 Ill.App.3d 355, 572 N.E.2d 1000, 1003, 157 Ill.Dec. 536 (1st Dist. 1991). The tenant then has the burden of proving that the lessor acted unreasonably by withholding consent in order to obtain a benefit not reflected in the terms of the original lease. The court must determine the true motivations of the landlord, discarding any pretextual motivations. 1995 U.S.Dist. LEXIS 14878 at **111 – 112. According to the court, the landlord in Toys “R” Us acted unreasonably by refusing to give his consent to the tenant’s sublease in order to have a portion of the leased building returned to him, so that he could improve his status under the lease and rent directly to the subtenant. 1995 U.S.Dist. LEXIS 14878 at *114. The court noted that the landlord initially refused to consent to the sublease without any knowledge of or inquiry into the subtenant’s finances or plans to use the space. 1995 U.S.Dist. LEXIS 14878 at *66. The court determined that the landlord’s justifications for withholding consent to the sublease were pretextual, finding no proof that they were considered at the time the landlord made the decision to reject the lease. However, the court noted that the justifications might have been reasonable had there been evidence that they were considered in determining whether to consent to the sublease. 1995 U.S.Dist. LEXIS 14878 at *114. The court considered the issue of whether the sublease would affect the landlord’s expectation of future percentage rent. The court stated that a landlord may act commercially reasonably in not consenting to a sublease or assignment that will not generate the amount of rent the landlord would have expected under the terms of the original lease. 1995 U.S.Dist. LEXIS 14878 at *117. In Toys “R” Us, however, assuming arguendo that the landlord’s percentage rent issue was not pretextual, the court determined that the landlord acted unreasonably because it had not received percentage rent under the original lease and had slim chances of ever receiving percentage rent. 1995 U.S.Dist. LEXIS 14878 at **119 – 120. The court also rejected the landlord’s other arguments as pretextual. It stated that the landlord’s concerns about restoration costs might have been reasonable if it had determined the actual costs and the likelihood that they would be necessary and communicated this concern as the reason for the rejection. However, in this case there was no proof that restoration costs were considered at the time of the rejection. 1995 U.S.Dist. LEXIS 14878 at *125. The landlord’s concerns about exterior changes also were considered pretextual and unreasonable. The lease included a provision requiring the landlord’s reasonable consent to exterior changes. The court reiterated that any consent provisions in leases have a reasonableness requirement imposed on them under Illinois law, whether or not it is explicitly required in the lease. 1995 U.S.Dist. LEXIS 14878 at *129. Since the landlord did not determine the actual costs and damages involved, its withholding of consent on this basis was deemed unreasonable. 1995 U.S.Dist. LEXIS 14878 at *125. The court also disagreed with the landlord’s argument that its rejection of the sublease was based on the subtenant’s failure to obtain consent of the property’s mortgage lender. In addition to being pretextual, the court stated that the argument was not valid because it was the landlord,



not the tenant, who had the duty to seek the lender’s approval. If the landlord had sought the lender’s consent and the lender reasonably objected, the landlord’s refusal to consent would have been “commercially reasonable.” 1995 U.S.Dist. LEXIS 14878 at *129. However, because the landlord never approached the lender for consent, there was no evidence as to whether the lender would have consented. Toys “R” Us should make landlords aware that they may suffer serious damages if they unreasonably withhold consent to a tenant’s proposed assignment or sublease. The tenant in Toys “R” Us was awarded damages on the basis that the tenant and its sublessee would have occupied the space and exercised their lease options. The court noted that when there is uncertainty in construing provisions relating to renewals or extensions of leases, the tenant is favored, not the landlord. As a result, the court assumed that both the tenant and its sublessee would have exercised all of their available options. 1995 U.S.Dist. LEXIS 14878 at *137. The court also noted that under Illinois law, an award of future damages to a plaintiff must be reduced to present-day cash value. The court determined that an 8.6-percent prime rate should be used as the discount rate to calculate damages. 1995 U.S.Dist. LEXIS 14878 at *143. However, the court requested further evidence to decide whether the tenant could prove its claimed damages for projected increases in common area maintenance and real estate taxes. The court also requested further evidence regarding prejudgment interest, but it awarded attorneys’ fees to the tenant. 1995 U.S.Dist. LEXIS 14878 at **140 – 144. Finally, the court agreed to accept supplemental evidence on the issue of whether the remaining 15,000 square feet of premises that would not have been subleased to the proffered sublessee had any residual value to offset the damages claimed by Toys “R” Us, but noted that the landlord, as the defendant, would bear the burden of proving that residual value because under Illinois law the defendant in a breach of contract action has the burden of proof on the issue of the plaintiff’s failure to mitigate its damages. 1995 U.S.Dist. LEXIS 14878 at **144 – 147. In the decision rendered following the parties’ filing of their supplemental briefs, the district court found Toys “R” Us had attempted to mitigate its damages caused by the landlord’s breach in refusing to consent to the proffered sublessee by bringing suit to compel the landlord to consent to the sublease. Further, it noted that because the landlord had failed to provide any evidence (beyond a conclusory, unsupported affidavit from one of the landlord’s beneficiaries) that the remaining space had any residual value, it accepted the tenant’s evidence that it had no residual value. See Toys “R” Us, Inc. v. NBD Trust Company of Illinois, No. 88 C 10349, 1996 U.S.Dist. LEXIS 19177 at *7 (N.D.Ill. Dec. 20, 1996). Likewise, the court accepted Toys “R” Us’ historical data on increases in common area maintenance charges and real estate taxes, as the landlord offered only an affidavit with a lower average percentage increase without any supporting data or calculations. 1996 U.S.Dist. 19177 at *9. Finally, the court awarded the tenant prejudgment interest pursuant to 815 ILCS 205/2, which provides for prejudgment interest at five percent on money due “pursuant to an ‘instrument in writing.’” Id. In all, the total amount of the damages awarded to the tenant for the landlord’s refusal to accept a subtenant proposed by the tenant was $1,575,754.40, plus $640,016.50 in attorneys’ fees and $84,208.45 in litigation expenses. 1996 U.S.Dist. LEXIS 19177 at *12. Thus, it was a very expensive lesson for the landlord that had refused to consent to a proffered subtenant even when the lease did not address the standards for the landlord’s consent.



5. [7.67] Effect of Tenant’s Bankruptcy Although bankruptcy issues are discussed in greater detail in Chapter 11 of this handbook, one case deserves some discussion here, In re Trak Auto Corp., 367 F.3d 237 (4th Cir. 2004), particularly as it affected the landlord’s right to consent to attempted lease assignment by the bankrupt tenant (similar principles should apply to assignments by a bankrupt tenant’s trustee in bankruptcy). Although the case was decided by the Fourth Circuit Court of Appeals (rather than the Seventh Circuit, which includes Illinois), the Trak Auto opinion is instructive for Illinois and other landlords in negotiating leases for shopping center tenants because it contains a thorough history of the relevant provisions of §365 of the Bankruptcy Code, 11 U.S.C. §365, as they relate to the assumption and assignment of leases by shopping center tenants. Often a bankrupt retail tenant’s key assets consist of below-market leases in shopping centers or other attractive retail locations. (The same may or may not be true of office lease locations, but the applicable provisions of the Bankruptcy Code are different.) Section 365 of the Bankruptcy Code currently contains two different provisions dealing with the right of a debtor in a bankruptcy proceeding to assign its lease notwithstanding any provisions in the lease restricting its right to assignment. The Trak Auto opinion reconciled the application of these two provisions in the context of a retail tenant’s bankruptcy. Section 365(f)(1) generally allows the tenant to assign its lease without regard to any restrictions in the lease (i.e., over any objections by the landlord or attempts by the landlord to enforce a lease provision prohibiting an assignment by the tenant without the landlord’s consent). However, as the Trak Auto case demonstrates, §365(b)(3)(C) provides more protection for landlords of bankrupt shopping center tenants than it does for other retail or office tenants. Section 365(f) of the Bankruptcy Code provides in relevant part:

(f)(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection. (2) The trustee may assign an executory contract or unexpired lease of the debtor only if —

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and (B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law that terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or



obligation under such contract or lease on account of an assignment of such contract or lease, such contract, lease, right, or obligation may not be terminated or modified under such provision because of the assumption or assignment of such contract or lease by the trustee. 11 U.S.C. §365(f).

In contrast, §365(b)(3) of the Bankruptcy Code provides: (3) For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection (f), adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance —

(A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; (B) that any percentage rent due under such lease will not decline substantially; (C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and (D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center. 11 U.S.C. §365(b)(3).

Trak Auto involved a Chicago shopping center landlord’s objection to the plan by Trak Auto to assign its auto parts store lease to a discount apparel merchandiser. The Trak Auto court held the more specific provisions of §365(b)(3)(C) controlled rather than the more general provisions of §365(f)(1). As a result, the Fourth Circuit held the bankruptcy court had erred in allowing Trak Auto to assign its lease to the apparel merchandiser when the assignment would violate the use restrictions in Trak Auto’s lease. 367 F.3d at 241 – 242. The lease restriction required the tenant to use the premises only as a Trak Auto store, which the Fourth Circuit held was based on the landlord’s “judgment that an auto parts retailer [was] important to a successful mix of stores in the center.” 367 F.3d at 244. In addition, the fact that the landlord “successfully negotiated to have the leased space dedicated to the sale of auto parts” meant the landlord had the right under §365(b)(3)(c) to insist that use restriction be honored by any Trak Auto assignee. Id. This was true, according to the Fourth Circuit, regardless of the fact that the bankruptcy court had concluded the market in the area was saturated with auto parts stores, which meant there was no market for an assignment of the Trak Auto lease to such a retailer (as evidenced by, according to the bankruptcy court, the failure of any auto parts dealer to bid on an assignment of the Trak Auto lease). Id.



The lesson for a shopping center landlord is clear. Object to any attempt by a bankrupt tenant or its trustee in bankruptcy to assume its lease if as part of its plan it intends to assign the lease to another tenant that is objectionable under any one of the §365(b)(3) requirements. These other provisions of §365(b)(3) that may apply to the attempt to assign a bankrupt tenant’s lease are not discussed here. Two articles that contain a very good summary of the law surrounding this issue are Susan G. Talley and Harris Ominsky, Assignments of Retail Leases in Bankruptcy, Part 1 — What’s Left of the Lease?, 19 Prob. & Prop. 18 (Jan./Feb. 2005), and Assignments of Retail Leases in Bankruptcy, Part 2 — On the Right Track?, 19 Prob. & Prop. 42 (Mar./Apr. 2005). Chapter 11 of this handbook also contains a more in-depth discussion of the assumption and assignment of bankrupt tenant leases generally. D. [7.68] Effect of Assignment or Subletting by Tenant For all practical purposes, the rules of law governing a landlord’s right to withhold its consent to a tenant’s assignment of the lease or a subletting of the premises are identical. However, the legal effects of an assignment and of a subletting are different. This, in turn, means that a landlord’s potential duties and liabilities will be different. Attorneys who represent commercial landlords should advise them of the effect an assignment or a sublease will have on the landlord’s duties and liabilities under the lease at issue. An assignment of a lease is distinguished from a subletting by the fact that in an assignment a tenant transfers its entire interest in the unexpired lease term. Courts interpreting Illinois law have expressed this distinction in at least two ways. For instance, the “distinction between an assignment or sale of a lease and a sublease is whether the entire leasehold passes from the lessee to his transferee so as to put the latter and the original lessor in a landlord-tenant relationship; or whether less than the leasehold interest passes so as to leave the transferee in the landlord-tenant relationship with the transferor.” Fairmont Park Raceway, Inc. v. Commissioner, 327 F.2d 780, 784 (7th Cir. 1964) (citing Illinois law). In the latter instance, a sublease, not an assignment, would exist. Alternatively, an Illinois appellate court has stated:

It has long been the law that where one assigns his whole estate without reserving a reversionary interest to himself, a privity of estate is immediately created between his transferee and the original lessor, and in such a case, the transfer is an assignment. . . . However, if any reversion in the leased premises is retained or reserved, no matter how small, the privity of estate between the transferee and the original lessor is not established and there is no assignment. [Citations omitted.] Danaj v. Anest, 77 Ill.App.3d 533, 396 N.E.2d 95, 96, 33 Ill.Dec. 19 (2d Dist. 1979).

See also Urban Investment & Development Co. v. Maurice L. Rothschild & Co., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); Builders Square, Inc. v. Illgross Partners & Co., No. 94 C 4632, 1994 U.S.Dist. LEXIS 14164 (N.D.Ill. Sept. 27, 1994) (holding that agreement between plaintiff and original tenant was assignment and not sublease when language in agreement indicated that it was assignment and when original tenant reserved no reversionary interest, rejecting landlord’s argument that original tenant’s reservation of right to obtain periodic estoppels was reversionary interest sufficient to constitute sublease).



Once a landlord-tenant relationship is established, the landlord and tenant have both privity of contract and privity of estate. See generally 24 I.L.P. Landlord and Tenant §§47 – 49 (1980). One or both of these legal concepts will operate to determine the extent of a landlord’s duties and liabilities to a tenant’s assignee or sublessee. A tenant can sever privity of estate by assigning the lease, but its contractual liability to the landlord will remain unless the landlord releases the tenant. Springer v. DeWolf, 194 Ill. 218, 62 N.E. 542, 543 (1901); Consolidated Coal Company of St. Louis v. Peers, 166 Ill. 361, 46 N.E. 1105, 1107 (1896); Uresil Corp. v. Becton Dickinson & Co., No. 89 C 6130, 1990 U.S.Dist. LEXIS 811 (N.D.Ill. Jan. 29, 1990); LaSalle National Bank v. Bachmann, 108 B.R. 1013 (N.D.Ill. 1989). This principle was followed in Chicago Title & Trust Co. v. GTE Directories Corp., No. 94 C 5003, 1995 U.S.Dist. LEXIS 14331 (N.D.Ill. Sept. 29, 1995). Suit was filed against the original tenant after a subsequent assignee extended the lease and then assigned it to another party, which later vacated the premises. The court noted that a tenant’s contractual liability remains unless its landlord releases it from liability. In addition, the court ruled that since the lease in question did not limit the exercise of the extension option to the original tenant, the lease could be extended by a subsequent assignee. As a result, the assignee had the right to extend the lease without obtaining the original tenant’s permission. Further, since the original tenant was not released from liability, it would have continuing obligations under the extension. 1995 U.S.Dist. LEXIS 14331 at *9. Privity of estate with the landlord imposes liability on the assignee for breach of those tenant lease covenants that run with the land.

The test as to whether a covenant runs with the land or is merely personal is whether the covenant concerns the thing granted and the occupation or enjoyment of it or is a collateral and personal covenant not immediately concerning the thing granted. If a covenant concerns the land and the enjoyment of it, its benefit or obligation passes with the ownership, but to have that effect the covenant must respect the thing granted or demised and the act to be done or permitted must concern the land or the estate conveyed. In order that a covenant may run with the land its performance or non-performance must affect the nature, quality or value of the property demised, independent of collateral circumstances, or must affect the mode of enjoyment. Keogh v. Peck, 316 Ill. 318, 147 N.E. 266, 269 (1925) (suit by tenant’s assignee against landlord’s assignee for specific performance of option to purchase contained in 99-year lease).

More recent Illinois courts have also enunciated the elements needed to establish a covenant running with the land. These elements are that (1) the covenantor and covenantee intend that the covenant run with the land, (2) the covenant itself touches and concerns the land, and (3) privity of estate exists. Streams Sports Club, Ltd. v. Richmond, 99 Ill.2d 182, 457 N.E.2d 1226, 1230, 75 Ill.Dec. 667 (1983); Nassau Terrace Condominium Association, Inc. v. Silverstein, 182 Ill.App.3d 221, 537 N.E.2d 998, 1000, 130 Ill.Dec. 669 (1st Dist. 1989). Nassau Terrace is discussed in greater detail in §7.69 below. Privity of estate as between the landlord and the assignee will arise upon assignment, but unless the assignee assumes the tenant’s obligations under the lease, privity of contract between



the landlord and tenant’s assignee will not arise. Consolidated Coal, supra; Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 423 N.E.2d 1170, 1175, 53 Ill.Dec. 366 (1st Dist. 1981); Cork-Oswalt, Inc. v. Hickory Hotel Co., 20 Ill.App.2d 406, 156 N.E.2d 259, 262 (3d Dist. 1959). An assignee that assumes the lease will also be liable for the performance of its conditions and covenants through privity of contract. 49 AM.JUR.2d Rev. Landlord and Tenant §1132 (1995); Springer, supra. In American National Bank & Trust Company of Chicago v. Hoyne Industries, Inc., 738 F.Supp. 297 (N.D.Ill. 1990), later proceeding, No. 88 C 7756, 1990 U.S.Dist. LEXIS 9453 (N.D.Ill. Jul. 30, 1990), aff’d, 966 F.2d 1456 (7th Cir. 1992) (Rule 53) (reported in full at 1992 U.S.App. LEXIS 13339), the landlord and the successor to the original tenant disputed whether privity of contract existed between them. If privity of contract did exist, the obligation to perform under the lease would be imposed on the successor tenant, which had vacated the premises 18 months before the lease’s expiration date. Under Illinois law, when the assignee of a lease does not assume the obligations of the lease, only privity of estate results between the landlord and the assignee. The assignee, therefore, is liable for rent only as long as privity of estate exists and the assignee remains in possession. Privity of contract exists when the lease obligations are assumed by the assignee. In contrast to privity of estate, the assignee cannot abrogate those obligations by a further assignment of the lease and the termination of its right to possession. 738 F.Supp. at 299. Based on these legal principles, the district court determined that privity of contract existed between the landlord and the tenant’s successor. This was the case even though the tenant and its successor had failed to obtain the landlord’s consent to the assignment because the successor had indeed assumed the tenant’s lease obligations under the terms of the purchase agreement. 738 F.Supp. at 300 – 301. In rendering its opinion, the Seventh Circuit agreed with the lower court’s reasoning based on the facts of the case. 1992 U.S.App. LEXIS 13339 at *16. In the event of a sublease, however, neither privity of contract nor privity of estate exists between the landlord and the sublessee. As a result, the sublessee cannot sue the landlord directly to enforce the landlord’s covenants in the prime lease. 49 AM.JUR.2d Rev. Landlord and Tenant §1184 (1995). Under this circumstance, the sublessee must instead look to the party with whom it is in privity, the sublessor. In Hornsby’s Stores, Inc., v. Strauss, No. 86 C 5809, 1986 U.S.Dist. LEXIS 16022 (N.D.Ill. Dec. 23, 1986), a sublessee and sublessor sued the landlord for the costs they incurred in replacing the demised premises’ leaking roof after the landlord refused to make the repair at its expense. The court determined that since the prime lease obligated the landlord to make all structural repairs at its expense, the landlord was obligated to replace the roof. 1986 U.S.Dist. LEXIS 16022 at *5. To the landlord’s argument that the sublease imposed on the sublessee responsibility for structural repairs and maintenance of the roof, the court stated that “[t]he sublease only determines liability for repairs as between [the sublessor] and [sublessee]. The relationship between the tenants and the landlord is governed by the lease. Under that document, the landlord is obligated to replace the roof.” 1986 U.S.Dist. LEXIS 16022 at **4 – 5. Thus, the sublessor was entitled to summary judgment against the landlord and to withhold its costs for replacement of the roof from the rent. However, because the sublessee was not a party to the prime lease, it had no right to recover its costs against the landlord.



Nonetheless, there is some Illinois authority supporting the proposition that a nonparty to a lease “can sue on a contract . . . if the parties intended to benefit that non-party.” May’s Family Centers, Inc. v. Goodman’s, Inc., 571 F.Supp. 1012, 1015 (N.D.Ill 1983), citing Carson Pirie Scott & Co. v. Parrett, 346 Ill. 252, 178 N.E. 498, 501 (1931). In this case, a sublessee sued the landlord for damages under various legal theories for failure to consent to the sublessee’s and sublessor’s proposed assignment of the lease. The assignment clause in the prime lease stated that the landlord would not unreasonably withhold its consent. The landlord argued that the sublessee could not sue to enforce the prime lease because the sublessee was neither in privity with the landlord nor a third-party beneficiary of the lease. However, the district court determined that, under general principles of Illinois contract law and the lease provision at issue, the sublessee could state a claim as an intended beneficiary of the assignment provision of the prime lease. In so holding, the court relied on the fact that the relevant provisions of the lease anticipated successive assignments and sublettings and landlord approval of each such transfer of the premises. 571 F.Supp. at 1016. E. [7.69] Effect of Assignment by Landlord A landlord’s assignment of a lease will not disrupt the privity of contract or privity of estate existing at the time of the assignment with a tenant or a tenant’s successors. Thus, the distinctions between privity of contract and privity of estate that exist in the context of a tenant’s assignment or sublease do not necessarily dictate the extent of the obligations of the landlord’s successor. “[T]he obligations of a successor lessor differ from those of a successor lessee.” Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 423 N.E.2d 1170, 1175, 53 Ill.Dec. 366 (1st Dist. 1981). A lease’s obligations and benefits will inure to the benefit of the landlord’s assignee. Bruno v. Gabhauer, 9 Ill.App.3d 345, 292 N.E.2d 238, 240 (1st Dist. 1972). This fact, of course, is a double-edged sword. Illinois caselaw suggests that a landlord’s assignee owes the tenant all of the landlord’s duties and liabilities under the lease. Montgomery Ward & Co., supra, 423 N.E.2d at 1175. “[T]he right of the lessee is unaffected by the lessor’s assignment of the lease and alienation of the premises; and the alienee is subject to all the rights and equities of the lessee against the lessor.” Id. When a landlord has failed to fulfil its lease obligations to its tenant and has ignored the tenant’s complaints, the landlord’s assignee will be charged with notice of the alleged problems because “an assignee stands in the shoes of the assignor.” American National Bank & Trust Company of Chicago v. Sound City, U.S.A., Inc., 67 Ill.App.3d 599, 385 N.E.2d 144, 146, 24 Ill.Dec. 377 (2d Dist. 1979). See also Montgomery Ward & Co., supra (landlord’s assignee liable to tenant for amount of tenant’s overpayment of its share of real estate taxes). Thus, all of the landlord’s duties and obligations under the assigned lease will become the duties and obligations of the landlord’s successor. Even in the absence of an express assignment, a successor to the landlord will be bound by the terms of a lease if the contested covenant runs with the land. Nassau Terrace Condominium Association, Inc. v. Silverstein, 182 Ill.App.3d 221, 537 N.E.2d 998, 1000, 130 Ill.Dec. 669 (1st Dist. 1989). In Nassau Terrace, a condominium association (the successor to the original landlord) filed suit against a commercial tenant, a washer and dryer business, for a declaration that the condominium association was not bound by the lease terms, there having been no formal



assignment of the lease from the original landlord to its successors. The court determined that the language of the lease evidenced an intent that the lease covenants run with the land. In so holding, the court relied on two clauses in the lease, one that made the lease “binding upon all future owners, and the heirs, executors, and assigns of the Lessor” and another that stated that the lease ran with the land and buildings. Id. Possession of the premises, presumably a laundry room, because it was necessary to the tenant’s business, was found to touch and concern the land. Finally, the court found that privity of estate existed between the original landlord’s successors and the tenant. 537 N.E.2d at 1001. Thus, the tenant was entitled to possession of the premises. 537 N.E.2d at 1002. Under Code of Civil Procedure §9-215, all remedies available to the original landlord are also available to a landlord’s successor. This section provides:

The grantees of any leased lands, tenements, rents or other hereditaments, or of the reversion thereof, the assignees of the lessor of any lease, and the heirs, legatees and personal representatives of the lessor, grantee or assignee, shall have the same remedies by action or otherwise, for the non-performance of any agreement in the lease, or for the recovery of any rent, or for the doing of any waste or other cause of forfeiture, as their grantor or lessor might have had if such reversion had remained in such lessor or grantor. 735 ILCS 5/9-215.

Assignment and subletting are discussed in greater detail in Chapter 6 of this handbook. F. Breach by Landlord 1. [7.70] Effect on Tenant’s Obligations A tenant’s obligation to pay rent is a continuing obligation that is normally considered independent of the landlord’s duty to fulfil its obligations under the lease. City of Chicago v. American National Bank, 86 Ill.App.3d 960, 408 N.E.2d 379, 380 – 381, 42 Ill.Dec. 1 (1st Dist. 1980) (landlord’s duty to repair is independent of tenant’s duty to pay rent); 601 West 81st Street Corp. v. City of Chicago, 129 Ill.App.3d 410, 472 N.E.2d 827, 831 – 832, 84 Ill.Dec. 690 (1st Dist. 1984) (landlord’s duty to pay taxes is independent of city’s duty to pay rent); Lipkin v. Burnstine, 18 Ill.App.2d 509, 152 N.E.2d 745 (1st Dist. 1958) (tenant’s duty to pay rent is continuing obligation as long as tenant remains in possession even though tenant may establish right to rescind lease, vacate premises, or obtain other relief). However, a landlord’s failure to make a termination payment to a tenant has been held to be a material breach excusing the tenant from its obligations to pay real estate taxes after vacating the premises. In United States Fidelity & Guaranty Co. v. Old Orchard Plaza Limited Partnership, 284 Ill.App.3d 765, 672 N.E.2d 876, 220 Ill.Dec. 59 (1st Dist. 1996), the tenant, which had sold its ground leasehold estate to the landlord, had the right to vacate its office premises after a ten-year lease with the promise that it would receive a $2 million termination payment. When the tenant vacated the property, the receiver the court appointed for the property claimed that the tenant’s failure to pay real estate taxes billed on the property after the tenant vacated the premises was a breach relieving the receiver and the landlord from the obligation to make the termination



payment. Contrary to the receiver’s argument, the court held that the receiver’s failure to make the termination payment constituted a material breach, excusing the tenant from its obligations to pay real estate taxes after it left the premises. 672 N.E.2d at 884. The court rejected the receiver’s theory, which was based on the general rule that a material breach on the part of the landlord does not excuse the tenant’s obligations to pay rent. The court distinguished between a landlord’s breach while the tenant remains in possession of the property and a landlord’s breach after the tenant completes its rent payments and vacates the property. While a tenant that remains in possession of its property has a continuing obligation to pay rent after its landlord breaches, a tenant that has completed rent payments and vacated its property may be excused from further obligations after its landlord breaches. Id. 2. [7.71] Rights of Tenant As indicated by the cases cited in §7.22 above, if a landlord breaches its obligation to maintain the common areas of a shopping center in a particular manner, a tenant will have the right to enjoin the landlord from violating the lease covenants. As seen in LaSalle Bank National Ass’n v. Moran Foods, Inc., 477 F.Supp.2d 932 (N.D.Ill. 2007), the tenant may also be able to assert claims for damages and possibly seek termination of the lease, depending on the materiality of the landlord’s breach and the specific language of the lease. If a landlord has agreed to restrictions on its right to use the common areas of its property in a tenant’s lease, it will be bound by them, and unless the lease language is ambiguous or requires a tenant to act reasonably or in good faith in consenting to changes to the common areas, a court will not write such terms into the lease. See 477 F.Supp.2d at 937 – 939 and the other cases cited in §7.22 above. G. [7.72] Special Circumstances When Oral Modifications or Waivers Are Not Binding

on Landlord The common-law doctrine of waiver by the tenant does not apply to the Chicago Transit Authority (CTA). See Schivarelli v. Chicago Transit Authority, 355 Ill.App.3d 93, 823 N.E.2d 158, 291 Ill.Dec. 148 (1st Dist. 2005). In Schivarelli, the lease with the CTA specified that the tenant, who leased an unused space under a certain portion of the elevated tracks for a hot dog stand, would be responsible for the payment of all utilities associated with the premises. The lease as written was presented to and approved by the CTA Board, which approved it, based on a summary that did not mention payment of utilities. Two years later, the lease was amended without changing the provision on payment of utilities, again with the approval of the CTA Board without mentioning the payment of utilities. Two extension options contained in the lease were exercised by the tenant. During the entire time period from the commencement of the lease through the first of two extensions and part of the second extension (a period of approximately 13 years), despite the lease language, the CTA did not bill the tenant for any utilities and did not issue any notices of default to the tenant. Toward the end of the second extension (during 1996), the parties began to negotiate another extension. The first draft of the extension prepared by counsel for the tenant edited the utility payment clause of the CTA form lease to make the CTA responsible for payment of utilities, but when the attorney was questioned about the change from the lease form, the change was dropped.



The extension was signed by the tenant in late 1997, but it was never signed by the CTA, although the plaintiff claimed the terms of the extension had been authorized by the CTA Board in 1995. During late 1997, the CTA discovered it had not billed the tenant for any utilities during the lease term and requested proof from the tenant that it had paid them. The tenant’s response claimed the lease had been modified by an oral agreement under which the tenant enlarged the vestibule of the CTA facility at its cost in exchange for being relieved of the responsibility to pay utilities. Shortly after the tenant’s response, the CTA sent a bill to the tenant for the utilities for the entire lapsed lease term (over $150,000), and the tenant filed a declaratory judgment action asking for a determination that it was not liable for utility payments during the period in question and for a reformation of the lease, claiming the inclusion of the utility payment provision was a mutual mistake. The trial court ruled for the tenant, and the CTA appealed, arguing that the individual who made the oral agreement with the tenant had no authority to bind the CTA. The First District Appellate Court agreed with the CTA on the grounds that the Metropolitan Transit Authority Act, 70 ILCS 3605/1, et seq., grants authority to the CTA to enter into lease agreements through its governing and administrative body, the CTA Board, and the CTA was not bound by an agreement its governing body did not approve. Based on this case, a tenant of a statutorily created governmental body or quasi-governmental agency in Illinois would be wise to make sure all of the terms are included in the written document approved by the governing body. The same advice applies generally to all leases but is particularly imparted when dealing with governmental agencies. XI. TERMINATION OF TENANCY A. [7.73] Landlord’s Obligation To Mitigate Damages upon Tenant’s Breach When a lease is terminated before its established expiration date as a result of a tenant’s default or the tenant’s abandonment of the demised premises, a landlord must consider to what extent it might have an obligation to mitigate its damages. Until recently, this area of Illinois law remained unsettled, with some authority supporting the proposition that a landlord had no general duty to mitigate. See, e.g., Hirsch v. Home Appliances, Inc., 242 Ill.App. 418 (1st Dist. 1926); Chicago Title & Trust Co. v. Hedges Manufacturing Co., 91 Ill.App.3d 173, 414 N.E.2d 232, 235, 46 Ill.Dec. 510 (2d Dist. 1980). However, mere possession without cashing a rent check delivered by a tenant after the landlord validly terminated a month-to-month lease has been held not to be a waiver of the landlord’s right to terminate the lease. Wang v. Marcus Brush Co., 354 Ill.App.3d 968, 823 N.E.2d 140, 142, 291 Ill.Dec. 130 (1st Dist. 2005). In Wang, the court found it relevant that the landlord did not cash or deposit the personal check tendered by the tenant after the termination notice was sent. Instead, the landlord filed a suit for possession of the premises within three weeks after receiving the check. Thus, there was no express or implied waiver by the landlord of the right to possession.



Nonetheless, a strong judicial inclination to impose a duty to mitigate on landlords was clearly evident in Illinois caselaw, especially when the defaulting tenant tendered a suitable replacement to the landlord. See generally Annot., 75 A.L.R.5th 1 (2000) (and cases cited therein); Anthony J. Aiello, Note, Illinois Landlords’ New Statutory Duty To Mitigate Damages: Ill.Rev.Stat. Ch 110, §9-213.1, 34 DePaul L.Rev. 1033 (1985) (and cases cited therein). Several early judicial opinions recognized the conflicting state of Illinois law regarding the landlord’s duty to mitigate. Hirsch, supra; Wohl v. Yelen, 22 Ill.App.2d 455, 161 N.E.2d 339 (1st Dist. 1959). For a further discussion of Wohl and other early cases on this issue, see §7.77 below. 1. [7.74] Statutory Duty To Mitigate Damages The Illinois legislature attempted to clarify the unsettled state of Illinois law on the landlord’s duty to mitigate its damages caused by a defaulting tenant by enacting Code of Civil Procedure §9-213.1. This section simply provides:

After January 1, 1984, a landlord or his or her agent shall take reasonable measures to mitigate the damages recoverable against a defaulting lessee. 735 ILCS 5/9-213.1.

While seeming to finally resolve any question as to a landlord’s duty to mitigate damages as the result of a defaulting tenant, the statute has been criticized for failing to address certain issues inherent in the duty to mitigate. First, Code of Civil Procedure §9-213.1 provides no definition of what constitutes “reasonable measures.” Anthony J. Aiello, Note, Illinois Landlords’ New Statutory Duty To Mitigate Damages: Ill.Rev.Stat. Ch 110, §9-213.1, 34 DePaul L.Rev. 1033, 1034 (1985). It would not be unreasonable, however, to believe that Illinois courts would turn to the standards established in the caselaw developed in the context of lease assignments when determining the reasonableness of a landlord’s withholding of consent under the statute. For further discussion of whether a landlord has unreasonably withheld its consent to a lease assignment, see §§7.65 and 7.66 above. Second, Code of Civil Procedure §9-213.1 alone does not specify whether it applies retrospectively or prospectively. However, in the absence of legislative intent, Illinois courts will apply the statute to leases executed after January 1, 1984. Prospective application to such leases, of course, fails to address a landlord’s duty to mitigate damages suffered after January 1, 1984, under leases executed prior to January 1, 1984. 34 DePaul L.Rev. at 1034. After the date Code of Civil Procedure §9-213.1 was adopted, there have been a number of reported cases that have interpreted it. See St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 230 Ill.Dec. 1013 (1st Dist. 1998); St. Louis North Joint Venture v. P&L Enterprises, Inc., 116 F.3d 262 (7th Cir. 1997); MXL Industries, Inc. v. Mulder, 252 Ill.App.3d 18, 623 N.E.2d 369, 191 Ill.Dec. 124 (2d Dist. 1993); JMB Properties Urban Co. v. Paolucci, 237 Ill.App.3d 563, 604 N.E.2d 967, 178 Ill.Dec. 444 (3d Dist. 1992). See also American National Bank & Trust Company of Chicago v. Hoyne Industries, Inc., 738 F.Supp. 297 (N.D.Ill. 1990), later proceeding, No. 88 C 7756, 1990 U.S.Dist. LEXIS 9453 (N.D.Ill. Jul. 30, 1990), aff’d, 966 F.2d 1456 (7th Cir. 1992) (Rule 53) (reported in full at 1992 U.S.App. LEXIS 13339); MBC, Inc. v. Space Center Minnesota, Inc., 177 Ill.App.3d 226, 532 N.E.2d 255, 126 Ill.Dec. 570 (1st Dist. 1988); Stein v. Spainhour, 167 Ill.App.3d 555, 521



N.E.2d 641, 118 Ill.Dec. 359 (4th Dist. 1988). These cases have begun to answer the unanswered questions at the time Code of Civil Procedure §9-213.1 first became effective, but in some cases with conflicting results. Thus, issues still remain unresolved. Some of these conflicting decisions are discussed in more detail in §7.73 above and §§7.75 and 7.76 below. The opinion in Stein suggests that Code of Civil Procedure §9-213.1 may be applicable to breaches occurring after its enactment regardless of when the lease was executed. In Stein, the court observed that the statutory obligation to mitigate damages became effective after the breach under consideration, but that the statute did not apply to a situation in which the tenant continued to tender minimum rent and failed to surrender the premises. 521 N.E.2d at 644. In Garland Office L.L.C. v. Syms Corp., No. 03 C 0870, 2003 U.S.Dist. LEXIS 15052 at *9 (N.D.Ill. Aug. 28, 2003), a landlord’s complaint for recovery of rent owed by a tenant that allegedly abandoned its premises survived a motion to dismiss on behalf of the tenant, arguing that the landlord failed to plead it had made a reasonable attempt to mitigate its damages. According to the court, when the landlord pled it had performed all conditions of the lease, one of which required the landlord to “use reasonable efforts to relet the Premises,” following the tenant’s default, that was sufficient to survive a motion to dismiss. Id. 2. [7.75] Burden of Proof A landlord bears the burden of proving that it mitigated damages under Code of Civil Procedure §9-213.1, 735 ILCS 5/9-213.1. Snyder v. Ambrose, 266 Ill.App.3d 163, 639 N.E.2d 639, 203 Ill.Dec. 319 (2d Dist. 1994). In deciding this issue of first impression in a suit by a landlord against its tenant for unpaid rent, the court held that the trial court committed prejudicial error by excusing the landlord from presenting any evidence that he had attempted to mitigate his damages when the landlord was in the better position to prove he complied with the statute. The fact that the defendant had failed to answer the complaint or plead mitigation as an affirmative defense did not bar evidence on the subject because the landlord had a statutory duty to mitigate and shouldn’t be surprised by having to prove something he was obligated to do by statute. 639 N.E.2d at 640. In St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 230 Ill.Dec. 1013 (1st Dist. 1998), the court addressed whether a landlord’s failure to mitigate damages precluded or reduced its recovery. The St. George Chicago court stated that a landlord’s failure to mitigate reduces the landlord’s damages. The court rejected the tenant’s argument, which was based on Snyder, supra, 639 N.E.2d at 641, that a landlord’s failure to mitigate precludes any recovery by the landlord. 695 N.E.2d at 508. The court also rejected St. Louis North Joint Venture v. P&L Enterprises, Inc., 116 F.3d 262, 265 (7th Cir. 1997), which interpreted Snyder as placing the burden of proof of mitigation on the landlord as a “prerequisite for recovery.” Rather, the St. George Chicago court stated that nothing in the statute indicated the legislature intended to depart from common law, which treats an obligation to mitigate as solely concerning the measure of damages, not the right to recover damages. 695 N.E.2d at 508. Noting the split among the Illinois appellate courts deciding Snyder and St. George Chicago as to whether the failure to present evidence of its mitigation of damages from a tenant’s breach



bars the landlord’s recovery or simply causes otherwise recoverable damages to be reduced, the Northern Illinois District Court in Manufacturers Life Insurance Company (U.S.A.) v. Mascon Information Technologies Ltd., 270 F.Supp.2d 1009, 1013 – 1014 (N.D.Ill. 2003), held the St. George Chicago reasoning more persuasive and the landlord’s failure to mitigate would not be a complete bar to recovery from a breaching tenant. As a result, while the court was able to decide in favor of the landlord on the landlord’s motion for summary judgment on the issue of whether the tenant breached its lease, a genuine issue of material fact existed on the landlord’s attempts to mitigate its damages, thus requiring the presentation of evidence on the subject during which the burden of proof would be on the landlord. 270 F.Supp.2d at 1014. 3. [7.76] What Constitutes “Reasonable Measures” to Mitigate Damages In discussing the language of Code of Civil Procedure §9-213.1, 735 ILCS 5/9-213.1, the district court in American National Bank & Trust Company of Chicago v. Hoyne Industries, Inc., 738 F.Supp. 297, 302 (N.D.Ill. 1990), later proceeding, No. 88 C 7756, 1990 U.S.Dist. LEXIS 9453 (N.D.Ill. Jul. 30, 1990), aff’d, 966 F.2d 1456 (7th Cir. 1992) (Rule 53) (reported in full at 1992 U.S.App. LEXIS 13339), noted that the statute does not specify what are “reasonable measures” and, as a result, does not prohibit or curtail parties from defining such a standard within their lease agreement. The district court characterized the statute as “phrased in flexible and general terms” and held that its application did not necessarily mandate the result reached in MBC, Inc. v. Space Center Minnesota, Inc., 177 Ill.App.3d 226, 532 N.E.2d 255, 126 Ill.Dec. 570 (1st Dist. 1988). Id. The Seventh Circuit in Hoyne Industries disagreed with the MBC court’s determination that the landlord’s attempt to relet the premises at a market rate higher than the rent otherwise payable under the lease was not a reasonable attempt to mitigate. Nonetheless, it applied MBC because that case was at that time the only Illinois precedent addressing the dispute. 1992 U.S.App. LEXIS 13339 at **16 – 17. For a further discussion of MBC and Hoyne Industries, see §7.78 below. In JMB Properties Urban Co. v. Paolucci, 237 Ill.App.3d 563, 604 N.E.2d 967, 970 – 971, 178 Ill.Dec. 444 (3d Dist. 1992), the Illinois appellate court held the landlord properly mitigated its damages caused by a tenant’s default when it relet the tenant’s abandoned space for rent less than that paid by the defaulting tenant. In JMB Properties, a jewelry store tenant (Paolucci) defaulted on its lease for premises in a retail store by abandoning the premises two years prior to the expiration of the lease and opening another jewelry store within a five-mile radius of the mall. The manager of the retail mall (JMB) and Carlyle Real Estate Limited Partnership XIV, the retail mall owner, sued Paolucci for past due rent and damages. Paolucci filed an affirmative defense, alleging that the plaintiffs had failed to mitigate their damages. 604 N.E.2d at 968. The court concluded that not only did the plaintiffs make reasonable efforts to relet the vacated premises, but also they relet them to the first available tenant within seven months of the defaulting tenant’s departure. Moreover, they relet this space prior to leasing other available spaces in the mall. 604 N.E.2d at 970. While the plaintiffs relet the abandoned premises for only one-half the rent Paolucci was obligated to pay under his lease, the JMB Properties court held this was not a per se failure to mitigate damages. The court noted that the new tenant, an operator of a discount store, generated sales at a much lower rate per square foot than the jewelry store. By renting to the discount store,



the plaintiffs obtained a suitable tenant for their available space, and securing such a tenant manifested reasonable efforts to mitigate damages. 604 N.E.2d at 971. Had the plaintiffs failed to rent to the discount store, the space may have remained empty, resulting in no mitigation of damages at all. Thus, under the circumstances, the court held that the landlord satisfied its duty to mitigate damages by not simply permitting abandoned property to remain vacant and relying on collecting damages from the defaulting tenant. Rather, the landlord’s actively seeking and obtaining “a suitable replacement tenant to occupy the vacant space” meant it had reasonably attempted to mitigate its damages. Id. In St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 230 Ill.Dec. 1013 (1st Dist. 1998), a landlord and tenant entered into a ten-year lease in October 1988. The tenant vacated the leased premises in April 1992. In August 1992, the landlord terminated the lease for nonpayment of rent and subsequently filed suit for damages. The tenant asserted the landlord’s failure to mitigate damages as an affirmative defense. The appellate court cited Illinois’ statutory requirement that a landlord take reasonable steps to mitigate damages. 735 ILCS 5/9-213.1. The lease included a provision regarding the damages the landlord could recover in the event that it terminated a defaulting tenant’s lease. Under that provision, the landlord was entitled to (a) unpaid rent and operating expenses through the date of the termination of the lease, (b) unamortized costs of tenant improvements, (c) a “rent differential,” and (d) attorneys’ fees and court costs. The parties disagreed over the interpretation of the “rent differential” provision, which entitled the landlord to the present value of the lease rent for the rest of the unexpired lease term, minus the present value of the fair rental value (the fair market rent) over the unexpired lease term. The court concluded that this section of the lease satisfied the plaintiff’s statutory duty to mitigate for the period from the termination of the lease to the end of the lease term since it assured the tenant the maximum amount of mitigation possible. 695 N.E.2d at 507. However, the court stated that the “rent differential” section did not apply to the period from the tenant’s breach until the termination of the lease, and the landlord was required to demonstrate actual reasonable measures to mitigate. 695 N.E.2d at 508. In St. Louis North Joint Venture v. P&L Enterprises, Inc., 116 F.3d 262 (7th Cir. 1997), a shopping mall landlord brought suit for damages when its tenant vacated the leased premises, without notice, prior to the termination of its lease agreement. Once the tenant left, the landlord hired a leasing agent to relet the premises. The agent placed advertisements in national shopping center trade publications, identified prospective tenants, and contacted national tenants and local retailers at other locations in search of a substitute. Despite these efforts, the property remained vacant for approximately one year. 116 F.3d at 264. In affirming the federal district court’s order granting summary judgment to the landlord, the court rejected the tenant’s argument that it had been constructively evicted due to a decrease in foot traffic because of the landlord’s ongoing parking lot construction over an eight-month period. The court also rejected the tenant’s assertion that it was entitled to a hearing on the issue of whether the landlord took reasonable steps to mitigate its damages. The court noted that under Code of Civil Procedure §9-213.1, the landlord has the burden of proving mitigation of damages as a prerequisite to recovering damages. 116 F.3d at 265. The court reasoned that because the tenant took no steps to offer evidence to refute the landlord’s claims that it had mitigated or the reasonableness of the landlord’s actions, no material fact existed that would prevent the court from granting summary judgment in favor of the landlord. 116 F.3d at 266.



In MXL Industries, Inc. v. Mulder, 252 Ill.App.3d 18, 623 N.E.2d 369, 378, 191 Ill.Dec. 124 (2d Dist. 1993), the court held that the landlord had taken reasonable steps to mitigate its damages by erecting a sign, placing calls to bankers, real estate brokers, and developers, and running newspaper advertisements in regional and local newspapers. In Kallman v. Radioshack Corp., 315 F.3d 731 (7th Cir. 2002), the court affirmed the district court’s finding that the landlord had not taken reasonable steps to mitigate its damages when it took two and a half years to re-lease the property. 315 F.3d at 740. Key factors leading to the trial court’s and the Seventh Circuit’s conclusion were that the landlord waited for nearly five months after the tenant vacated the premises to engage a broker to market the property and that the landlord listed the property at a higher rent than was being paid by the vacating bankrupt tenant. Finally, despite the recommendations of the broker to the landlord that it repair some of the items in contention with the former tenant and build it out as a new “vanilla box” to enhance the leasability of the property, the landlord insisted on waiting until it had a tenant in hand before performing any work. 315 F.3d at 740 – 741. As a result, the Seventh Circuit affirmed the trial court’s ruling the landlord had failed to mitigate its damages, which meant the landlord did not recover the amounts the landlord had claimed as damages on account of lost rent and real estate taxes for the many months the premises had remained vacant after the tenant abandoned the premises. 315 F.3d at 740 – 742. Amalgamated Bank of Chicago v. Kalmus & Associates, Inc., 318 Ill.App.3d 648, 741 N.E.2d 1078, 251 Ill.Dec. 900 (1st Dist. 2000), deals with a claim by a tenant that the landlord failed to mitigate its damages after the landlord sued the tenant for a breach of a post-expiration agreement with the landlord to clean up environmental contamination of its former leased premises. Shortly before the tenant’s lease was to expire in April 1996, the tenant discovered a nine- to twelve-inch hole in the concrete floor of the building while it was moving its equipment out of the premises in March 1996. The hole had been “caused by copper chloride that had leaked in solution from an etching machine. The solution ate through the floor and spread to the ‘gravel stone base [course]’ under the floor” and “contaminated [it] with copper and the groundwater was contaminated with chlorides.” 741 N.E.2d at 1080. In late June 1996, the parties entered into an agreement (Clean-Up Agreement) calling for Kalmus to take the necessary steps at the premises to enable it to obtain a no further remediation letter (NFR letter) from the Illinois Environmental Protection Agency (IEPA), which was to provide “that, based on the industrial/commercial use of the property, the copper and chloride residual does not require further remediation under the Illinois Environmental Protection Act.” Id. The Clean-Up Agreement specifically stated that the landlord was “not releasing its claim that it is entitled to holdover rent until such ‘no further remediation’ letter is received,” and that the tenant “does not admit that it is liable to [landlord] for such holdover rent.” Id. Instead, the Clean-Up Agreement specifically stated the issue of holdover rent was to be addressed separately and apart from the Clean-Up Agreement. Id. The tenant’s environmental engineer tested a number of samples from the contaminated soil and excavated the site to the point where the contamination levels were below the minimum required for industrial/commercial properties, although according to the engineer’s report, half of



the final samples showed contamination levels above the level to safeguard construction workers, and he recommended an engineered barrier (a new six-inch concrete floor) over the areas where contamination existed. The tenant poured a new floor in August 1996, before the report was submitted to the landlord or the IEPA reviewed it. 741 N.E.2d at 1082. A year later, after some back-and-forth discussions between the landlord and the tenant, some revisions to the report were made (but without the tenant performing any further work). After the landlord had the report reviewed by its own environmental consultant, the landlord finally signed off on the report. Id. Several months later, the IEPA responded by stating it would not issue an NFR letter until its concerns regarding the report were addressed, and in June 1998, the landlord advised the IEPA that it would assume responsibility for the cleanup and obtain the NFR letter. 741 N.E.2d at 1082 – 1083. The landlord then hired its own consultant to perform additional remediation by removing portions of the concrete floor and soil and stones, submitted a revised report requesting an NFR letter that had no restrictions on future use, and obtained the NFR letter in June 1999. 741 N.E.2d at 1083. In January 1998, while the back-and-forth discussions between the landlord, the tenant, and the IEPA were ongoing, the landlord filed suit against the tenant for breach of the Clean-Up Agreement, but the trial did not occur until July 1999 (after the landlord obtained the NFR letter). The property had remained vacant for the entire 37 months following the expiration of the lease through the date of the trial. 741 N.E.2d at 1080, 1083. Although the landlord had some interest from one prospective tenant who declined to lease the premises until after the landlord had the NFR letter, the appellate court, like the trial court, declined to assume the landlord could have leased the premises to that tenant without the NFR letter or that it was inappropriate for the landlord to have disclosed the pending request and cleanup work to the prospective tenant. 741 N.E.2d at 1087. Over the arguments of the tenant that it had not breached the Clean-Up Agreement, the trial court awarded the landlord its cleanup costs, an amount it determined (based on the evidence presented) to be the fair rental value of the premises for the entire 37-month period, an amount equal to estate taxes, insurance, utilities, and maintenance expenses for that period, and marketing and environmental expenses totaling over $594,000. 741 N.E.2d at 1083. The appellate court affirmed the trial court’s decision. It held the landlord had not failed to mitigate its damages by not entering into a lease with a prospective tenant when the tenant refused to lease until after the landlord had obtained an NFR letter. 741 N.E.2d at 1087. 4. [7.77] Prior Illinois Caselaw In the Twentieth Century, Illinois courts developed several identifiable strands of caselaw in their consideration of whether to impose a duty to mitigate on landlords. One line of caselaw imposed no duty of mitigation on a landlord upon a tenant’s breach and abandonment of the premises. See, e.g., Rau v. Baker, 118 Ill.App. 150 (1st Dist. 1905); In re Estate of Conklin, 116 Ill.App.3d 426, 451 N.E.2d 1382, 72 Ill.Dec. 59 (4th Dist. 1983) (landlord has no duty to mitigate either by actively seeking substitute tenant or by investigating prospective tenant tendered by defaulting tenant). A more conciliatory approach to mitigation also evolved under which the landlord was obligated to accept a suitable substitute tenant when one was offered, but, in the



absence of a suitable substitute, no duty to mitigate existed. See, e.g., Wohl v. Yelen, 22 Ill.App.2d 455, 161 N.E.2d 339 (1st Dist. 1959); Scheinfeld v. Muntz TV, Inc., 67 Ill.App.2d 8, 214 N.E.2d 506 (1st Dist. 1966). Another line of caselaw also exists that evidences an apparently short-lived trend toward imposing a duty of mitigation on landlords. For a more extensive discussion of each line of cases, see generally Anthony J. Aiello, Note, Illinois Landlords’ New Statutory Duty To Mitigate Damages: Ill.Rev.Stat. Ch 110, §9-213.1, 34 DePaul L.Rev. 1033, 1040 – 1043 (1985). The second line of cases is explored more thoroughly here for a number of reasons. First, the more recent of the pre-mitigation statute cases evidence a trend toward requiring a landlord to accept a suitable tenant and mitigate its damages to the extent possible. Second, there is a close link between the issues in the second line of cases and the issue of who is a suitable substitute tenant in the assignment and subleasing context. Finally, there is still some uncertainty as to the situations in which the statutory obligation to mitigate applies. Wohl, supra, is most often cited as the case establishing the judicial trend toward a rule imposing the duty to mitigate on Illinois landlords. The landlord in Wohl initially indicated its willingness to consent to a sublease if the tenant located a substitute tenant. When the tenant obtained a prospective subtenant, however, the landlord refused to consent to a sublease because it wanted to sell the building. The tenant then vacated the demised premises. The court reviewed the Illinois caselaw on the landlord’s duty to mitigate its damages and noted that those cases holding that a landlord need not seek a new tenant to replace a defaulting tenant generally involved a landlord that had not reentered the premises and had not been presented with an acceptable substitute tenant by the defaulting tenant. 161 N.E.2d at 343. In contrast, the Wohl court found that the landlord’s arbitrary refusal to accept a new tenant was unreasonable and held that landlords have a duty to mitigate in all situations in which they are presented with a reasonably acceptable substitute. Id. Thus, the Wohl court refused to acknowledge that there was no duty to mitigate under Illinois law. The Wohl decision received further elaboration in Scheinfeld, supra, in which the tenant abandoned the premises and requested that the landlord mitigate its damages. The landlord refused and confessed a judgment against the tenant for unpaid rent. In rendering its opinion, the Scheinfeld court commented that the Wohl decision had been based on one of two alternative grounds. Either the landlord had waived the lease restriction regarding subleasing, or it had a duty to mitigate when tendered a suitable subtenant. 214 N.E.2d at 510. In affirming Wohl, the Scheinfeld court observed that Wohl required the presentation of a substitute tenant as a condition precedent to the landlord’s duty to mitigate. If a lease does not require the landlord to mitigate its damages, either expressly or implicitly, general contract law principles will imply such an obligation. Id. Thus, a landlord is not obligated to accept any prospective tenant, but with respect to the issue of damages, the landlord has a choice between consenting to a sublease or crediting the defaulting tenant with the amount the prospective sublessee would have paid. 214 N.E.2d at 511. Reget v. Dempsey-Tegler & Co., 70 Ill.App.2d 32, 216 N.E.2d 500 (5th Dist. 1966), makes it clear that a landlord may refuse to let to an unsuitable tenant and may hold a defaulting tenant liable for the entire rental absent a contrary intent expressed in the lease, provided reasonable



grounds for such refusal exist. 216 N.E.2d 503. The landlord’s refusal to relet the premises in Reget, due to its concern that the prospective tenant’s use would damage the premises, was determined to be reasonable. A more recent application of the Wohl court’s distinction between an arbitrary refusal to relet and the failure of a defaulting tenant to tender a suitable substitute occurred in Conklin, supra. The Conklin court held that the landlord had no duty to mitigate since there was no indication the landlord was ever presented with a substitute tenant. 451 N.E.2d at 1384. 5. [7.78] Landlord’s Contractual Obligation To Mitigate Damages Regardless of whether Code of Civil Procedure §9-213.1, 735 ILCS 5/9-213.1, applies, the debate over whether and to what extent the landlord has a duty to mitigate damages survives in those instances in which the lease imposes on the landlord the contractual obligation to mitigate damages resulting from a tenant’s default or abandonment. In MBC, Inc. v. Space Center Minnesota, Inc., 177 Ill.App.3d 226, 532 N.E.2d 255, 126 Ill.Dec. 570 (1st Dist. 1988), the court interpreted a lease provision reserving to the landlord the right to relet the premises upon reentry, at the rental rate, for the lease term and on conditions determined in the landlord’s sole discretion. Furthermore, the lease provided that the landlord was not required to accept any substitute tenant offered by the tenant. Citing an old Illinois case, Harmon v. Callahan, 286 Ill. 59, 121 N.E. 194 (1918) (although landlord has no general duty to mitigate damages by reletting upon tenant’s abandonment, lease at issue obligated landlord to exercise reasonable diligence to relet premises), the MBC court held that the landlord’s attempts to relet the premises at a rental considerably higher than that of the original lease and failure to offer the premises to prospective tenants on the same terms that were applicable to the original tenant created a breach of the landlord’s duty to exercise reasonable diligence to mitigate damages. 532 N.E.2d at 260 – 261. In meeting a contractual duty to mitigate, the landlord must make reasonable efforts to relet the premises. “Reasonable diligence,” as interpreted by the MBC court, would include attempts to relet at the original rental rate and acting in good faith for the benefit of the defaulting tenant, regardless of whether a higher rental rate would reflect market rates or sound business judgment. Although this decision illuminates what efforts are required of the landlord to meet a contractual or statutory duty to mitigate, the opinion does not shed any light on what rule of law applies in the absence of a contractual obligation to mitigate damages in leases executed prior to the enactment of Code of Civil Procedure §9-213.1. In American National Bank & Trust Company of Chicago v. Hoyne Industries, Inc., 738 F.Supp. 297, 301 (N.D.Ill. 1990), aff’d, 966 F.2d 1456 (7th Cir. 1992) (Rule 53) (reported in full at 1992 U.S.App. LEXIS 13339), the lease permitted the landlord, upon the tenant’s abandonment of the premises, to “use reasonable efforts to mitigate its damages” and to relet the premises at a rental higher than that paid by the tenant in its effort to mitigate its damages. Based on this language, the court determined that the landlord had not breached its obligation to mitigate damages under the lease by attempting to rent the property at a rate considerably higher than the tenant was obligated to pay under the lease. 738 F.Supp. at 301.



For further guidance as to the legal standard pertaining to the landlord’s obligation to mitigate, see also Chicago Title & Trust Co. v. Baskin Clothing Co., 219 Ill.App.3d 726, 579 N.E.2d 1045, 1052 – 1053, 162 Ill.Dec. 231 (1st Dist. 1991) (landlord sought declaratory judgment that tenant remained liable under lease after tenant’s assignee was released from lease obligations by bankruptcy court). With respect to the issue of mitigation, the Baskin Clothing court held that, although the landlord’s efforts to relet the space proved fruitless, these efforts, nonetheless, met the landlord’s lease obligation to mitigate. The Seventh Circuit in Hoyne Industries, supra, stated that “Baskin most likely stands only for the proposition that MBC does not apply when a landlord is merely entertaining offers and does not expressly ask for a substantially higher rent than the defaulting tenant had been paying.” 1992 U.S.App. LEXIS 13339 at *17. 6. [7.79] Comment One commentator has noted a judicial tendency to confuse a landlord’s duty to mitigate damages upon a tenant’s abandonment by reletting the premises with the landlord’s right to withhold its consent to assignment or subletting. See generally Murray S. Levin, Withholding Consent to Assignment: The Changing Rights of the Commercial Landlord, 30 DePaul L. Rev. 109 (1980). Certainly this confusion is evident in that line of Illinois cases represented by Wohl v. Yelen, 22 Ill.App.2d 455, 161 N.E.2d 339 (1st Dist. 1959), which held that when a defaulting tenant presents the landlord with a suitable substitute tenant, the landlord has an obligation to mitigate its damages. Indeed, it has been noted that “the Illinois rule expresses the landlord’s duty to mitigate in terms of the landlord’s approval of transfer.” 30 DePaul L.Rev. at 130 n.116. Given this tension in Illinois caselaw, it is fair to conclude that at least prior to the enactment of Code of Civil Procedure §9-213.1, 735 ILCS 5/9-213.1, Illinois law imposed no duty on the landlord to seek actively to relet vacated premises when the lease failed to evidence the parties’ intent as to the issue of mitigation and when the defaulting tenant failed to tender to the landlord a prospective substitute tenant. Section 9-213.1 may simply be a legislative statement imposing on the landlord an affirmative duty to take active steps to relet the premises in order to mitigate the damages it might otherwise seek to recover against the defaulting tenant. Thus, after January 1, 1984, a landlord no longer has the luxury to sit idly by while damages against a defaulting tenant accrue. This interpretation of Code of Civil Procedure §9-213.1 gives credence to the suggestion in Stein v. Spainhour, 167 Ill.App.3d 555, 521 N.E.2d 641, 118 Ill.Dec. 359 (4th Dist. 1988), that it may be applicable to lease abandonments occurring after this date. Such an interpretation would resolve the question as to retrospective or prospective application of §9-213.1 by applying it to all breaches occurring after its effective date. Such an application of §9-213.1 would preserve party expectations that otherwise would be disrupted by retrospective application. It would also avoid the somewhat unsatisfactory result that would occur if §9-213.1 is applied only prospectively. Indeed, §9-213.1 itself discredits the caselaw suggesting a landlord has no affirmative obligation to mitigate damages.



B. Expiration or Termination of Lease 1. [7.80] Expiration of Lease Term A landlord has no obligation to demand possession of the premises or to provide a tenant with a notice to quit upon the expiration of the lease term as fixed by the lease. Under the forcible entry and detainer action sections of the Code of Civil Procedure, expiration of the lease term, as specified in the lease, is sufficient notice to the tenant to vacate the premises. 735 ILCS 5/9-213. Under Code of Civil Procedure §9-207, when a lease is a month-to-month lease, not less than 30 days’ prior written notice is required to terminate the lease at the end of the next month. 735 ILCS 5/9-207. In Wang v. Marcus Brush Co., 354 Ill.App.3d 968, 823 N.E.2d 140, 291 Ill.Dec. 130 (1st Dist. 2005), the landlord gave such a notice to her commercial tenant to terminate its oral month-to-month lease on January 31, 2004. The tenant tendered rent for February 2004 to the landlord, but she did not cash or deposit the check and instead filed an action for possession under 735 ILCS 5/9-101, et seq., on February 20, 2004. The tenant claimed she had waived her right to terminate the lease by possessing the February rent check, and the trial court dismissed the complaint, and the landlord appealed. 823 N.E.2d at 141. The appellate court found the landlord had not waived her right to terminate the lease or for possession and reversed the trial court’s dismissal of the case. 823 N.E.2d at 142. 2. [7.81] Requirements To Properly Terminate Lease for Tenant’s Breach Under Illinois law, a landlord is prohibited from self-help evictions. In re Williams, 201 B.R. 948 (Bankr. N.D.Ill. 1996) (involving Chicago Housing Authority (CHA) tenant who filed for bankruptcy protection after expiration of 14-day notice period and after CHA had filed a forcible entry and detainer action, but before order of possession was granted). The sole method of regaining possession of the premises of a defaulting tenant or a tenant that has wrongfully held over is resort to §9-209 of the Code of Civil Procedure, “Forcible Entry and Detainer,” 735 ILCS 5/9-209. 201 B.R. at 953. See Fortech, L.L.C. v. R.W. Dunteman Co., 366 Ill.App.3d 804, 852 N.E.2d 451, 459, 304 Ill.Dec. 201 (1st Dist. 2006) (“Forcible Entry and Detainer Act . . . provides the sole means for setting a dispute over possession rights to real property”). Even though a notice to quit and demand for possession is a prerequisite to filing an action for eviction, the Fortech court held that properly giving a notice to quit and demand for possession did not give the sub-landlord the right to take possession of the subtenant’s premises until the date specified in the order for possession. Until then, the tenant was entitled to remain in possession and continue to store its materials. 852 N.E.2d at 460. The process of evicting a tenant in Illinois is a five-step process, which determines when a lease is terminated. First, the tenant must be delinquent in the payment of rent or have otherwise breached the lease. “Second, the landlord must notify the tenant, in writing, that rent must be paid [or the other default cured] within no less than five days. Third, the specified time period mentioned in the notice must pass without tender of payment [or cure of the other default] by the tenant. Fourth, the landlord must sue for possession or maintain ejectment and obtain a judgment for possession. Fifth, and finally, a writ of possession issues pursuant to the judgment for possession.” Williams, supra, 201 B.R. at 951.



There is a division of authority as to whether the lease is actually terminated after the third step has occurred or whether the landlord must take the fourth step, but according to the Williams bankruptcy court, the better view is that the lease is terminated once the first three steps have occurred. See 201 B.R. at 950 – 953 and cases cited therein. Under this authority, the landlord need only give the statutorily required notice and wait for the specified time period to pass without a cure by the tenant. If the lease specifies a longer time period is required, the contractual agreed notice and cure periods will override the shorter statutory period. However, on appeal, the Northern Illinois District Court held a tenant’s lease is not terminated until the fourth step has occurred, i.e., an order of possession has been entered. Williams v. Chicago Housing Authority, 207 B.R. 874, 875 (N.D.Ill. 1997). But its decision was reversed by the Seventh Circuit Court of Appeals in In re Williams, 144 F.3d 544, 549 – 550 (7th Cir. 1998), but only insofar as the Seventh Circuit opted to allow the bankruptcy court’s order lifting the stay on the eviction proceedings in state court to be entered. Rather than deciding whether Ms. Williams had defenses to her eviction, the Seventh Circuit held the automatic stay placed on the eviction proceedings should be lifted to allow the eviction proceedings to proceed in state court so that either the landlord could regain possession or Ms. Williams could include assumption of her lease in her plan. 144 F.3d at 550. For a similar holding by the Northern Illinois District Court and reversal by the Seventh Circuit Court of Appeals, see Bennett v. Saint Stephen Terrace Apartments, 211 B.R. 265 (N.D.Ill. 1997), rev’d, 165 F.3d 31 (7th Cir. 1998). Tenant defaults and landlord’s remedies are discussed in greater detail in Chapter 8 of this handbook. 3. [7.82] Termination of Possession Without Termination of Lease Commercial leases often provide, as one of the landlord’s remedies, the right on the part of the landlord to terminate a defaulting tenant’s right to possession of the premises without terminating either the lease or the tenant’s obligation to pay rent under the lease. A sample lease provision addressing this remedy is set out below. Landlord may terminate the right of Tenant to possession of the premises without terminating this Lease by giving notice to Tenant that Tenant’s right of possession shall end on the date stated in such notice, whereupon the right of Tenant to possession of the premises or any part thereof shall cease on the date stated in such notice. If Landlord terminates the right of Tenant to possession of the premises without terminating this Lease, such termination of possession shall not release Tenant, in whole or in part, from Tenant’s obligation to pay the rent hereunder for the full term. Landlord shall have the right, from time to time, to recover from Tenant, and Tenant shall remain liable for, additional rental payments and any other sums thereafter accruing as they become due under this Lease during the period from the date of such notice of termination of possession to the stated end of the term. No reentry or repossession, repairs, alterations and additions, or re-letting by Landlord shall be construed as an eviction or ouster of Tenant or as an election on Landlord’s part to terminate this Lease, unless a written notice of such intention is given to Tenant, or shall operate to release Tenant in whole or in part from any of Tenant’s obligations hereunder. Landlord may, at any time and from time to time, sue and recover judgment for any deficiencies from time to time remaining after the application from time to time of the proceeds of any such re-letting.



Upon termination of a tenant’s right to possession, under Code of Civil Procedure §9-213.1, the landlord would then be obligated to mitigate its damages, but the tenant would remain liable for amounts due under the lease until the landlord relets the premises or terminates the lease. 735 ILCS 5/9-213.1, Illinois caselaw also supports this dichotomy when the language of the lease contains a right on the part of the landlord to terminate the tenant’s right to possession without terminating the lease or the parties have agreed to such a result. For example, in Elliott v. LRSL Enterprises, Inc., 226 Ill.App.3d 724, 589 N.E.2d 1074, 168 Ill.Dec. 674 (2d Dist. 1992), a landlord filed a breach of contract action against its tenant for failure to pay rent through the end of the lease term. The parties previously had entered into an agreed order terminating the tenancy as of a date three months before the end of the lease term, provided the tenant continued to pay rent through the agreed termination date. Thereafter, the landlord filed a breach of contract action seeking damages under the lease for periods of time after the tenant’s tenancy was terminated. 589 N.E.2d at 1076. With respect to the landlord’s claim for rent for the balance of the lease term, the court noted that “the order states that the tenancy, not the lease, was terminated” and held the “parties incorporated the language ‘termination of tenancy’ into the order because they understood that the lease would remain in effect.” 589 N.E.2d at 1079. Because the lease itself was not terminated, the tenant remained in privity of contract with the landlord, and the landlord would not be precluded from bringing suit for a breach of the lease. Id. Thus, the court implied, without deciding, that the tenant could be liable for the balance of the rent through the end of the lease term. Tenants’ defaults and landlords’ remedies are addressed in greater detail in Chapter 8 of this handbook. Miner v. Fashion Enterprises, Inc., 342 Ill.App.3d 405, 794 N.E.2d 902, 276 Ill.Dec. 652 (1st Dist. 2003), sheds some light on a landlord’s rights to and limitations on recovery of rent when the tenant abandons the leased premises by liquidating its inventory and ceasing to do business. In Miner, without taking any action to terminate the lease, the landlord filed suit to recover rent that was past due at the time the complaint was filed. The landlord obtained a default judgment for those amounts almost three months later, but it failed to amend its complaint to include the additional two months of rent coming due between the filing of the complaint and the entry of the judgment. As a result, although the court held that the landlord was permitted to file a second complaint two years later for rent accruing under the lease after the first complaint, it held that the landlord was barred by res judicata from collecting those two months of rent in that later proceeding because it could have included those amounts in the earlier judgment. 794 N.E.2d at 914 – 915. Interestingly, the Miner suit was brought by the landlord against the parent corporation of the tenant (the tenant had been dissolved during the year in which the first suit was filed) and the parent corporation’s shareholders on the basis that the landlord was entitled to pierce the corporate veil of the tenant and pursue claims against its sole shareholder parent corporation and the parent’s shareholders. 794 N.E.2d at 910. The lease itself apparently did not contain, as one of the landlord’s remedies for a breach, a right to accelerate the balance of the rent due for the term. Even though the lease was entered into after the enactment of 735 ILCS 5/9-213.1, it specifically stated the landlord had no duty to mitigate its damages following the tenant’s breach, but the Miner court did not mention the statute. Rather, it specifically noted this provision in finding the trial court had erroneously interpreted that clause to mean the obligation to pay all subsequent



rent was accelerated after the tenant abandoned the premises. 794 N.E.2d at 913 – 914. The issue of whether the landlord was nevertheless obligated to mitigate its damages might still have been able to be raised by the defendants or the court in the later proceedings on the merits of the complaint. The Miner opinion addressed only procedural issues, such as whether the landlord’s count for unpaid rent against the defendants was barred by the doctrine of res judicata (it held it was not) or its count for fraudulent misrepresentation failed to state a cause of action (it held it did). 4. [7.83] Exercise of Termination Option Landlords and tenants should be aware of the need to strictly follow lease terms when exercising a termination option in a lease. In MXL Industries, Inc. v. Mulder, 252 Ill.App.3d 18, 623 N.E.2d 369, 191 Ill.Dec. 124 (2d Dist. 1993), a tenant filed an action for declaratory judgment seeking a determination that it had satisfied the early termination provisions of its commercial lease. The tenant had entered into a five-year commercial lease for industrial space. After one year, the tenant notified the landlord, in writing, of its intent to exercise its early termination rights under the lease, stating that it had left the premises as of February 1988. The tenant tendered three checks to the landlord as payment in full of its leasehold obligations and sought to have the lease terminated by the landlord. The landlord placed the checks in an interest-bearing account and notified the tenant that the tenant was still liable for maintenance damages and an additional month’s rent under the early termination provision of the lease. The landlord argued that the tenant remained on the premises until March on the basis that a cooling tower the tenant owned was not removed until March 1 and the tenant’s personal property remained on the premises after February 28, 1988. 623 N.E.2d at 371 – 372. The court held that the tenant had not complied with the termination provisions of the lease, and therefore the tenant’s efforts to terminate the lease actually were attempts to renegotiate the lease terms. The court stated that the tenant failed to tender the full amount due in accordance with the lease and that the lease was not terminated because of the evidence that the tenant’s possessions remained on the property after February 28, 1988. 623 N.E.2d at 377. C. [7.84] Landlord’s Potential Liability After Eviction of Tenant Landlords should be aware, particularly in the residential context, that they may be subject to liability related to actions taken to evict a tenant. In Anast v. Commonwealth Apartments, 956 F.Supp. 792 (N.D.Ill. 1997), an evicted tenant brought an action against the owner and manager of the apartment complex from which she was evicted. The court determined that she stated claims for deprivation of her due process rights and violations of the Fair Housing Act of 1968, 42 U.S.C. §3601, et seq., the Rehabilitation Act of 1973, 29 U.S.C. §701, et seq., and the Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act), 815 ILCS 505/1, et seq. The tenant, who suffered from mental illness, had not paid her rent for two months, leading the landlord to file a forcible entry and detainer complaint. When the tenant did not appear in court, the judge entered a default judgment in favor of the apartment owner. The tenant lost her subsidized housing unit, her housing subsidy, and her personal possessions and was rendered homeless. 956 F.Supp. at 795 – 796.



The court determined that the plaintiff stated a claim for violation of her due process rights because the tenant sufficiently proved a symbiotic relationship between the federal government and the apartment owner and manager in order to meet the requirement of state action necessary for a due process claim. The tenant alleged that the apartment owners and manager were participants in a “Section 8 Substantial Rehabilitation Program,” subject to regulations established by the government and in communication with the Department of Housing and Urban Development regarding the tenant. 956 F.Supp. at 798. In light of the ties between the apartment complex and the federal government and the tenant’s alleged damages, the court determined that she stated a claim for violation of her due process rights. 956 F.Supp. at 798 – 799. The tenant stated claims for violation of the Fair Housing Act and the Rehabilitation Act by demonstrating that she was mentally ill and by alleging that the apartment owner and manager refused to delay her eviction hearing until she was released from the hospital and able to comprehend the proceedings. 956 F.Supp. at 800 – 801. In addition, the tenant stated a claim against the apartment owner and manager for a violation of the Consumer Fraud Act by alleging that the apartment owner and manager filed their complaint for possession without notice, thereby allegedly concealing the fact that they were terminating the lease as well as the basis for the eviction. 956 F.Supp. at 802. Although the types of causes of action involved in Anast will apply more often to residential leases, commercial landlords also should take into account the circumstances under which they elect to evict a tenant because of the possibility that the tenant may have a cause of action against the landlord regarding the impropriety of its eviction. While not involving a claim by a tenant against the landlord, the decision in Fortech, L.L.C. v. R.W. Dunteman Co., 366 Ill.App.3d 804, 852 N.E.2d 451, 304 Ill.Dec. 201 (1st Dist. 2006), is an example in the commercial lease context in which the actions of a new tenant and its contractor after the entry of an order for possession but before it actually became effective could become a source of liability for the landlord. In Fortech, supra, after a dispute arose between the then sub-landlord (Reclamation) and its subtenants (Du-Kane and Dunteman) with respect to payment of real estate taxes, Reclamation issued the requisite notice to quit and in 1994 filed an eviction complaint against Du-Kane and Duntemann. 852 N.E.2d at 453. In 1996, while the 1994 action was pending, Reclamation sublet the property to Fortech and assigned its rights in the pending action to Fortech. Fortech filed an entirely new eviction action against Du-Kane and Dunteman, but also continued to pursue the original case. 852 N.E.2d at 454. The trial court issued an order in the 1996 action for possession of the premises in favor of Fortech on May 22, 1997, but the order specified enforcement of the judgment was stayed until June 21, 1997. Despite the stay, Fortech’s contractor (K-Five) started work on the premises as early as May 23, 1997, in order to make it ready for construction of a manufacturing facility to produce reinforced cement products. Meanwhile, Dunteman and Du-Kane filed a notice of appeal, and although it asked the circuit court to extend the stay on the order of possession, the court refused. Instead, it issued a new order on Fortech’s emergency motion to compel Dunteman and Du-Kane to remove the piles of debris from the site by July 18, 1997.



In the 1994 action, Fortech amended its complaint seeking damages and attorneys’ fees from Dunteman, Du-Kane, and two of the corporate officers, including back rent for periods between when the 1994 eviction suit was filed and 1996, and lost profits from its inability to set up full operations as long as Dunteman and Du-Kane were still stockpiling their materials on the site. In the 1996 action, Du-Kane filed a claim for damages due to conversion among other counts against K-Five. Id. The basis for the claim for conversion was that K-Five, as Fortech’s contractor, had entered onto the premises and used the stockpiled materials in regrading the site to create berms, internal roadways, and other mass grading for the future building and parking lot. Id. The opinion does not explain why Fortech was not the subject of Du-Kane’s and Duntemann’s claims, which were based on the argument that even though K-Five was not the sub-landlord, it was acting as Fortech’s agent and was liable, jointly and severally, with Fortech for Du-Kane’s losses when it improved Fortech’s site with Du-Kane’s stockpiled materials. 852 N.E.2d at 457. According to the court, because self-help is no longer permitted under Illinois law, the sub-landlord was not entitled to possession of the premises until the earlier of the date for possession ordered by the court or the date Du-Kane removed its stockpiled material. If Fortech wasn’t allowed possession, then neither was K-Five. 852 N.E.2d at 460. The trial court’s order for summary judgment in favor of K-Five and against Du-Kane on Du-Kane’s claim for conversion was vacated, and the case was remanded to conduct further proceedings to resolve any remaining factual matters. 852 N.E.2d at 462. If Du-Kane and Dunteman were successful in the case after remand, it is possible Du-Kane and Dunteman would seek to use the same theory to claim damages against Fortech in the 1996 action or at least as an offset to Fortech’s claim for past due rent and other damages (unless Fortech and Du-Kane and Dunteman had already settled their issues). The lesson for landlords is clear — do not act to dispose of a tenant’s property without a court order for possession and before the time the tenant has to vacate the premises has passed. XII. [7.85] COMMERCIAL REAL ESTATE BROKER LIEN ACT On January 1, 1992, the Commercial Real Estate Broker Lien Act, 770 ILCS 15/1, et seq., became effective in Illinois. Briefly, this Act grants most real estate brokers the right to file a lien against commercial real estate, or any interest therein, in the amount of the agreed compensation for the broker’s services. The Commercial Real Estate Broker Lien Act defines “commercial real estate” as “real estate located in Illinois other than (i) real estate containing one to 6 residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland for assessment purposes under the Property Tax Code [35 ILCS 200/1-1, et seq.].” 770 ILCS 15/5. Commercial real estate does not include “single family residential units such as condominiums, townhouses, or homes in a subdivision when sold, leased, or otherwise conveyed on a unit by unit basis even though these units may be part of a larger building or parcel of real estate containing more than 6 residential units.” Id. An interest in commercial real estate also includes “any interest in a land trust as defined in Section 15-1205 of the Code of Civil Procedure [735 ILCS 5/15-1205].” Id.



A. [7.86] Statutory Provisions The Commercial Real Estate Broker Lien Act provides that a broker has a lien against commercial real estate in the amount the broker is due pursuant to a written instrument either signed by the owner or the owner’s agent or signed by a prospective buyer or tenant or their respective agent as to the purchase, lease, or other conveyance to the buyer or tenant of an interest in the commercial real estate. 770 ILCS 15/10(a). Such a lien is available only to the broker named in the instrument signed by the owner, buyer, or tenant and not to an employee or independent contractor of the broker. Id. The lien attaches to the commercial real estate or interest therein upon the broker’s being otherwise entitled to a fee under either type of written instrument and, except as provided elsewhere in the Commercial Real Estate Broker Lien Act with respect to payments due in installments and leases (which are described below), upon the broker’s recording a notice of lien in the recorder’s office of the county in which the commercial real estate is located prior to the transfer of the commercial real estate against which the broker is claiming a lien. 770 ILCS 15/10(b). The lien attaches as of the date of the recording of the notice of lien and does not relate back to the date of the written agreement. Id. With respect to leases, “the claim for lien must be recorded within 90 days after the tenant takes possession . . . unless written notice of the intended signing of the lease is personally served on the broker entitled to claim a lien at least 10 days prior to the date of the intended signing of the lease in which case the claim for lien must be recorded before the date indicated for the signing of the lease in the notice served on the broker.” 770 ILCS 15/10(d). If the broker’s written agreement is with a prospective buyer or tenant, the lien attaches when the prospective buyer or tenant purchases, leases, or otherwise accepts a conveyance or transfer and the notice of lien is recorded by the broker. The notice of lien must be recorded within 90 days after the purchase, lease, or other conveyance or transfer to the buyer or tenant. It attaches to the interest purchased or leased as of the date of recording and does not date back to the date of the written agreement. 770 ILCS 15/10(e). Once the broker records its notice of lien, it must mail a copy to the owner of record of the commercial real estate by registered or certified mail, return receipt requested, or personally serve the owner of record or its agent, unless it is recorded within ten days prior to closing. 770 ILCS 15/10(f). Failure to mail a copy of the notice as required under the Commercial Real Estate Broker Lien Act makes the lien unenforceable. Id. A person claiming such a lien must begin proceedings by filing a complaint within two years after recording the lien. 770 ILCS 15/10(g). The Commercial Real Estate Broker Lien Act also extends to “persons” claiming a lien based on an option to purchase. Id. A person claiming a lien must begin proceedings to foreclose the lien claim by filing a complaint within 6 months after recording the lien. Id. The Commercial Real Estate Broker Lien Act outlines the contents of lien notices and complaints to foreclose liens under the Act. See id.; 770 ILCS 15/10(h). Costs of proceedings, including reasonable attorneys’ fees, costs, and prejudgment interest, are awarded to the prevailing party. 770 ILCS 15/10(l). As a result of the adoption of the Commercial Real Estate Broker Lien Act, landlords are well-advised to inquire whether a prospective tenant has used the services of a broker in locating



the premises and to take steps to ensure, either at the time of execution of the lease or through the terms of the lease, that the tenant compensates its broker in accordance with the terms of its agreement with the broker (if the landlord has not separately agreed to compensate the tenant’s broker). If the landlord has agreed to compensate the tenant’s broker, consideration should still be given as to whether a lien waiver should be obtained at the time of payment. Counsel to commercial landlords are urged to review the Commercial Real Estate Broker Lien Act in its entirety to determine its applicability to the particular transaction in which the client is involved. Counsel must look beyond the immediate impact of the Act at the initial execution of a lease and give consideration to its likely impact on the renewal or extension of the lease or the exercise of an option to purchase. B. [7.87] Caselaw Interpretations of Commercial Real Estate Broker Lien Act Two cases have interpreted the Commercial Real Estate Broker Lien Act. See Brian Properties, Inc. v. Burley, 278 Ill.App.3d 272, 662 N.E.2d 522, 214 Ill.Dec. 956 (1st Dist. 1996); Grubb & Ellis Co. v. First Colonial Trust Co., No. 94 C 3706, 1995 U.S.Dist. LEXIS 13256 (N.D.Ill. Sept. 6, 1995). These cases are discussed in §§7.88 and 7.89 below. 1. [7.88] Different Agreements and Interplay with Real Estate License Act Brian Properties, Inc. v. Burley, 278 Ill.App.3d 272, 662 N.E.2d 522, 214 Ill.Dec. 956 (1st Dist. 1996), demonstrates the interrelated nature of a management agreement and a sales listing agreement, and the interplay between the requirements for a valid listing agreement under what was then §19 of the Real Estate License Act (225 ILCS 455/19 (1992)) and a broker’s right to a lien under the Commercial Real Estate Broker Lien Act, 770 ILCS 15/1, et seq. As Brian Properties demonstrates, a failure to comply with the Real Estate License Act can have the effect of preventing a broker from having a cause of action under the Commercial Real Estate Broker Lien Act. In Brian Properties, supra, a real estate broker who entered into a “management agreement” with a landlord brought suit to foreclose a commercial broker’s lien under the Commercial Real Estate Broker Lien Act on the basis that the landlord owed the broker a commission when the property was sold. The trial court dismissed the complaint on the basis that the broker’s claim was made under an open-ended sales listing agreement, which was void under former §19 of the Real Estate License Act, and the appellate court affirmed. 662 N.E.2d at 525. In Brian Properties, the landlord purchased the beneficial interest in a land trust from another party that had entered into a management agreement with the broker. The management agreement in question provided that it was automatically renewed annually unless either party provided written notice on or before 30 days prior to the expiration of the renewal period. The management agreement also promised the broker a six-percent commission on the gross sales price if the property was sold during the term of the agreement. During one of the renewal terms under the management agreement, the landlord entered into a sales listing agreement with another broker for sale of the property. When the property was sold, the original broker demanded, but was not



paid, a six-percent commission under the management agreement. The broker then recorded a lien against the property pursuant to §10 of the Commercial Real Estate Broker Lien Act, 770 ILCS 15/10, and filed suit to foreclose the lien. 662 N.E.2d at 523 – 524. On appeal, the broker argued that on its face the agreement demonstrated that it was a management agreement, not a listing agreement. Further, the broker argued that even if sections of the agreement relating to leasing were void, the section relating to sale of the property was not void because it was an incentive for making the property profitable and enhancing its value. 662 N.E.2d at 524. The court disagreed with the broker’s arguments and held that despite the agreement’s title, its function was as a listing agreement, not a management agreement, because the broker was to locate buyers or tenants for the owner. The court also stated that the plain language of the agreement demonstrated that the broker was to obtain a percentage of the sales it effected, not a percentage of any gross sales arranged by any broker. Id. Moreover, because the court determined that the agreement was a listing agreement, it was subject to former §19 of the Real Estate License Act, which requires that a listing contract contain an automatic expiration provision that is set within a definite period of time. The appellate court agreed with the trial court’s determination that since the agreement was open-ended, it was void as a matter of law in light of the Real Estate License Act’s statutory requirement. 662 N.E.2d at 525. As a result of the holding in Brian Properties, brokers and landlords must be cognizant of the different statutes that might apply to the agreements they are entering. If an agreement contains a provision for the payment of a commission on the sale of the property, it must satisfy the requirements of the Real Estate License Act and have an automatic expiration date that occurs within a definite period of time. Otherwise the broker’s claim for a commission may not be enforceable, and the broker may not have an enforceable lien under the Commercial Real Estate Broker Lien Act. The particular provisions of the Real Estate License Act in effect at the time of Brian Properties have been repealed, but they have been replaced with substantially identical language that is found in §10-25 of the Real Estate License Act of 2000, 225 ILCS 454/10-25. 2. [7.89] Interplay Between Statutory Claims by Multiple Brokers and Contractual

Arbitration Provisions Grubb & Ellis Co. v. First Colonial Trust Co., No. 94 C 3706, 1995 U.S.Dist. LEXIS 13256 (N.D.Ill. Sept. 6, 1995), addressed the interplay between a contractual arbitration clause and a claim for a lien under the Commercial Real Estate Broker Lien Act. In Grubb & Ellis, a broker brought suit for breach of contract and foreclosure of a lien under the Commercial Real Estate Broker Lien Act. The court granted the landlord’s motion to compel arbitration with the broker in accordance with the exclusive authorization of sale and lease agreement, under which the landlord granted the broker exclusive brokerage rights for a parcel of its commercial property. After an arbitration award was granted to the broker, the broker and its co-broker (which had not been a party to the arbitration) filed petitions for declaration of the broker’s lien and for attorneys’ fees and prejudgment interest under the Commercial Real Estate Broker Lien Act. 1995 U.S.Dist. LEXIS 13256 at **1 – 2.



The landlord argued that it had dispatched both brokers’ lien claims when the landlord deposited more than the judgment amount in escrow with a title insurance company. The landlord cited §20 of the Commercial Real Estate Broker Lien Act, 770 ILCS 15/20, contending that it required that lien claims be released when they were secured by an escrow deposit. The court rejected this argument for two reasons. First, no payment could have been made from the escrow account without a full release of the liens, which would mean the brokers would have to give up the portion of their claims for attorneys’ fees and prejudgment interest. 1995 U.S.Dist. LEXIS 13256 at *3. Second, §20 of the Commercial Real Estate Broker Lien Act applies only to situations that “would prevent the closing of a transaction or conveyance.” 1995 U.S.Dist. LEXIS 13256 at *4. According to the court, since no such situation was claimed by the defendants to exist, the defendants could not evoke the escrow arrangements provided under the Commercial Real Estate Broker Lien Act. 1995 U.S.Dist. LEXIS 13256 at **4 – 5. The court then separately addressed the claims of the broker and the co-broker. With respect to the co-broker, the court stated that the co-broker’s petition for declaration of the broker’s lien and for attorneys’ fees and prejudgment interest should be granted in its entirety since the landlord did not include the co-broker in its arbitration proceedings even though the co-broker was a party to the litigation. 1995 U.S.Dist. LEXIS 13256 at *4. In addressing the claims made by the broker, the court held, first, that the arbitrator had no jurisdiction to adjudicate the broker’s lien rights, even though the brokerage contract between the broker and the owner purported to give the arbitrator this right. The court stated that while the arbitrator can determine whether a broker is entitled to a commission and the amount of the commission, the lien remedy is wholly statutory and thus wholly judicial, citing §10(g) of the Commercial Real Estate Broker Lien Act, which states: “A broker may bring suit to enforce a lien in the Circuit Court in the county where the property is located by filing a complaint and sworn affidavit that the lien has been recorded.” 770 ILCS 15/10(g); 1995 U.S.Dist. LEXIS 13256 at *7. The broker also argued for attorneys’ fees and prejudgment interest on the basis of §10(l) of the Commercial Real Estate Broker Lien Act, 770 ILCS 15/10(l), stating that even though these amounts were not authorized by the arbitration agreement, the broker was entitled to them by the Commercial Real Estate Broker Lien Act and entitled to sue for them after the arbitration dispute was resolved. The landlord argued that these amounts should have been included in the petition to the arbitrator and that even if they were not included, the fact that the arbitrator chose not to award them should preclude any action in court. 1995 U.S.Dist. LEXIS 13256 at *8. The court held that since Illinois adheres to the “American Rule,” which states that recovery of attorneys’ fees can occur only under specific statutory authority or contractual agreement between the parties, the broker’s claim for attorneys’ fees was governed by the Commercial Real Estate Broker Lien Act and therefore was a judicial remedy. The court also speculated that the broker might be able to recover its costs in connection with the arbitration under §10(l) of the Commercial Real Estate Broker Lien Act. The court’s speculation was based partially on the fact that the landlord invoked the arbitration and the arbitration was considered work that advanced the litigation. 1995 U.S.Dist. LEXIS 13256 at **9 – 10.



The court denied the broker’s petition for prejudgment interest on the grounds that the petition for prejudgment interest should have been submitted to the arbitrator because there was an interest provision in the contract. This meant the broker’s claim for interest was related to the breach of contract claim, and the court felt the broker should have raised the claim for interest in the arbitration proceeding. However, the court did allow the broker an opportunity to present further authority to support its claim because neither party had really addressed the issue. 1995 U.S.Dist. LEXIS 13256 at **10 – 11. XIII. VISUAL ARTISTS RIGHTS ACT OF 1990 A. [7.90] Statutory Obligations and Rights Under the Visual Artists Rights Act of 1990 (VARA), Pub.L. No. 101-650, 104 Stat. 5128, property owners may not remove certain types of art from their premises if doing so would destroy, distort, mutilate, or modify the artwork. VARA, which amends the Copyright Act, 17 U.S.C. §101, et seq., also limits an owner’s ability to renovate, raze, or use its property. The two claims created under VARA protect “works of visual art” (limited-edition paintings, drawings, prints, and sculptures that are subject to copyright protection) that are made part of a building. 17 U.S.C. §§101, 113. Under the first claim, works of visual art may not be intentionally distorted, mutilated, or modified if doing so would prejudice the artist’s honor or reputation. 17 U.S.C. §106A(a)(3)(A). Under the second claim, works of visual art of “recognized stature” may not be destroyed. 17 U.S.C. §106A(a)(3)(B). VARA does not protect applied art (ornamentation affixed to an item), strictly utilitarian objects, or “works made for hire” (works prepared by an employee within the scope of the artist’s employment or statutorily defined commissioned works). 17 U.S.C. §101. These rights exist for the life of the last surviving artist of a work created by more than one artist (i.e., beyond the term of the contract between the artist and the owner or leaseholder) and are enforceable by the artist only. 17 U.S.C. §§106A(b), 106A(d). Although VARA covers only works subject to copyright protection, the statute does not require artists to register their work with the Register of Copyrights to be protected by VARA. 17 U.S.C. §§411, 412. VARA preempts state law and applies only to works of visual art created after VARA’s effective date (June 1, 1991) and to certain works of visual art created before VARA’s effective date. 17 U.S.C. §106A(d); Historical and Statutory Notes, 17 U.S.C.A. §106A. By its terms, VARA applies to works of art created before its effective date as long as the artist had not transferred title to the work as of VARA’s effective date. 17 U.S.C. §106A(d)(2). See also Pavia v. 1120 Avenue of the Americas Associates, 901 F.Supp. 620 (S.D.N.Y. 1995). An artist prevailing under the statute may recover either actual or statutory damages. 17 U.S.C. §504. Owners are permitted to remove previously installed art from their properties if they can do so without destroying, distorting, mutilating, or modifying the art and after making a diligent good-faith effort to notify the artist of the intended action that will affect the work. The owner will be deemed to have made a diligent effort if the notice is sent by registered mail to the artist’s most recent address as recorded with the Registrar of Copyrights. If the owner gives notice pursuant to VARA, the owner may remove the art if the artist fails to remove the artwork within 90 days after receiving notice. 17 U.S.C. §113(d)(2).



B. [7.91] Caselaw Interpreting VARA To date, three reported cases outside Illinois have interpreted the Visual Artists Rights Act of 1990. See Carter v. Helmsley-Spear, Inc., 861 F.Supp. 303 (S.D.N.Y. 1994), aff’d in part, rev’d in part, vacated, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S.Ct. 1824 (1996); Pavia v. 1120 Avenue of the Americas Associates, 901 F.Supp. 620 (S.D.N.Y. 1995); Martin v. City of Indianapolis, 982 F.Supp. 625 (S.D.Ind. 1997). Each case interprets different provisions of VARA and provides valuable instruction on how landlords and property owners may avoid the more onerous provisions of VARA. The cases and the instruction they provide to landowners and landlords are discussed in §§7.92 – 7.95 below. 1. [7.92] “Works Made for Hire” Under VARA Carter v. Helmsley-Spear, Inc., 861 F.Supp. 303 (S.D.N.Y. 1994), aff’d in part, rev’d in part, vacated, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S.Ct. 1824 (1996), provides valuable insight on what constitutes a “work made for hire” under the Visual Artists Rights Act of 1990. In Carter, a limited partnership leased a commercial building from the owner and contracted with three artists to design, build, and install sculpture in the building’s lobby. The work contained multiple pieces of sculpture, a mosaic, and various items attached to the lobby’s floor and ceiling. The parties entered the contract in December 1991. The lease between the building owner and the limited partnership terminated on March 31, 1994. On April 7, 1994, the management agent of the building ordered the three artists, John Meade Swing, John James Veronis, Jr., and John Francis Carter, collectively known as the “Three-Js” or “Jx3” to leave the building and barred them from reentering the building. The management agent made statements that led the artists to believe the building owner intended to alter the art or remove the art from the building. On April 8, 1994, the limited partnership filed for bankruptcy. Thereafter, the three artists brought an action under VARA against the building owner and the limited partnership to prevent the owner from having their work altered or destroyed. 861 F.Supp. at 312. The Second Circuit Court of Appeals reversed the district court decision in Carter, concluding that VARA did not protect certain sculpture installed in a commercial building because the sculpture was work made for hire. The district court had found that the plaintiffs were hired as independent contractors and, therefore, their work was not made for hire as defined in the Copyright Act. Although the Second Circuit agreed that the district court had properly found the work was not unprotected applied art and that some parts of the sculpture comprised separate works, while the remainder constituted a single work, the court of appeals found the district court’s decision that the sculpture was not work for hire to be clearly erroneous and reviewed the legal question of whether the sculpture was work for hire de novo. The basis for the Second Circuit’s disagreement with the district court’s conclusion was in its application of a multifactored test to determine whether a work was produced for hire by an employee or was produced by an independent contractor that had been established by the Supreme Court in Community for Creative Non-Violence v. Reid, 490 U.S. 730, 104 L.Ed.2d 811, 109 S.Ct. 2166 (1989). 71 F.3d at 84, 85. The court of appeals applied the Reid test, noting that the Copyright Act fails to define “employee” or “scope of employment.” 71 F.3d at 85. Under this test, the three artists were not



independent contractors because their contract gave the limited partnership the right to assign the artists tasks other than creating the sculpture, which supported the conclusion that they were employees. Moreover, other indicia of employee status existed. The artists were provided employee benefits, treated like employees for tax purposes, and paid a weekly salary. The artists also agreed to a 40-hour week and to limit their work for others. 71 F.3d at 86 – 87. Based on these factors, the court concluded the artists were employees but cautioned “because the Reid test is fact-dependent, future cases involving the work for hire question will not always fit neatly into an employee or independent contractor category.” 71 F.3d at 87. Martin v. City of Indianapolis, 982 F.Supp. 625 (S.D.Ind. 1997), discussed in §7.94 below, also applied the Reid test, but unlike the court in Carter, the Martin court concluded the artist’s work had not been a work made for hire. 982 F.Supp. 632 – 635. 2. [7.93] Applicability of VARA to Artwork Created Before VARA’s Enactment Pavia v. 1120 Avenue of the Americas Associates, 901 F.Supp. 620 (S.D.N.Y. 1995), the second reported case interpreting the Visual Artists Rights Act of 1990, addresses the applicability of VARA to those works of art created before VARA was enacted. In Pavia, an artist brought an action alleging that the defendants violated VARA by moving two of four pieces of a sculpture he was commissioned to create for a hotel lobby to a commercial warehouse. 901 F.Supp. at 624. In 1963, Philip Pavia, an artist and sculptor, was commissioned by the Hilton Hotels Corporation to create a work of art for display in the lobby of the Hilton Hotel located on Sixth Avenue in New York City. The piece, a large, bronze sculpture consisting of three large, diamond-shaped, standing forms and one smaller form lying on its side, was recognized by critics as a noteworthy piece of art. 901 F.Supp. at 623. Mr. Pavia asserted that Hilton Hotels advised him that the work would remain displayed in the hotel permanently. The sculpture remained on display in the hotel until 1988. In July 1988, agents of Hilton Hotels took possession of the sculpture and moved two of the four pieces to a commercial warehouse, which was accessible to the public 24 hours a days, seven days a week. The remaining two pieces were moved from the hotel lobby. The artist claimed the display of his work in this manner harmed his reputation. 901 F.Supp. at 624. Pavia held that a work consisting of multiple, separate elements can form a singular “work of visual art” protected by VARA. 901 F.Supp. at 627. The court based its holding on Carter v. Helmsley-Spear, Inc., 861 F.Supp. 303 (S.D.N.Y. 1994), aff’d in part, rev’d in part, vacated, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S.Ct. 1824 (1996), reasoning that art comprised of several parts can “form an integrated whole” and therefore be considered a single work of art. 901 F.Supp. at 628, quoting Carter, 861 F.Supp. at 314. However, Pavia also held that VARA did not give an artist the right to stop the post-enactment display of a sculptural work mutilated before VARA’s enactment. 901 F.Supp. at 623. The court noted that the fact that the sculpture was created before Congress enacted VARA did not remove the work from the ambit of the Act. Works of art created before VARA’s effective date are protected if title had not been transferred from the artist as of the Act’s effective date. 901 F.Supp. at 628, citing 17 U.S.C. §106A(b)(2). Because the court was hearing these issues on a motion to dismiss, the court accepted as true Mr. Pavia’s assertion that he never transferred title to the sculpture. However, the court also found Mr. Pavia failed to state a claim



because the acts committed by the defendants did not give rise to a claim. The removal of the sculpture occurred before the enactment of the Act, and VARA exempts from its scope acts that occurred before its effective date. 901 F.Supp. at 628, citing 17 U.S.C. §106A(a)(3). Mr. Pavia’s assertions that the continued display of his sculpture constituted a continuous mutilation covered by VARA were unavailing. Based on the legislative history of the Act, the court concluded that the distortion, mutilation, or modification of the work had occurred only when the work was removed. The continued display of the work in the alternate location was not a distortion, mutilation, or modification actionable under VARA. 901 F.Supp. at 629. Thus, under Pavia, it is clear landlords are protected from claims under VARA that artists may attempt to bring for damages they allegedly suffered if their artistic work was removed from a building or otherwise destroyed, mutilated, or modified before VARA’s effective date. 3. [7.94] Works of “Recognized Stature” Under VARA; Waiver of VARA Rights The most recent of the three decisions interpreting the Visual Artists Rights Act of 1990 offers further insights into the Act’s requirements that a work be of recognized stature and not be used as advertising and how an artist may waive his or her rights under VARA. In Martin v. City of Indianapolis, 982 F.Supp. 625 (S.D.Ind. 1997), a municipality contracted to destroy a sculpture after it acquired land on which the sculpture was located. The artist who created the sculpture brought a claim alleging a violation of his integrity rights under VARA. The court granted summary judgment to the artist on the basis that the sculpture was protected by VARA and was intentionally destroyed in violation of the Act. The city argued that Martin’s sculpture was not a work of recognized stature. Martin’s evidence included newspaper and magazine articles and letters and awards recognizing his artwork. Although the city claimed that this evidence was hearsay, the court allowed it, stating that it showed how art critics and the public viewed Martin’s work. The court stated that the evidence demonstrated that the work was of recognized stature, quoting the two-tier test in Carter v. Helmsley-Spear, Inc., 861 F.Supp. 303, 325 (S.D.N.Y. 1994), aff’d in part, rev’d in part, vacated, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S.Ct. 1824 (1996), that requires a plaintiff to show “(1) that the visual art in question has ‘stature,’ i.e. is viewed as meritorious, and (2) that this stature is ‘recognized’ by art experts, other members of the artistic community, or by some cross-section of society.” 982 F.Supp. at 631. The city’s second argument was that the sculpture was a form of advertising not protected under §101 of VARA. The city’s argument was based on the fact that the owner of the land where the sculpture was located owned the company that produced the materials used to make the sculpture, provided the materials and labor for constructing the sculpture, and included the sculpture in its advertising brochure. The court noted that the prior cases had not interpreted the advertising provision of VARA, but it held that the sculpture was not advertising, particularly because it did not have identifying marks or signage of the sponsoring company. 982 F.Supp. at 632. The city’s third argument was that the sculpture was a work made for hire not covered under §101 of VARA. The city argued that since Martin was a full-time employee of the company that owned the land where the sculpture was located, his work was a work made for hire. Martin



contended that his sculpture was created in his capacity as an artist during non-company hours on weekends and holidays. The court stated that the issue was whether creating the sculpture was within the scope of Martin’s employment, noting that when an employee is in general employment with an employer, it does not mean that the conduct in question was within the employee’s scope of employment. 982 F.Supp. at 632 – 633. The court followed Community for Creative Non-Violence v. Reid, 490 U.S. 730, 104 L.Ed.2d 811, 109 S.Ct. 2166 (1989), citing a three-part test from the RESTATEMENT (SECOND) OF AGENCY §228 (1958), to determine the sculpture was not a “work made for hire.” 982 F.Supp. at 633. First, the sculpture was not the “kind of work” that Martin was employed to perform. 982 F.Supp. at 633 – 634. Martin was hired by the company as an engineer, not as the creator of original artworks, nor was the company in the business of the creation of artworks. Second, the creation of the sculpture was not “substantially within time and space limits” of Martin’s employment. 982 F.Supp. at 634. Third, the sculpture was not “actuated by a purpose to serve the master,” noting that Martin completed the work on his own time and without compensation, and that the work was not constructed for the promotion of the company or for one of the company’s clients. 982 F.Supp. at 634 – 635. Finally, the court rejected the city’s argument that Martin waived his VARA rights when he signed a project agreement as part of the variance he obtained from the city to build the sculpture. The court stated that the contract did not contemplate destruction of the sculpture and that it guaranteed that the city would provide 90 days’ written notice for Martin to remove his sculpture, which did not occur. The court noted that the waiver of an artist’s rights under VARA must be specific as to use and should be strictly construed. 982 F.Supp. at 636 – 637. The court granted Martin’s motion for summary judgment on the basis that he demonstrated the five elements of a VARA claim: a. Martin proved that he was the author of the sculpture since, following copyright law, he was an individual author working outside an employment relationship. b. The sculpture was a work of visual art for purposes of the statute. c. The sculpture was within the scope of VARA because even though it was completed four years before VARA’s 1991 enactment, Martin retained title to the work as of the date of VARA’s enactment. d. The sculpture was a work of recognized stature. e. The city intentionally destroyed the sculpture by contracting with a demolition company to destroy the work. 982 F.Supp. at 637 – 638. In a subsequent decision, Martin v. City of Indianapolis, 4 F.Supp.2d 808 (S.D.Ind. 1998), the court awarded Martin $20,000 in statutory damages and costs as well as reasonable attorneys’ fees.



C. [7.95] Comment The two Martin cases, Martin v. City of Indianapolis, 982 F.Supp. 625 (S.D.Ind. 1997), and Martin v. City of Indianapolis, 4 F.Supp.2d 808 (S.D.Ind. 1998), illustrate, as do the other two cases under the Visual Artists Rights Act cited in §7.91 above, the importance to landlords (and property owners) of investigating the history behind artworks on display before unilaterally demolishing or removing them. As the Martin cases show, failure to consider the implications of VARA might be very costly to the landlord or owner. Even if the landlord or owner is ultimately successful or the damages found due to the artist are relatively modest (as they were in the Martin cases), considerable expense and costly time delays to a project might result if litigation commences over a piece of artwork at the time when the landlord or owner plans to remove or demolish the artwork. Property owners may take several measures to protect their properties from possible future claims under VARA made by artists with respect to works in the future. In their lease provisions, owners should expressly limit the right of tenants to contract with artists to install art on the premises. Owners may expressly bar such contracts or require that tenants first obtain the owner’s written consent to install art on the premises. If owners decide to permit tenants to install art or install art on their own premises, they should install art that is beyond the scope of VARA. To avoid the application of VARA, the owner may install art that is not a work of visual art or contract the art as a work made for hire. See Carter v. Helmsley-Spear, Inc., 861 F.Supp. 303 (S.D.N.Y. 1994), aff’d in part, rev’d in part, vacated, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S.Ct. 1824 (1996). It would be difficult to argue that artwork installed in a building is not a work of visual art, but it is possible for such artwork to fall within the exclusion for work made for hire. Under the test relied on in Carter and the Martin cases to determine whether the work was one made for hire, it may be difficult for owners and their attorneys to predict the outcome of a claim by an artist under VARA. However, owners can protect themselves from artists bringing causes of action under VARA and claiming that they are independent contractors by making their contractual relationships with artists include as many indicia of an employer-employee relationship as possible. In that regard, Carter is very helpful. Even if the art is not a work for hire and otherwise comes within the purview of VARA, the owner may have the artist waive his or her rights under VARA. The waiver must be written, must be signed by the building owner and the artist, and must grant the owner the right to remove the art even though removal may destroy, distort, mutilate, or modify the piece. 17 U.S.C. §113(d)(1). Owners may also decide to contract for art that may be removed without its destruction, distortion, mutilation, or other modification. In those situations, the owner may remove such art as long as either the artist is notified pursuant to VARA and fails to remove the work or pay for its removal within 90 days after receiving the notice or the owner has followed the statutory procedures to attempt to notify the artist. See 17 U.S.C. §113(d)(2).



Which option the owner elects to follow will depend on the nature of the artwork commissioned, the artist, and the other circumstances involved. The three decisions discussed here provide some guidance to owners who address the VARA issues at the outset, rather than waiting until they wish to remove or destroy the artwork.

©COPYRIGHT 2010 BY IICLE. 7S — 1

Landlord’s Duties and Liabilities JANET M. JOHNSON Schiff Hardin LLP Chicago The author would like to thank Gregory S. Jones, a former summer associate at

Schiff Hardin LLP, for his assistance in researching the material for this supplement.

7S

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7S — 2 WWW.IICLE.COM

II. Use and Enjoyment of Premises D. Constructive Eviction 2. [7S.7] Caselaw on What Is or Is Not Constructive Eviction III. Landlord’s Obligation To Pay Real Estate or Leasehold Taxes B. [7S.11] Tenant’s Obligation To Pay Increased Share of Taxes F. [7S.15] Effect of Tenant’s Bankruptcy IV. Landlord’s Duty To Repair and Maintain A. [7S.16] General Rule: Landlord Has No Duty To Repair B. Exceptions to General Rule of No Duty To Repair 1. [7S.18] Landlord’s Express Covenant To Repair 2. [7S.19] Tenant’s Remedies upon Landlord’s Breach of Express Covenant To

Repair 3. [7S.20] Landlord’s Obligation To Make Structural or Nonstructural Repairs 4. [7S.21] Improvements Made on Landlord’s Behalf C. Landlord’s Tort Liability for Property Damage and Injury to Tenants and Third Parties 1. [7S.23] General Rule: No Liability for Personal Injury or Property Damage 2. [7S.24] Exception to General Rule for Injuries Within Tenant’s Premises When

Landlord Retains Control 5. [7S.27] Exception to General Rule for Injuries Occurring in Common Areas 7. [7S.29] Comment V. Landlord Exculpatory Clauses and Statutory Prohibitions on Exoneration A. [7S.30] Statutory Prohibition on Exoneration for Landlord’s Negligence and Caselaw

Interpretation D. [7S.33] Comment E. [7S.33A] Limitations on Damages for Landlord Breaches (New Section) VII. Property Damage A. Fire 1. [7S.42] Situations in Which Landlord Bears Risk of Loss 3. [7S.43A] Damage to Property of Third Parties (New Section) B. [7S.44] Other Loss Events C. [7S.45] Waiver of Subrogation Provisions


ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 7S — 3

IX. Options To Renew and Options To Purchase A. Options To Renew or Extend Lease 1. [7S.51] Exercise of Option To Renew; Excusable Neglect 3. [7S.53] Effect of Lease Assignments on Options To Renew B. [7S.54] Options To Purchase X. Enforcement of Tenant Covenants and Other Lease Provisions A. [7S.56] Effect of Landlord’s Failure To Enforce Lease Provisions B. [7S.61] Effect of Non-Waiver Provisions C. Assignment of Lease and Subletting of Premises 1. [7S.63] Prohibition in Lease Against Assignment 2. [7S.64] Landlord’s Failure To Object to Assignment 3. [7S.65] Unreasonable Withholding of Consent 5. [7S.67] Effect of Tenant’s Bankruptcy D. [7S.68] Effect of Assignment or Subletting by Tenant F. Breach by Landlord 2. [7S.71] Rights of Tenant XI. Termination of Tenancy A. Landlord’s Obligation To Mitigate Damages upon Tenant’s Breach 1. [7S.74] Statutory Duty To Mitigate Damages 3. [7S.76] What Constitutes “Reasonable Measures” To Mitigate Damages B. Expiration or Termination of Lease 1. [7S.80] Expiration of Lease Term 4. [7S.83] Exercise of Termination Option D. [7S.84A] Effect of Tenant’s Bankruptcy (New Section) 1. [7S.84B] Payment of Real Estate Taxes and Other Pass-Through Expenses (New

Section) 2. [7S.84C] Payment of Monthly Base Rent (New Section) 3. [7S.84D] Payment of Percentage Rent (New Section) 4. [7S.84E] Comment (New Section) XII. Commercial Real Estate Broker Lien Act A. [7S.86] Statutory Provisions B. [7S.87] Caselaw Interpretations of Commercial Real Estate Broker Lien Act 1. [7S.88] Different Agreements and Interplay with Real Estate License Act

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XIII. Visual Artists Rights Act of 1990 A. [7S.90] Statutory Obligations and Rights

LANDLORD’S DUTIES AND LIABILITIES §7S.11


II. USE AND ENJOYMENT OF PREMISES D. Constructive Eviction 2. [7S.7] Caselaw on What Is or Is Not Constructive Eviction Add after the first paragraph: On the other hand, because a determination of whether a tenant has been constructively evicted is a factual matter, ordinarily the issue will not be decided on a motion to dismiss. See BCWC LLC v. Reading Rock, Inc., No. 07 C 2356, 2007 WL 2955573 (N.D.Ill. Oct. 10, 2007) (whether lessor’s action is of serious and substantial character and whether tenant vacated premises in reasonable amount of time are usually questions of fact). In RNR Realty, Inc. v. Burlington Coat Factory Warehouse, 168 Ill.App.3d 210, 522 N.E.2d 679, 119 Ill.Dec. 17 (1st Dist.), appeal denied, 121 Ill.2d 586 (1988), the trial court’s finding that the tenant had not been constructively evicted was affirmed by the First District Appellate Court. The tenant claimed the landlord’s problems with delivering sufficient parking to serve its store caused it to vacate the premises, but the tenant had not complained to the landlord that it was in default after the loss of use of an adjacent parking lot for nearly 13 months, and the tenant did not actually leave the premises for another 4 months. At that time, the tenant moved to a smaller building in the area that it purchased, a factor that the appellate court said was sufficient for the trial court to hold the tenant had intentionally and unreasonably delayed its abandonment of the premises. 522 N.E.2d at 685. Other facts the appellate court pointed out as sufficient to allow the trial court to deny the tenant’s claim of constructive eviction were related to the tenant’s claimed loss of business and lower sales per square foot for the store as compared to its other stores. The appellate court noted the decline in sales was average for all of the tenant’s other Chicago area stores over the same time period and the lower sales per square foot could have been due to the fact that the store in question was 22,000 square feet larger than the tenant’s other Chicago area stores. 522 N.E.2d at 686. III. LANDLORD’S OBLIGATION TO PAY REAL ESTATE OR LEASEHOLD

TAXES B. [7S.11] Tenant’s Obligation To Pay Increased Share of Taxes Add at the end of the section: Ambiguous lease terms may give rise to litigation between the landlord and its tenant, including whether the tenant is liable for a pro rata share of real estate taxes on the building. In JPMorgan Chase Bank, N.A. v. Alecta Real Estate North Michigan Avenue, Inc., No. 08 C 3018, 2010 WL 375615 (N.D.Ill. Jan. 21, 2010), after many different versions of a draft lease between the owner and the bank for a portion of a downtown Michigan Avenue building purchased from the bank in a sale-leaseback transaction, the final lease as signed by the parties contained conflicting and contradictory language as to whether the bank was liable for its proportionate

§7S.15 COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


share of real estate taxes due on the retail portions and office portions of the building occupied by the bank. 2010 WL 376515 at **1 – 2. When the bank sued for a declaratory judgment that the lease did not require it to pay real estate taxes, the court found the language at issue ambiguous because it was susceptible to two reasonable interpretations and resorted to extrinsic evidence to determine the intent of the parties. 2010 WL 375615 at **2, 4. The extrinsic evidence examined by the court included an offering memorandum for the sale of the building by the bank that was given to prospective buyers, including Alecta, which stated that “[a]ll office and retail rents are quoted on a net basis with full pass throughs of operating expenses and real estate taxes.” 2010 WL 375615 at *5. The court also looked at various drafts of the lease in which the bank would have been liable for its share of real estate taxes, as well as the fourth draft in which the drafter removed the references to taxes generally, but apparently failed to amend the definition of “operating expenses” to include taxes, which the court found had been intended, and also failed to eliminate other provisions dealing with refunds of taxes and allocating taxes, which would have been unnecessary provisions had the parties intended the bank was not to be liable for any real estate taxes. 2010 WL 375615 at *6. More importantly, the court found it significant that none of the bank’s representatives testified the bank did not intend to be liable for taxes when the lease was negotiated. In addition, an internal memorandum sent “up the chain” within the bank to obtain the corporate approvals needed to sign the lease, which summarized the terms of the lease, included a referenced to the bank paying its proportionate share of real estate taxes. Id. Moreover, the closing statement for the sale of the building by the bank contained a reference to collections and payments to the bank by the purchaser of real estate taxes collected from the tenants of the building that stated the bank would not have to pay taxes twice to the purchaser for the same period. The court relied on testimony from a bank representative who thought the wording meant the bank would not want to pay taxes as a tenant that had accrued before its leaseback of space in the building commenced. Finally, the bank also admitted it paid, without protest, its share of real estate taxes from 1998 – 2003 and only objected in 2004 when an outside auditor reviewing the lease told the bank the lease did not require the bank to pay taxes. 2010 WL 375615 at **7 – 8. Based on this evidence, the court had no difficulty holding the parties’ intent was that the bank was obligated to pay its share of real estate taxes and the landlord was entitled to reformation of the lease to reflect that intent. 2010 WL 375615 at *13. The decision came six years after the bank first raised an objection to paying real estate taxes. No doubt the bank and its new landlord spent hundreds of thousands of dollars or more on legal fees and litigation costs. Thus, the case should be viewed as a lesson in why careless or imprecise drafting of lease terms can be costly for both the landlord and the tenant. F. [7S.15] Effect of Tenant’s Bankruptcy The section is revised: A commercial landlord’s worst nightmare occurs when one of its tenants files for bankruptcy relief in order to liquidate or reorganize. Any unpaid amounts due and payable under the lease prior to the entry of an order for relief by the bankruptcy court become unsecured debts. This



means, just like the holders of any other unsecured debts owed by the tenant to others, the landlord must file its claim and wait in line to see how many cents on the dollar it will recover, if any. In addition, if the tenant wants to reorganize rather than liquidate or needs time to sell its merchandise or other personal property located in its leased premises, the landlord must wait until the tenant elects to assume or reject its lease with the landlord before it can make plans to release the space. Not all the news for a landlord is bad, however. A special provision of the Bankruptcy Code requires the tenant to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease . . . until such lease is assumed or rejected.” 11 U.S.C. §365(d)(3). (Such obligations are often referred to somewhat erroneously as “post-petition” obligations.) There is a split of authority among the federal district and the federal circuit courts of appeal on how §365(d)(3) is applied to actual lease disputes, however. A Third Circuit decision arising out of the bankruptcy of Montgomery Ward, In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001), sheds some light, at least in the Third Circuit, on what real estate taxes are considered post-petition obligations and must be paid to a landlord under Bankruptcy Code §365(d)(3) when a tenant files for relief in bankruptcy court, while an earlier Seventh Circuit decision arising out of the bankruptcy of the Handy Andy chain, In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), took a different approach. Courts in other jurisdictions differ on whether and what portion of an obligation to pay real estate taxes or other rent due under the tenant’s lease is a post-petition or prepetition obligation. Thus, the outcome will depend on the jurisdiction in which the bankrupt tenant files its bankruptcy petition and the provisions of the lease at issue. These cases and others from Illinois federal district courts and the Seventh Circuit, as well as some from other jurisdictions are discussed in greater detail in §§7S.84A – §7S.84E below. IV. LANDLORD’S DUTY TO REPAIR AND MAINTAIN A. [7S.16] General Rule: Landlord Has No Duty To Repair Add at the end of the section: A provision in a lease under which a tenant acknowledges it has examined and knows the condition of the premises and has received them in good condition and repair and that no representations as to the condition and repair of the premises have been made by the landlord or its agents prior to the tenant having executed the lease unless they are stated in the lease will not bar a tenant from claiming it was fraudulently induced into signing a lease. See BCWC LLC v. Reading Rock, Inc., No. 07 C 2356, 2007 WL 2955573 (N.D.Ill. Oct. 10, 2007). In Reading Rock, the tenant abandoned the premises leased to it in May 2004 without ever having occupied them and ceased paying rent as of February 2005 when it was unable to obtain an occupancy certificate due to five serious fire code problems found after the lease was signed as well as other items noted by the city when the tenant applied for a special use permit. 2007 WL 2955573 at *2.



According to the tenant’s counterclaim against the landlord, filed after the landlord sued to recover unpaid rent and other incidental damages, the landlord’s agents had represented to it in May of 2004 that the premises were available for immediate occupancy when in reality the landlord had been notified at least seven times between 1992 and 2001 that there were “numerous building and fire code violations, and that repairs needed to be made to the parking lot,” which the landlord had not fixed. 2007 WL 2955573 at *1. The violations and the notification the landlord had received from the city that no one could occupy the building without a certificate of occupancy were not disclosed to the tenant prior to signing the lease. 2007 WL 2955573 at **1 – 2. When the landlord filed a motion to dismiss the tenant’s counterclaim, the court denied that motion on the basis that an integration clause, such as the one contained in Reading Rock’s lease, did not bar a claim for fraudulent misrepresentations allegedly made prior to the tenant’s entering into the lease. Because the tenant claimed the defects in the premises were latent, and not known to it at the time it entered into the lease, the court found Reading Rock had sufficiently pled the elements of a fraudulent inducement claim to survive a motion to dismiss, because in considering such a motion the court is required to accept all facts pled as true. As a result, the court denied the landlord’s motion to dismiss the tenant’s counterclaim. 2007 WL 2955573 at **3 – 4. The lack of a duty on the part of the landlord to repair the leased premises, absent an express provision in the lease or other valid exception to the general rule, prevents a tenant from asserting a claim against the landlord in tort for negligence for its failure to repair the premises. See Mandelke v. International House of Pancakes, Inc., 131 Ill.App.3d 1076, 477 N.E.2d 9, 12, 87 Ill.Dec. 408 (1st Dist. 1985); Zion Industries, Inc. v. Loy, 46 Ill. App.3d 902, 361 N.E.2d 605, 614, 5 Ill.Dec. 282 (2d Dist. 1977) (“landlord has no common law duty to repair the premises and is therefore not answerable in negligence for failure to do so”). The same rule has been applied to the relationship between a sub-landlord and a sub-tenant. See Uresil Corp. v. Becton, Dickinson & Co., No. 89 C 6130, 1990 WL 51379 at *2 (N.D.Ill. Apr. 10, 1990). In fact, so understood is this principal that the attorney for Uresil was sanctioned by the court in a later proceeding for having no basis in law for signing a complaint that included a negligence claim against the sub-landlord. Uresil Corp. v. Becton, Dickinson & Co., No. 89 C 6130, 1990 WL 133523 at **2 – 3 (N.D.Ill. Sept. 13, 1990). The court went as far as to say the attorney, who by signing a pleading was considered to have certified to the court that he had conducted a reasonable inquiry and that, to the best of his knowledge, information, and belief, the pleading was warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law, had no basis for such a certification. Uresil’s attorney was held liable for the sub-landlord’s reasonable attorneys’ fees incurred in obtaining a dismissal of the negligence count. Id.



B. Exceptions to General Rule of No Duty To Repair 1. [7S.18] Landlord’s Express Covenant To Repair Add after the carryover paragraph at the top of p. 7-24: If a landlord promises in a lease to make certain repairs or improvements to the leased premises, its failure to do so may prevent it from otherwise enforcing other lease obligations against the tenant. In Newcastle Properties, LLC v. K&P Automotive, Inc., 423 B.R. 515 (N.D.Ill. 2010), the lease allowed the tenant to occupy an adjacent space in the building other than its leased space on an interim basis until the landlord completed certain specified improvements to the leased premises. However, because the two spaces did not have a demising wall between them, the tenant ended up occupying both spaces and the landlord never made the improvements called for in the lease, which included a demising wall between the two spaces. 423 B.R. at 517 – 518. After the original landlord’s successor sold the building to a new owner, the new owner demanded the tenant pay more rent because it was occupying both spaces. The tenant refused, and for a number of years the landlord continued to demand extra rent and the tenant continued to refuse. The landlord also demanded the tenant vacate the “temporary” space so it could build a demising wall, but never sent anyone to actually do the work and never obtained the permits to do the work. It also never demanded the tenant vacate the actual premises demised under the lease as was contemplated at the time it was signed so that it could make the other improvements called for in the lease. 423 B.R. at 518. Eventually, the landlord filed suit in state court to collect unpaid rent, although the reported decision does not say what rent was demanded by the landlord (past due rent under the lease or rent on the “temporary” space). The landlord was granted a judgment in that proceeding, and the tenant appealed. Before the appellate court entered its decision on the state court decision, however, the tenant filed for bankruptcy and no further proceedings occurred in the state court. The bankruptcy court denied the landlord’s claims, and the landlord appealed, claiming it was entitled to rent for both portions of the space. 423 B.R. at 518. The Northern District Court agreed with the bankruptcy court and denied the landlord the additional rent it was seeking. 423 B.R. at 523. The lesson for the landlord here is that in order to enforce its rights, it must have performed its obligations, although the facts in Newcastle are a bit unusual because the landlord and tenant had never agreed in the written lease that the tenant would lease both parts of the building. 2. [7S.19] Tenant’s Remedies upon Landlord’s Breach of Express Covenant To

Repair Add at the end of the section: Another remedy that may be available to a tenant if the landlord breaches its obligation to repair the premises was articulated in Quincy Mall, Inc. v. Kerasotes Showplace Theatres, LLC, 388 Ill.App.3d 820, 903 N.E.2d 887, 328 Ill.Dec. 227 (4th Dist. 2009). In Quincy Mall, the landlord refused to replace a leaking roof in a building that was approximately 25 years old



despite numerous requests by the tenant. The landlord argued the duty to replace the roof was on the tenant under a general repair clause in the lease obligating the tenant to keep and maintain the demised premises in good condition and repair, and obligating it to “leave the demised premises in a good condition at the expiration” of its 30-year lease. 903 N.E.2d at 891. The tenant eventually replaced the roof itself and set off its costs against the rent owed under the lease. When the landlord sued the tenant for the amount of rent set off, the court held the tenant had met its obligation to pay rent under the lease by setting off “the amount it spent to make its building fit for its commercial purpose.” 903 N.E.2d at 892. The court articulated three tests the tenant must meet in order to be entitled to set off the cost of the roof replacement against the rent when the “landlord fails to replace a critical component of the leased premises, which is vital to the operation of its commercial tenant’s business in violation of the landlord’s duty to do so.” Id. First, the tenant must inform the landlord of the need to replace the necessary component. Second, the landlord must have failed to replace it in a timely manner. Third, the tenant must inform the landlord of its intent to set off the reasonable costs of the necessary replacement. Id. There is no mention in Quincy Mall as to whether the lease contained any language expressly requiring the tenant to pay its rent “without setoff or deduction” as is often the case in commercial leases today. Most likely it did not (or the landlord failed to raise the issue in the circuit court proceedings), as the court noted that the landlord did not dispute the fact that (1) the tenant had given “written notice [to the landlord] that the roof could not be repaired and had to be replaced, (2) the [landlord] failed to replace the roof in a timely manner, and (3) [the tenant] informed the [landlord] of its intent to follow through with (a) replacing the roof and (b) setting off the cost for such replacement.” Id. Based on these facts, the court held the tenant had met its duty to pay rent through its setoff and was entitled to summary judgment on the issue of its right of setoff. How the lease is worded may make a difference on the timing of a tenant’s remedies against a landlord that breaches its obligations under the lease. In TNT Logistics North America, Inc. v. Bailly Ridge TNT, LLC, No. 05 C 7219, 2006 WL 2726224 (N.D.Ill. Sept. 21, 2006), the landlord agreed to construct an earthen berm topped by a solid fence in an effort to reduce the noise from the tenant’s business operations. When people living near the property complained about the noise to the Illinois Pollution Control Board, the tenant filed suit against the landlord claiming it had breached the lease provision requiring construction of the berm and fence because the fence was not adequate to address the sound problems and seeking indemnification under a specific clause in the lease. That clause obligated the landlord to indemnify the tenant from claims arising out of a breach of the representation and warranty that 24-hour, 7-day-a-week warehouse operations would be permitted under applicable land use and zoning laws, codes, regulations, and ordinances, and specifically stated it would include claims for challenges seeking to eliminate or reduce the scope of the tenant’s intended use of the premises. 2006 WL 2726224 at **1 – 3. While the court held the landlord’s motion to dismiss did not address the breach of contract claim for failure to adequately construct the fence and thus survived the granting of the motion to dismiss the indemnification claim, the indemnification clause of the lease did not include an agreement to defend the tenant and thus was not ripe. Only if the pending complaints filed against



the tenant before the Illinois Pollution Control Board resulted in any loss covered by the indemnity would the tenant be entitled to make a claim against the landlord seeking reimbursement. 2006 WL 2726224 at *7. 3. [7S.20] Landlord’s Obligation To Make Structural or Nonstructural Repairs Add at the end of the first full paragraph on p. 7-27: See also Quincy Mall, Inc. v. Kerasotes Showplace Theatres, LLC, 388 Ill.App.3d 820, 903 N.E.2d 887, 891, 328 Ill.Dec. 227 (4th Dist. 2009) (citing Sandelman in holding general repair clause in lease did not contain “plainly discoverable” language required to shift burden to replace roof that could no longer be repaired to tenant; thus, burden to replace roof was on landlord). 4. [7S.21] Improvements Made on Landlord’s Behalf Add at the end of the section: An exception to the general rule regarding no liability of a landlord to the tenant for the value of improvements voluntarily made to the premises by the tenant also exists when the landlord breaches its obligation under the lease to make certain repairs or improvements. In such cases, the tenant may be entitled to make the repairs and set off “the amount it spent to make the building fit for its commercial purpose.” Quincy Mall, Inc. v. Kerasotes Showplace Theatres, LLC, 388 Ill.App.3d 820, 903 N.E.2d 887, 892, 328 Ill.Dec. 227 (4th Dist. 2009). Quincy Mall and the conditions to a tenant’s right to set off costs incurred against rent are discussed in more detail in §7S.19 above. C. Landlord’s Tort Liability for Property Damage and Injury to Tenants and Third

Parties 1. [7S.23] General Rule: No Liability for Personal Injury or Property Damage Add after the Gilley citation in the carryover paragraph at the top of p. 7-31: Bennett v. Northlake Associates Limited Partnership, 442 F.Supp.2d 569 (N.D.Ill. 2006); Add after the second full paragraph on p. 7-33: A federal district court case applying Illinois law in a wrongful death action by the administrator of the estate of a tenant’s employee killed when a forklift he was operating tipped over and crushed him cited the general rule in Illinois that when a landlord relinquishes control over the property to a tenant it no longer owes any duty to third parties and the tenant unless it retains control over a part of the premises and the injury occurs in the part of the premises within the landlord’s control. Bennett, supra, 442 F.Supp.2d at 570 – 571. Because the lease clearly stated the tenant was to maintain all of the leased property and to “make all structural, unforeseen and extraordinary changes and repairs (as well as non-structural, foreseen and ordinary changes and repairs)” and the landlord was not “required to rebuild any improvements on the Leased



Property or make any repairs, replacements or renewals of any nature or description to the Leased Property or any structure or improvements thereon, whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen,” the court had no difficulty granting the landlord’s motion for summary judgment on all claims against it, particularly when the administrator cited no evidence from which it could be concluded the landlord retained control over any part of the property or that the lease did not accurately characterize the relationship between the landlord and tenant. 442 F.Supp. at 571. 2. [7S.24] Exception to General Rule for Injuries Within Tenant’s Premises When

Landlord Retains Control Add after the carryover paragraph at the top of p. 7-34: Guerino and Kuhn were cited as the basis to deny summary judgment in a tenant’s favor as sub-landlord under a sublease when an employee of the subtenant was killed in a fall into a building elevator shaft in Fan v. Auster Co., 389 Ill.App.3d 633, 906 N.E.2d 663, 679, 329 Ill.Dec. 465 (1st Dist. 2009). Auster is discussed in greater detail in §7S.68 below. 5. [7S.27] Exception to General Rule for Injuries Occurring in Common Areas Add before the Bloom citation in the partial paragraph at the bottom of p. 7-41: Ciciora v. CCAA, Inc., 581 F.3d 480, 484 (7th Cir. 2009) (“mere existence of some ice on the sidewalk” leading into restaurant was not sufficient to show negligence or lack of reasonable care by landlord charged with responsibility under its lease with restaurant tenant for maintaining parking lot, driveway, and sidewalk, including snow and ice removal; tenant whose employee voluntarily removed snow and salted sidewalk also not liable when facts did not demonstrate plaintiff’s fall was result of unnatural accumulation of snow or ice or tenant aggravated existing condition); 7. [7S.29] Comment Add at the end of the section: While Sears, supra, does not discuss any issues of insurance coverage, another example of a situation in which a landlord needs to be indemnified and covered by its tenant’s liability insurance arose in Cole v. Kroger Co., No. 3:08-CV-217-PMF, 2010 WL 914928 (S.D.Ill. Mar. 9, 2010). In that case, which is discussed in detail in §7S.68 below, the ground lessor was sued by the ground lessee’s tenant for common-law premises liability arising out of a slip and fall by the tenant’s customer in the parking lot of a shopping center. The privity of estate that existed between the ground lessor and its ground lessee was the basis on which the court held the ground lessor could potentially be liable for the customer’s injuries if it had actual or constructive knowledge of the defect in the parking lot that allegedly caused the customer to fall. 2010 WL 914928 at *3. The case involved a motion for summary judgment by the tenant, which had filed a third-party complaint against the ground lessor. The court denied the tenant’s motion on the basis of the existence of a genuine issue of material fact — the knowledge of the ground lessor, which



the court said required further proceedings to resolve. Even if a ground lessor ultimately was successful in avoiding liability, the cost and expense of defending itself in such a case is still significant and the landlord would be well served if its ground lease required its ground lessee to defend and indemnify it against such claims, as well as to name the ground lessor as an additional insured on the ground lessee’s commercial general liability insurance. V. LANDLORD EXCULPATORY CLAUSES AND STATUTORY

PROHIBITIONS ON EXONERATION The heading is revised: V. LANDLORD EXCULPATORY CLAUSES AND STATUTORY

PROHIBITIONS ON EXONERATION; LIMITATIONS ON DAMAGES FOR LANDLORD BREACHES A. [7S.30] Statutory Prohibition on Exoneration for Landlord’s Negligence and Caselaw

Interpretation Add after the fourth full paragraph on p. 7-45: Subsequent cases have held the Landlord and Tenant Act (or long-standing Illinois public policy) voids only lease provisions promising to indemnify a landlord for its own negligence, not lease provisions promising to insure a landlord. See Sears, Roebuck & Co. v. Charwil Associates Limited Partnership, 371 Ill.App.3d 1071, 864 N.E.2d 869, 875, 309 Ill.Dec. 628 (1st Dist. 2007); Clarendon America Insurance Co. v. Prime Group Realty Services, Inc., 389 Ill.App.3d 724, 907 N.E.2d 6, 13, 329 Ill.Dec. 687 (1st Dist. 2009). These two cases are discussed in greater detail in §7S.33 below. Sears is also discussed in §7.27 of this handbook. The court in Prime Group relied heavily on specific language in the lease that expressly stated the indemnity provisions of the lease would not “relieve Landlord from liability for its own negligence or willful misconduct or that of anyone for whom Landlord is legally responsible.” 907 N.E.2d at 13. However, the court also found the language of the lease obligating the tenant to provide liability insurance that required losses to be paid “notwithstanding any act or negligence of Tenant or Landlord” did not violate the Illinois law prohibiting indemnification of a party for its own negligent acts, because that public policy “does not extend to the promise of one party to procure insurance for another’s negligent acts.” Id. The court did not cite the Landlord and Tenant Act in its opinion, but it did rely on the application of the Act by the court in Economy, supra, discussed in §7S.33 below. Add before the last paragraph: In Dubey v. Public Storage, Inc., 395 Ill.App.3d 342, 918 N.E.2d 265, 335 Ill.Dec. 181 (1st Dist. 2009), a provision in a storage unit rental agreement requiring the occupant to agree it would not store personal property having a value of more than $5,000 in the unit and limiting the storage unit company’s liability and responsibility for any loss of the occupant’s property to



$5,000 was held to be void under the Landlord and Tenant Act as in effect at the time the rental agreement was signed (before the amendment adding §1(b)). According to the court, if there is no contrary contractual language, which there was not at the time the rental agreement was signed, all laws and statutes in effect at that time are considered part of the contract, and, thus, the Landlord and Tenant Act rendered the limitation of liability on the part of the storage company void. 918 N.E.2d at 275 – 276. As a result, the storage company was held liable for conversion and assessed punitive damages for auctioning off Ms. Dubey’s personal items even though she had paid all of her rent. The storage company had mistakenly sold her property because it was actually stored in a unit different than the one on the storage company’s records for her rental agreement. The reason her property was sold or disposed of was that the unit in which her property had actually been stored, according to the storage company’s records, was leased to another person who had not paid the rent for that unit. The court considered the mistake as to the unit in which Ms. Dubey’s property was actually stored to be solely the storage company’s fault because its employee had directed her to use the unit she was using. The Dubey court also stated the law in Illinois generally holds contractual limitations valid, unless they are against public policy or there is something in the relationship between the parties that militates against upholding the agreement. 918 N.E.2d at 276. In this case, it pointed to the Landlord and Tenant Act as an example of a statutory expression of public policy that expressly invalidated the type of contractual limitation on liability in Ms. Dubey’s rental agreement. Section 1 of the Landlord and Tenant Act, as amended, reads:

(a) Except as otherwise provided in subsection (b), every covenant, agreement, or understanding in or in connection with or collateral to any lease of real property, exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his or her agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable. (b) Subsection (a) does not apply to a provision in a non-residential lease that exempts the lessor from liability for property damage. 765 ILCS 705/1.

The inference from the court’s opinion was that had §1(b) been in effect when Ms. Dubey’s storage unit rental agreement was signed, its decision might have been different, but it did not elaborate. 918 N.E.2d at 271, 275. The wording of §1(b) is so broad, it may be possible to argue it now permits language like that in the storage lease agreement in Dubey, which was intended to limit a storage company’s liability for negligently handling its occupant’s property. However, the words “property damage” used in §1(b) may restrict such waivers of liability to situations in which the property is damaged by fire, collapse of the building, or the negligent acts of the storage company’s employees or the occupants of other units. These types of damage may be covered by insurance, but the intentional or wrongful act of selling the unit occupant’s property may not. The language in new §1(b) appears to be expressly intended to permit waivers of claims that have the effect of barring a subrogation claim brought by a tenant’s insurance company if the tenant’s property was lost, stolen, or damaged by an occurrence covered by the tenant’s insurance and the tenant’s insurance company paid the claim. So-called waivers of subrogation clauses for the benefit of landlords are discussed in §7.45 of this handbook.



However, the Dubey court also found the rental agreement Ms. Dubey signed to be unconscionable because the contractual limitation on the value of the property that could be stored of $5,000 was not explained to Ms. Dubey, she had no time to read the agreement before signing it, and the company’s representative never pointed the $5,000 limit out to her even after she explained she needed a larger unit to store a large amount of household furnishings and appliances. 918 N.E.2d at 277. Thus, it is very likely a court faced with similar language in a storage unit rental agreement signed after the enactment of §1(b) to the Landlord and Tenant Act would still find the storage company liable. The Dubey court also reviewed the trial court’s award of damages for violation of the Consumer Fraud Act and affirmed the full amount of the award. That award included a determination that the storage company owed the occupant punitive damages in the amount of $207,435 (three times the compensatory damages awarded for the Consumer Fraud Act claim). 918 N.E.2d at 282. According to the court, such an award was justified in this situation because Ms. Dubey was financially vulnerable, having placed valuable personal property in a storage unit in the storage company’s control, and the company admitted it had unilaterally changed the identity number of units leased in occupants’ contracts before and had wrongfully auctioned off property of other occupants in the past. The court also found it significant that, after learning of its error in wrongfully selling off Ms. Dubey’s property, the storage company had no policy to compensate the occupant for her loss and would not tell her where her personal items (such as family photos) would have been disposed of, only telling her those items would have been discarded, not sold. According to the court, the company’s conduct was reprehensible. 918 N.E.2d at 282. D. [7S.33] Comment Add at the end of the section: More recent caselaw clarifies the difference between lease indemnification clauses that violate the Landlord and Tenant Act, which are void, and obligations to insure a landlord for the landlord’s own negligent acts, which are permitted. For example, Sears, Roebuck & Co. v. Charwil Associates Limited Partnership, 371 Ill.App.3d 1071, 864 N.E.2d 869, 309 Ill.Dec. 628 (1st Dist. 2007) (discussed in §7.27 of this handbook), held the landlord liable, under an indemnification provision and promise to procure insurance in the lease, for damages imposed on Sears arising out of an injury to a Sears customer walking in the parking lot of the landlord’s shopping mall. The customer was injured when she was struck by another Sears customer’s vehicle being backed out of a Sears automotive service center by a Sears employee. 864 N.E.2d at 872 – 873. In Sears, the court found the lease language unambiguous when it required the landlord to indemnify Sears for “all liability from any and all damages, claims or demands that may arise from or be occasioned by the condition, use or occupancy of all Common Areas . . . by the customers, invitees, licensees and employees of Landlord, [Sears] and Landlord’s other tenants” and also required the landlord to “obtain and maintain . . . liability insurance . . . for bodily injury or death . . . for property damage, and insuring the indemnity agreement.” 864 N.E.2d at 874. As a result, when the landlord’s comprehensive general liability insurance did not cover the accident (the policy expressly excluded damages from automobile accidents), the court found the landlord had breached its obligation to provide insurance even though the lease did not expressly require the landlord to provide automobile insurance. 864 N.E.2d at 875.



Relying on the Sears opinion’s articulation of the law distinguishing between an obligation to indemnify and an obligation to insure, the First District Appellate Court in a more recent case held a restaurant tenant in an office building had breached its obligation under its lease to maintain liability insurance covering the premises naming the landlord as an additional insured under a policy that provided “[a]ll losses shall be payable notwithstanding any act or negligence of Tenant or Landlord.” Clarendon America Insurance Co. v. Prime Group Realty Services, Inc., 389 Ill.App.3d 724, 907 N.E.2d 6, 9, 329 Ill.Dec. 687 (1st Dist. 2009). The insurance provision was found enforceable against the tenant, even though the lease required that insurance to cover the tenant’s or the landlord’s negligent acts. However, because the actual policy procured by the tenant specifically provided it did not apply if liability was imposed or sought to be imposed on an additional insured because of the additional insured’s own acts or omissions, the tenant’s insurance did not meet the lease requirements. 907 N.E.2d at 14 – 15. As a result, the landlord’s motion for summary judgment on the issue of whether the tenant had failed to procure liability insurance complying with the lease was granted. 907 N.E.2d at 10, 16. The claim the landlord in Prime Group sought coverage for under the tenant’s insurance policy arose out of an injury suffered by an employee of the tenant who slipped and fell on the roof of the premises after repairing the tenant’s rooftop HVAC equipment serving the tenant’s premises. Under the lease, the tenant was obligated to repair that HVAC equipment, but the landlord was obligated to maintain and repair the roof of the building. 907 N.E.2d at 9. The landlord argued the tenant became responsible for the roof as part of its premises when a lease amendment made it responsible to repair the rooftop HVAC equipment, but the court stated it did not need to address that argument on behalf of the landlord when the key provision at issue was the tenant’s unambiguous obligation to procure insurance for the benefit of the landlord. 907 N.E.2d at 12. Another case, Smith v. Village of Norridge, No. 06 C 4250, 2008 WL 697352 (N.D.Ill. Mar. 12, 2008), denied a tenant (Intrigue) its motion to dismiss the landlord’s cross-claim seeking to force Intrigue to indemnify, defend, and hold harmless the landlord from a claim by a customer of Intrigue for damages the customer allegedly suffered at the hands of the landlord’s security guards who responded to a call from Intrigue requesting assistance in dealing with the customer. Intrigue argued the lease indemnification provision was void under §1(a) of the Landlord and Tenant Act, 765 ILCS 705/1(a). The court concluded the Landlord and Tenant Act, because it was in derogation of the common law and was to be strictly construed, only barred clauses exculpating the landlord from liability for its own negligence, and did not address exculpation or indemnification from intentional torts. Further, no Illinois court had held §1 of the Landlord and Tenant Act applied to intentional torts, such as the claims for false imprisonment, assault, battery, malicious prosecution, and intentional infliction of emotional distress asserted by Intrigue’s customer. Thus, the court held the lease provision calling for the tenant, Intrigue, to indemnify the landlord was not void, and Intrigue’s motion to dismiss was denied. 2008 WL 697352 at **3 – 4. The court also held another provision of the lease requiring Intrigue to maintain insurance covering the landlord’s potential liability for occurrences on or about the leased premises was not void under the Landlord and Tenant Act. Accordingly, the landlord’s breach of contract claim for not obtaining the necessary insurance should not be dismissed. 2008 WL 697352 at *5.

LANDLORD’S DUTIES AND LIABILITIES §7S.33A


E. [7S.33A] Limitations on Damages for Landlord Breaches New section: Frequently commercial leases contain provisions limiting the landlord’s personal liability for damages for breaches of its obligations under the lease. In many instances the limitations also extend to the officers, directors, employees, partners, shareholders, or members of any entity landlord, and agents. There is little caselaw on the enforceability of most types of landlord liability limitation provisions, except for those provisions in leases in which the landlord is an Illinois land trust. A few types of limitation clauses and a handful of cases interpreting them deserve mention here. The types of provisions limiting the liability of the landlord under commercial leases can be classified into roughly three major categories. First, are the exculpation clauses commonly required by the trustees of the so-called Illinois land trust owner of property. A typical land trustee exculpation clause used in leases reads: This Lease (Lease) is executed by __________________ not personally but as Trustee under a certain Trust Agreement dated ____________, 20___, and known as Trust No. ___, in the exercise of the power and authority conferred upon and vested in it as such Trustee and under the express direction of the beneficiary or beneficiaries under said Trust Agreement to all provisions of which Trust Agreement this Lease is expressly made subject. It is expressly understood and agreed that nothing herein or in the Lease contained shall be construed as creating any liability whatsoever against said Trustee personally, and in particular without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve or sequester any property of said Trust, and that all personal liability of said Trustee of every sort, if any, is hereby expressly waived by said Assignor and by every person now or hereafter claiming any right or security hereunder; and that so far as said Trustee is concerned the owner of any indebtedness or liability accruing hereunder shall look solely to the premises leased pursuant to the above described Lease for the payment thereof. It is further understood and agreed that said Trustee has no agents or employees and merely holds naked title to the property described in the Lease and that said Trustee has no control over, and under the Lease assumes no responsibility for, (1) the management or control of such property, (2) the upkeep, inspection, maintenance or repair of such property, (3) the collection of rents or rental of such property, or (4) the conduct of any business which is carried on upon such property. Such exculpatory provisions added to leases and other agreements by land trustees or the trustees of other types of trusts have long been recognized as enforceable by the Illinois courts. See, e.g., Schumann-Heinke v. Folsom, 328 Ill.App. 321, 159 N.E. 250, 254 (1927) (trustees of Massachusetts business trust held not personally liable for amount due under contract when contract contained provision limiting liability to assets of trust and exempting trustees from personal liability); Conkling v. McIntosh, 324 Ill.App. 292, 58 N.E.2d 304, 306 – 307 (1944) (beneficiaries of land trust whose trustee signed note secured by trust deed in which it was agreed

§7S.33A COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


there would be no personal liability for any one and noteholder’s sole remedy was foreclosure of trust deed were not liable to pay debt despite argument by noteholder that beneficiaries had disregarded duty to preserve improvements that had deteriorated and had to be razed because beneficiaries were not parties obligated under trust deed to keep premises in repair). But see Lowenstein v. Chicago Title & Trust Co., 340 Ill.App. 160, 91 N.E.2d 96, 98 (1st Dist. 1950) (even though trustee was not personally liable under note and holder’s sole remedy was foreclosure, beneficiaries individually endorsed notes, which made them essentially guarantors of trustee’s obligations under note). There are some statutes and local ordinances that expressly negate the attempts by the beneficiary to use a land trust method of owning property to avoid certain types of personal liability. See, e.g., the Building Law Violation Ownership Disclosure Act, 765 ILCS 425/0.01, et seq. (requiring trustee with title to real property to disclose identity of every beneficiary with interest to enforcement agency with ten days after receipt of written notice of violation of ordinance relating to condition of real estate affecting health or safety and also allowing local fire inspector after fire to demand beneficiary disclose identity of persons with direct or indirect interests as well as other information related to other properties of those beneficiaries in same county where any claims have been made against fire insurance policies within past five years; persons violating Act can be fined $100 per day); City of Chicago Municipal Code §§13-12-010 through 13-12-050 (under §13-12-020, liabilities and obligations for code violations are imposed on trustee of land trust unless trustee “discloses in a verified pleading or in an affidavit filed with the court, the name and last known address of each person who was a beneficiary of the trust at the time of the alleged violation and of each person, if any, who was then acting as agent for purpose of managing, controlling or collecting rents, as the same may appear on the records of the trust”). In addition, at least one court has stated the beneficiaries of a land trust can be liable for actions sounding in tort that are based on negligence when they retain the power to control, possess, operate, and maintain or manage the property, while the trustee is insulated from such liabilities “if he has no rights of possession, operation, control or maintenance of the property.” [Emphasis added.] Just Pants v. Bank of Ravenswood, 136 Ill.App.3d 543, 483 N.E.2d 331, 335 – 336, 91 Ill.Dec. 49 (1st Dist. 1985) (holding trial court was to determine responsibilities of beneficiaries and trustee and beneficiaries would be necessary parties to suit by tenants against trustee for breach of contract and conversion arising out of claimed wrongful removal of tenant’s sign while tenants were still tenants). The Just Pants rationale for holding that a land trustee’s beneficiaries were proper parties to litigation involving the rights and liabilities arising out of the management, control, use, and possession of the property was relied on by the Northern District in Chicago Title & Trust Co. v. Baskin-Robbins, Inc., No. 89 C 9592, 1990 WL 78310 (N.D.Ill. June 6, 1990), in holding a beneficiary of a land trust could be liable for the contracts of the trustee. Baskin-Robbins involved the question of the liability of a land trust’s beneficiary for a claimed breach of a lease. In Baskin-Robbins, the land trustee landlord filed a suit against Baskin-Robbins for breach of the lease and unpaid rent after Baskin-Robbins abandoned its shopping center premises. Baskin-Robbins claimed it had been constructively evicted due to the untenantable condition of the building and filed a third-party complaint against the land trustee’s beneficiary on various breach of lease



claims. The beneficiary filed a motion to dismiss on the grounds he had not signed the lease. The court denied the beneficiary’s motion on the grounds the land trustee acted merely as the beneficiary’s agent and the beneficiary had “all managerial rights to benefits and control.” 1990 WL 78310 at *3. The beneficiary had also initialed a number of changes to various lease provisions and signed a non-disturbance agreement on behalf of the trustee. 1990 WL 78310 at *1. The second category of lease provisions limiting the personal liability of the landlord are those that specifically prohibit claims against the landlord (and its members, officers, directors, employees, partners, and agents, as well as its shareholders). Such provisions also often limit the assets that can be attached to satisfy any claim or judgment to the landlord’s interest in the real property. If the landlord has little equity in the property, this limitation renders the likelihood of a recovery for money damages unlikely. A sample of such type of clause is set forth below: Limitation on Liability of Landlord Tenant, and any person claiming an interest in the Premises through or under Tenant, each agree to look solely to the interests of Landlord, from time to time, in the Land and Building and any proceeds therefrom, and no judgments against such persons may be satisfied out of any other assets. In no event shall Landlord (or any of its members, officers, directors, agents, advisors, managers, shareholders, partners, beneficiaries, affiliates or successors and assigns) ever have any personal liability for any covenant, agreement, obligation, warranty, representation, indemnity or undertaking under this Lease or otherwise or be answerable or liable in any equitable, judicial or administrative proceeding or order. In the event of any assignment or assignments of Landlord’s estate or transfer of Landlord’s title in the Land and Building, the Landlord herein named (and in case of any subsequent assignment or transfer, the then assignor or transferor) shall be automatically freed and relieved from and after the date of such assignment or transfer of all liability as respects performance of any of Landlord’s covenants and agreements thereafter to be performed, and such assignee or transferee shall be bound by all of such covenants and agreements; it being intended that Landlord’s covenants and agreements shall be binding on Landlord, its successors and assigns only during and in respect of their successive periods of such ownership. Landlords often justify such provisions on the grounds that the landlord has very few obligations under the lease, but of course, the obligations of the landlord do vary from lease to lease. In some, the landlord’s obligations are indeed few (so-called “triple net leases” under which the tenant pays all expenses and taxes, repairs and maintains the building, and insures the building), but in others the landlord does have significant responsibilities to repair and maintain the common areas of the building, procure insurance, and rebuild any damaged portions of the building. A third category of lease provisions limiting the personal liability of the landlord under a commercial lease include limitations on the amount or nature of the damages that a tenant may claim on account of a failure by the landlord to deliver possession of the premises on the date



promised. The landlord’s inability to deliver possession of the premises might be due to a prior tenant’s holdover or a failure to complete construction of any improvements the landlord promised to make to ready the premises for occupancy by a new tenant. In Guitar Center Stores, Inc. v. 7250 South Cicero Equities, LLC, No. 07 C 4227, 2007 WL 3374592 (N.D.Ill. Nov. 8, 2007), the court addressed such a provision in a shopping center lease when the landlord’s lease called for the landlord to complete certain improvements to the premises and shopping center prior to a fixed date on which the premises were to be delivered to the tenant, Guitar Center, in order for Guitar Center to complete its own improvements. The lease specifically stated the landlord was not to be liable for the failure to meet the scheduled delivery dates and that the validity of the lease would not be affected. However, the lease also stated Guitar Center would not be obligated to pay rent or otherwise perform any of its obligations under the lease until the landlord delivered possession of the premises. In addition, the lease provided that if the landlord failed to deliver the premises for 60 days after the scheduled dates in the lease, the tenant had the right to terminate the lease within 60 days thereafter, but if it did not terminate the lease, the free rent period called for in the lease would be extended one day for every day of delay. 2007 WL 3374592 at *3. When the landlord did not deliver the premises on the scheduled date, the tenant sued the landlord seeking damages caused by the delay. 2007 WL 3374592 at *1. The court held the language in the lease limiting the tenant’s remedies to terminating the lease or an extension of the free rent period provided the tenant’s exclusive remedies for the delay, even though “[u]nder Illinois law, contract provisions limiting remedies are enforceable but are to be strictly construed.” 2007 WL 3374592 at *4. VII. PROPERTY DAMAGE A. Fire 1. [7S.42] Situations in Which Landlord Bears Risk of Loss Add at the end of the section: The Second District Appellate Court in Cincinnati Insurance Co. v. DuPlessis, 364 Ill.App.3d 984, 848 N.E.2d 220, 302 Ill.Dec. 220 (2d Dist 2006), had no difficulty extending the Dix exception to the common-law rule that a tenant is liable for his or her negligence in causing a fire at the premises to an oral lease for a house after a house fire started when the tenant left burning candles unattended. According to the court, the “Dix court clearly accepted the rationale that, where the landlord purchases insurance, the tenant becomes a coinsured with the landlord and, therefore, the insurer may not sue the tenant for subrogation. Obviously, whether the lease is oral or written has no effect on the tenant’s status as a coinsured and the insurer’s ability to seek subrogation from her.” 848 N.E.2d at 223. As a result, the trial court’s dismissal of the landlord’s insurance company’s subrogation claim against the tenant was affirmed. Id.



3. [7S.43A] Damage to Property of Third Parties New section: The Fifth District Appellate Court addressed the liability between the landlord and tenant for damage to the personal property of third parties caused by a fire in the tenant’s premises in ESL Delivery Services Co. v. Delivery Network, Inc., 384 Ill.App.3d 451, 893 N.E.2d 289, 323 Ill.Dec. 275 (5th Dist.), appeal denied, 229 Ill.2d 665 (2008). ESL Delivery reviewed the principles set out in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314, 597 N.E.2d 622, 173 Ill.Dec. 648 (1992), discussed in §7.42 of this handbook, which had held that an exculpatory clause in the lease relieving the landlord from liability for damage to the tenant’s personal property, while remaining silent on the landlord’s liability for damage to the leased premises in the case of a fire, nevertheless meant the landlord’s property insurance carrier was responsible for fixing fire damage to the leased premises even if the fire was caused by the tenant. 893 N.E.2d at 293. However, the ESL Delivery court distinguished the facts in its case, which involved claims for damage to the property of third parties, from the facts in Dix, which involved the issue of the responsibility for fixing damage to the premises itself, and held there was nothing in the tenant’s lease that would exculpate the tenant from its own negligence. Because the court also found there was nothing in the lease to show “the parties intended the landlord to bear the burden of losses suffered by third parties as a result of the tenant’s negligence,” the landlord was entitled to bring an action against the tenant for contribution for the landlord’s and tenant’s joint liability for damage to the property of other neighboring tenants in the building or in a next-door building that resulted from a fire started in the tenant’s garage. 893 N.E.2d at 294. A later Fifth District Appellate Court case further elaborated on the differences between Dix and ESL Delivery that should be noted here. In Hacker v. Shelter Insurance Co., 388 Ill.App.3d 386, 902 N.E.2d 188, 327 Ill.Dec. 433 (5th Dist. 2009), the court held an apartment tenant was not a coinsured under the landlord’s liability insurance policy and thus was not entitled to a defense by the landlord’s insurance company to a third-party complaint by the landlord against the tenant claiming her negligence caused or contributed to the injuries suffered by her mother who slipped and fell on the stairs of the apartment while visiting her. 902 N.E.2d at 194. The mother of the tenant had sued the landlord first claiming the landlord’s negligence in maintaining the stairway caused her injuries. 902 N.E.2d at 189 – 190. The Hacker court noted that the fact that the type of insurance policy at issue in Dix (property damage that covered fire losses or other damage to the premises) as compared to the type of policy at issue in Hacker (liability that covered liability of the insured to third parties) was significant. In the case of property damage insurance, “if the tenant did not receive the benefit of the landlord’s fire insurance, then both parties would have to insure the premises against fire.” Such an analysis does not apply to liability insurance, which covers losses from an individual’s liability to third parties arising out of the tenant’s negligence. 902 N.E.2d at 193. Accordingly, the tenant “cannot reasonably expect to be considered an insured under a landlord’s liability insurance” when there is no evidence the parties intended this in the lease or the insurance policy. Id.



The court noted it was a “common business practice for tenants to obtain their own renter’s insurance policy to cover their liability for losses they cause to third parties.” 902 N.E.2d at 194. The court expressly declined “to expand Dix to hold that a tenant gains the status of a coinsured under the landlord’s liability policy by the payment of rent,” noting that it had also declined to do so in ESL Delivery. Id. ESL Delivery and Hacker clarify the law considerably regarding when a landlord will not be held responsible for damage to the property of third parties (ESL Delivery) or injury to third persons occurring on the premises (Hacker). The best practice or lesson to be learned from the entire line of cases, of course, is that the lease should clearly state which losses or damages will be insured or borne by the landlord and which losses or damages will be insured or borne by the tenant. If this is done, there will be no need for a court to strain to find no liability on the part of the landlord. B. [7S.44] Other Loss Events Add at the end of the section: In SWPlaza III, LLC v. TSA Stores, Inc., No. 06-3177, 2008 WL 1930468 (C.D.Ill. May 1, 2008), the issue was not who was responsible for restoring the damage done by a tornado to a Sports Authority store in a shopping center, but whether the costs to restore exceeded the threshold amount that would allow the tenant (TSA) to terminate the lease. The lease allowed TSA to terminate the lease by notice within 60 days after the occurrence of the event giving rise to the loss if the cost of the repair and reconstruction of the leased premises and common areas was 35 percent or more of the then total reconstruction cost. If the cost to repair and reconstruction was less than 35 percent of that amount, the landlord was obligated to repair and restore the damage to the premises and common areas, and TSA was required to repair and restore its furnishings, furniture, equipment, inventory, and personal property. Rent was to abate completely until 60 days after the landlord completed its work, which was to be done within a reasonable period of time, “subject to force majeure, applicable building codes, the procurement of building permits and the receipt of insurance proceeds.” 2008 WL 1930468 at *1. A dispute arose between TSA and the landlord as to whether the 35-percent threshold had been met, with TSA claiming it had and notifying the landlord within the required 60 days that it had elected to terminate the lease. The landlord sued TSA for a declaratory judgment that TSA had breached the lease by giving its notice of termination and that the lease remained in effect. TSA counterclaimed, arguing it had properly terminated the lease and was entitled to rent payments it had made after the tornado that were not required under the termination provision in the lease. 2008 WL 1930468 at **1, 2. After a bench trial at which each of the parties introduced evidence of its calculation of the cost to repair and restore, the court found in favor of the landlord, stating TSA’s contractor’s estimates were unreasonably high and included items that were TSA’s responsibility to repair or restore, not the landlord’s. The court found it significant that TSA made the corporate decision to elect to terminate its lease before it had the estimates needed to determine if the 35-percent



threshold test had been met and then manipulated its cost estimates to reach the 35-percent threshold test, which violated its duty to make its decision to terminate fairly and in good faith. 2008 WL 1930468 at **8 – 10. In contrast, the landlord (which had moved very quickly to commence the repair and restoration work after the tornado) relied on actual costs it had incurred for its determination that the 35-percent threshold had not been met. 2008 WL 1930468 at **6 – 7. This meant TSA was liable to the landlord for damages arising out of its breach, which the parties agreed to attempt to settle themselves. 2008 WL 1930468 at *10. C. [7S.45] Waiver of Subrogation Provisions Add at the end of the next-to-last paragraph: The amendments to the Landlord and Tenant Act quoted in §7S.30 above appear to resolve the question of whether waivers of subrogation in commercial leases are enforceable in Illinois. However, had this statutory provision been in effect at the time of Whitledge, it would not have changed the decision in that case, because new §1(b) of the Landlord and Tenant Act does not apply to residential leases. IX. OPTIONS TO RENEW AND OPTIONS TO PURCHASE The heading is revised: IX. OPTIONS TO RENEW OR EXPAND PREMISES AND OPTIONS TO

PURCHASE A. [7S.50] Options To Renew or Extend Lease The heading is revised: A. [7S.50] Options To Renew, Extend, or Expand Lease 1. [7S.51] Exercise of Option To Renew; Excusable Neglect The heading is revised: 1. [7S.51] Exercise of Option To Renew or Expand; Excusable Neglect Add at the end of the section: The holding in Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2007 WL 2156674 (N.D.Ill. July 24, 2007), is consistent with the general rule in Illinois requiring strict compliance with the terms of the lease to exercise an option to renew. Under Rexam’s lease, Rexam was required to give notice at least 180 days before the date the lease expired, and when Rexam failed to give notice until late 2005 that it wished to renew its lease that was set to expire on March 31, 2006, the landlord rejected the notice of renewal as untimely and instructed Rexam to surrender possession of the facility on the stated expiration date. 2007 WL 2156674 at *1.



Instead of planning or starting the necessary work to vacate the premises, Rexam filed suit in state court seeking a declaratory judgment as to the rights and obligations of the parties under the lease. 2007 WL 2156674 at *2. The court had no difficulty determining Rexam had not timely exercised its option to renew when Rexam had not given its notice until the end of December because under the lease the notice was required by the end of October. 2007 WL 2156674 at *4. The court spent more time, however, addressing whether the landlord had waived its right to demand strict compliance with the lease terms, but again found in favor of the landlord. The facts are instructive for landlords that receive notices purporting to exercise options to renew because in Rexam the landlord acknowledged receipt of the notice attempting to renew in a letter sent to Rexam sent shortly after receiving Rexam’s notice. However, in a carefully worded letter the landlord expressly stated receipt of the notice was subject to Rexam being in full compliance with the terms and conditions of the lease. 2007 WL 2156675 at **1, 6. This was significant evidence (along with subsequent correspondence from the landlord to the tenant) that the court relied on to hold there was no waiver of the timely exercise as argued by Rexam because the landlord initially spent time inspecting the premises and discussing needed repairs with Rexam but without promising it would accept the renewal. 2007 WL 215667 at **6 – 7. In Rexam’s lease there were two conditions to exercise the option to renew — one being timely notice and the other being no defaults on the part of Rexam under the lease. The court treated a failure to properly maintain the building as a condition to the renewal, because it was also a default under the lease provision obligating the tenant to conduct all necessary repairs and maintenance. The court also found the landlord’s agreement to allow the tenant to defer certain repairs until spring was not inconsistent with a refusal to allow a late exercise of the renewal option because the obligation to repair the premises was a covenant that survived the termination of the lease. The principles articulated in Dikeman, supra, and Linn, supra, regarding strict performance of the terms of a renewal option in a lease and when strict performance might be excused were addressed in the context of the exercise of an option by a tenant to lease an adjacent parcel of land for the same term as the original parcel in Providence Insurance Co. v. LaSalle National Bank, 118 Ill.App.3d 720, 455 N.E.2d 238, 74 Ill.Dec. 208 (1st Dist. 1983). In Providence Insurance, the lease required the tenant to notify the landlord in writing no later than two years from the date of the lease, making the last date for exercise July 27, 1974, which was a Saturday. The tenant mailed a letter exercising the option on Thursday, July 25, 1974, by certified mail, return receipt requested, with proper postage. An employee of the landlord signed for the certified letter at the post office on Monday, July 29, 1974. 455 N.E.2d at 239. The landlord rejected the notice as untimely based on lease provisions that stated notices would be deemed complete five days after mailing or upon receipt, whichever was earlier, and that time was of the essence. The landlord then brought suit for a declaration that the tenant had failed to timely exercise its option. Because there was no evidence as to when the letter was placed in the landlord’s post office box and there was no indication the landlord suffered any undue hardship as a result of the one business day delay in receipt of the notice, the appellate court agreed with the trial court that the delay was de minimus. The appellate court also noted that the tenant’s failure to comply with the lease requirements might be excused under Linn



principles, which had suggested the harsh application of Dikeman’s strict performance standard might be excused when the delay was not due to the negligence or carelessness of the tenant. The appellate court further noted the delay could have been excused by a particular Illinois statute (now 5 ILCS 70/1.11), which the court stated was deemed incorporated into all Illinois contracts entered into during the existence of the statute. Under this statute, when the time within which any act provided by law is to be done falls on a Saturday, Sunday, or holiday, such day is excluded from the computation of time, as well as well as any succeeding day that is also a Saturday, Sunday, or holiday. 455 N.E.2d at 240 – 241. As a result, the appellate court denied the landlord’s motion for summary judgment and instead affirmed the trial court’s summary judgment directing specific performance of the option in favor of the tenant. The statute cited in Providence Insurance was held in a later case not to apply to a lease provision calling for the payment of rent on the first day of the month because it did not require computing of the time for doing an act. Thus, a tenant’s payment of rent on the third of the month was a breach of the lease. Rubloff CB Machesney, LLC v. World Novelties, Inc., 363 Ill.App.3d 558, 844 N.E.2d 462, 463, 300 Ill.Dec. 464 (2d Dist. 2006). The lesson here is that if a landlord drafts an option in a lease calling for the exercise of the option by a date certain, there will be no leeway for the tenant for late notices if the date falls on a Saturday, Sunday, or holiday, unless the lease has a provision extending the time for performance to the next business day. 3. [7S.53] Effect of Lease Assignments on Options To Renew Add after the first paragraph on p. 7-70: The decision in Chicago Title & Trust Co. v. GTE Directories Corp., No. 94 C 5003, 1995 WL 584434 (N.D.Ill. Oct. 2, 1995), is consistent with the principles articulated in Danaj and Bevelheimer. In GTE, the landlord sued the original tenant, GTE, for damages and for a declaratory judgment that GTE remained liable on the lease until its expiration date as extended despite several intervening assignments by GTE and its assignee. GTE argued that it was not liable because the assignee of its assignee had not been entitled to exercise the option to extend the lease without GTE’s consent and, because it did not have GTE’s consent, GTE was not liable under the lease for the liabilities of the tenant for the remainder of the second lease extension term. The court held that the original assignment by GTE did not contain any restrictions on the exercise of the extension option or any requirement to obtain GTE’s consent to future assignments. As a result, GTE’s assignee had all of the same rights GTE originally had under the lease. Likewise, once GTE’s assignee assigned the lease to another assignee who exercised the option to extend, the term was validly extended. Because GTE did not reserve any right to consent in its initial assignment, and that assignment was a complete assignment by GTE of all of its rights and obligations without reserving a right to approve any subsequent assignment, GTE’s assignee had the unrestricted right to assign to the next assignee. GTE also attempted to argue the lease extension was not an extension, but was a renewal, meaning the exercised option did not extend and continue the original lease, but rather created a new lease between the landlord and the second assignee commencing after the original lease expired. The court disagreed because the lease itself called the right an extension option, the option needed to be exercised at least one year prior to the end of the term, and the lease did not



require the tenant to execute a new lease. 1995 WL 584434 at *3. In a subsequent opinion, the same court also denied GTE the right to recover from the second assignee. GTE had filed a third-party complaint against the second assignee claiming a right to be indemnified by the second assignee. The second assignee had assigned its rights to the third assignee, who then defaulted, but because the second assignee had not assumed the lease obligations, the assignment to the third assignee terminated the second assignee’s obligations under the lease. This was because his assignment established only privity of estate, not privity of contract. Chicago Title & Trust Co. v. GTE Directories Corp., No. 94 C 5003, 1995 WL 669098 at *2 (N.D.Ill. Nov. 7, 1995). B. [7S.54] Options To Purchase Add after the second full paragraph on p. 7-71: In Napleton v. Ray Buick, Inc., 302 Ill.App.3d 191, 704 N.E.2d 864, 235 Ill.Dec. 291 (1st Dist. 1999), the court pointed to specific language in the lease to find an exception to the general rule that the lease terminates when a tenant exercises an option to purchase. The lease specifically stated there would be “no merger of the leasehold estate in and with the fee simple title and this Lease and the leasehold created hereby shall continue in full force and effect” if the tenant acquired fee simple title to the land. 704 N.E.2d at 869. Thus, the lease, as well as the remaining options to renew, were to be considered by the appraisers in determining the appraised value of the property for purposes of determining the price at which the tenant would have to buy the property under the exercised purchase option. 704 N.E.2d at 871. Add at the end of the section: See also Penn-Daniels, LLC v. Daniels, No. 07-1282, 2010 WL 431888 at *2 (C.D.Ill. Jan. 28, 2010) (on motion for reconsideration of court’s finding tenant was not entitled to exercise of option to purchase property contained in its lease because “no reasonable jury could find in favor of [tenant] on the question of whether there was an uncured event of default under the lease,” court vacated its prior final judgment reserving for trial issue of whether tenant’s breach of its obligation to keep property in good condition and repair was material), citing Wolfram, supra. In re Orla Enterprises, 399 B.R. 25 (Bankr. N.D.Ill. 2009), involved a dispute between a landlord that had filed for bankruptcy and then sought to reject a tenant’s lease that allegedly contained an option to purchase after the tenant had exercised the option to purchase. In Orla, a lease was signed for an automotive repair business property that, according to the tenant, had a fixed price option to purchase the property during the sixth lease year. According to the landlord, the option to purchase was never made a part of the lease. The parties were litigating this issue in the circuit court when the landlord filed for bankruptcy, thereby staying the circuit court proceedings. 399 B.R. at 27. According to the facts recited in the case, the tenant informed the landlord it wanted to exercise the purchase option in June of the sixth year of the lease, but the landlord denied the option existed and refused to sell the property. In December of that year, the tenant filed for bankruptcy, and its trustee in bankruptcy sought to enforce the option, claiming in the landlord’s bankruptcy proceeding that the lease had expired before the landlord’s bankruptcy filing because



of the landlord’s breach of the lease (refusing to honor the purchase option). The tenant’s argument was that the landlord’s breach meant the lease was not an executory contract or unexpired lease, so the landlord could not reject the lease in the landlord’s own later bankruptcy proceeding. The landlord claimed that the lease never contained an option to purchase and thus it had not breached the lease by refusing to sell the property to the tenant, or even if it had contained the purchase option, the option was itself a separate executory contract that the landlord could reject. 399 B.R. at 28. The bankruptcy court held that it did not matter whether the lease had contained the option to purchase. If it had, the tenant had timely exercised it, and the landlord breached the lease prior to its filing for bankruptcy. However, once that breach occurred, if material, the tenant had two choices — to treat the contract as in effect or as breached, allowing the tenant to cease its own performance. The court found the tenant had chosen to treat the lease as terminated, because it abandoned the premises and stopped paying rent when it filed for bankruptcy. When this occurred, the lease was terminated along with the option to purchase contained in the lease (if it had existed). As a result, under either theory, the court found the landlord and tenant would have had no contractual relationship as of the date of the landlord’s bankruptcy filing, which meant the landlord could not reject the lease. However, because the existence of the option had not been decided, the court ultimately decided further proceedings were needed to determine whether the tenant had breached the lease/option prior to the landlord’s bankruptcy filing. 399 B.R. at 30. X. ENFORCEMENT OF TENANT COVENANTS AND OTHER LEASE

PROVISIONS A. [7S.56] Effect of Landlord’s Failure To Enforce Lease Provisions Add at the end of the section: In Builders Square, Inc. v. Illgross Partners & Co., No. 94 C 4632, 1995 WL 66277 (N.D.Ill. Feb. 8, 1995), the issue was not a failure by the landlord to enforce a breach of a lease covenant by the tenant. Rather, the issue was whether the landlord had waived its right to terminate the lease when it was notified by the tenant’s broker that the tenant would be closing its store during the fall of the following year. The tenant, Builders Square, Inc. (an assignee of and affiliated with the original tenant, K-Mart Corporation), had engaged the broker to find a sublessee or assignee for the leased premises. Under the lease, the landlord had the right, upon receiving a notice from the tenant that it had elected to discontinue operating its store, to terminate the lease by a notice to the tenant given within 90 days of the date the tenant’s notice was mailed to the landlord. This type of right granted to a landlord in a lease is often called a recapture right. If the landlord gave notice of termination, the lease would terminate on the last day of the month following the end of the 90-day period and the tenant would be released from further liability under the lease. If the landlord did not exercise its right to terminate the lease, then once the store was closed, the rent due would revert to the minimum rent specified in the lease unless and until the store was reopened. The lease also had a broad general right to assign or sublease all or any part of the leased premises, but provided that the tenant would remain liable and responsible under the lease.



The letter from the tenant’s broker advising the landlord that the tenant was planning to close its store also enclosed a proposal from a prospective tenant for a portion of the building and suggested the tenant’s lease be terminated simultaneously with a direct lease for the portion the prospective tenant wanted to lease, with the landlord recapturing the rest of the space. Approximately a week after the broker’s letter was sent, the landlord responded stating it had not yet received notice from Builders Square or K-Mart Corporation that they were vacating the building, thereby implying the broker’s letter was not a notice by the tenant that it intended to vacate the store, and stating that if such a notice was given, the landlord would determine whether it would allow the original tenant to negotiate a buy-out of its lease because it had “no intent of letting K-Mart Corporation off of their Lease obligation.” 1995 WL 66277 at *2. Approximately five months after the first exchange between the broker for Builders Square and the landlord, Builders Square contracted to assign the lease to another retailer, Value City Department Stores. The assignment was contingent on Value City receiving an estoppel certificate and non-disturbance agreement from the landlord. Builders Square’s broker advised the landlord of the assignment and requested the estoppel and non-disturbance agreement. A week later the landlord wrote a letter stating it was assessing its options but refused to consent to the Value City assignment. For the next four months, the landlord and Builders Square attempted to negotiate the assignment to Value City. When the second agreement was reached, the landlord wrote to Builders Square advising Builders Square that if it discontinued its operations, the landlord would assert its right to terminate the lease. In late September Builders Square closed the store, and a week later the landlord sent its termination notice. Builders Square then filed a declaratory judgment action asking to have the court interpret the parties’ rights under the lease, which the court heard on Builders Square’s motion for summary judgment. The court held the original notice from the tenant’s broker did trigger the landlord’s 90-day termination right, but regardless of whether it was the first letter or the second letter that actually advised the landlord of the tenant’s decision to close its store, the landlord’s letter exercising its right to terminate was given after the 90-day period had expired, which meant it was untimely. As a result, the landlord had waived its right to terminate the lease. In a subsequent opinion, Builders Square, Inc. v. Illgross Partners & Co., No. 95 C 4632, 1995 WL 452985 (N.D.Ill. July 27, 1995), the court denied Builders Square’s claim against the landlord for tortious interference with prospective business relations by interfering with its right to assign the lease. Because the court found the parties had had a legitimate dispute in deciding whether the broker’s letters were sufficient to put the landlord on notice of Builders Square’s intent to vacate the store and there was no evidence that Builders Square responded to the landlord’s first letter stating it had not received a notice of its intent to vacate, the court found the landlord had not purposefully interfered with the tenant’s attempt to assign its lease to Value City. It is unclear from the two Builders Square opinions why the landlord did not simply accept Builders Square’s proposed assignee, Value City, in light of the unrestricted right to assign Builders Square had in its lease. While the landlord avoided liability to the tenant by its attempts to prevent the tenant from assigning its lease or closing its store, it made a calculated decision not to consider the first notice as one that triggered its right to terminate the lease or to accept the



proposed partial tenancy, but there really was no excuse for its failure to timely exercise its right to terminate after receiving the second notice. Had it really wanted to terminate the lease and keep Value City out of its shopping center, it could have done so if it had acted within the required 90-day period of time. B. [7S.61] Effect of Non-Waiver Provisions Add at the end of the first paragraph: See also Baird & Warner, Inc. v. Al-Par, Inc., 183 Ill.App.3d 467, 539 N.E.2d 192, 131 Ill.Dec. 839 (1st Dist. 1989) (landlord entitled to terminate lease after written demand tenant comply with use, signage, and maintenance of premises provisions of lease even after tenant’s violations had existed without complaint by landlord for nearly five years because tenant made no effort to comply by date specified in landlord’s notice). C. Assignment of Lease and Subletting of Premises 1. [7S.63] Prohibition in Lease Against Assignment Add after the third paragraph: In In re Ames Department Stores, Inc., 127 B.R. 744, 748 – 749 (Bankr. S.D.N.Y. 1991), the United States Bankruptcy Court for the Southern District of New York found that under Illinois law, which governed its decision, the sale of the Zayre Illinois Corporation stock to Ames Department Stores did not constitute an unauthorized assignment of the commercial lease. The court also found that under Illinois law, “the transfer of all of the stock issued by a tenant corporation does not effect an assignment of the tenant’s lease unless the lease so provides.” 127 B.R. at 748, citing National Bank of Albany Park in Chicago v. S.N.H., Inc., 32 Ill.App.3d 110, 336 N.E.2d 115, 123 (1st Dist. 1975), and Associated Cotton Shops, Inc. v. Evergreen Park Shopping Plaza of Delaware, Inc., 27 Ill.App.2d 467, 170 N.E.2d 35, 37 – 38 (1st Dist. 1960). 2. [7S.64] Landlord’s Failure To Object to Assignment Add at the end of the last paragraph: See also Peacock v. Feltman, 243 Ill.App. 236, 238 – 241 (1st Dist. 1927) (holding that corporate tenant breached non-assignment provision when it dissolved and was replaced by larger corporation; however, breach was waived when lessor continued to accept rent while aware of change in corporate identity). 3. [7S.65] Unreasonable Withholding of Consent Add at the end of the carryover paragraph at the top of p. 7-84: See also Shreeji Krupa, Inc. v. Leonardi Enterprises, No. 04 C 7809, 2007 WL 2386655 (N.D.Ill. Aug. 15, 2007) (landlord did not breach lease by failing to consent to assignment of convenience



store lease when tenant failed to demonstrate prospective purchaser of tenant’s business was ready and willing to accept all of tenant’s lease terms even when purchaser was ready, willing, and able to purchase tenant’s business; prospective purchaser had not signed proposed assignment tendered by tenant to landlord and testified at trial he would have been unwilling to accept lease such as tenant’s lease when it contained right on part of landlord to cancel lease on 60 days notice). 5. [7S.67] Effect of Tenant’s Bankruptcy Add at the end of the section: How can the landlord protect itself from losses when an assignee files for bankruptcy and does not assume the lease? In American National Trust Company of Chicago v. Kentucky Fried Chicken of Southern California, Inc., 308 Ill.App.3d 106, 719 N.E.2d 201, 206, 241 Ill.Dec. 340 (1st Dist. 1999), the lease provided that the original tenant remained primarily liable following the assignment. Nonetheless, the trial court dismissed the landlord’s amended complaint seeking rent and real estate taxes from the original tenant for the remainder of the lease term and damages for failure to maintain the premises after the assignee filed for bankruptcy protection. This was because the landlord had accepted a lump-sum payment from the assignee pursuant to a stipulation that released the assignee and all “predecessors-in-interest.” 719 N.E.2d at 206 – 207. According to the court, the original tenant was a predecessor-in-interest to the assignee, and had the landlord intended to preserve its claim against the original tenant, it could have expressly excluded the original tenant from the release it signed in the assignee’s bankruptcy proceedings or explicitly stated its action against the original tenant would survive the stipulation filed with the bankruptcy court. 719 N.E.2d at 212. D. [7S.68] Effect of Assignment or Subletting by Tenant Add after the first full paragraph on p. 7-92: In a different twist on a landlord’s potential liability for injuries suffered by third parties in the common areas of a shopping center, a tenant (Kroger) of a ground lessee sued the ground lessor for common-law premises liability arising out of a slip-and-fall incident in Kroger’s parking lot that the Kroger customer claimed was caused by slippery yellow paint used in the parking lot. Cole v. Kroger Co., No. 3:08-CV-217-PMF, 2010 WL 914928 at *1 (S.D.Ill. Mar. 9, 2010). The ground lessor claimed it was not liable because it was not a party to the assignment of the ground lease from the original ground lessee to the present ground lessee, which had occurred before the yellow striping in the parking lot had been painted. Alternatively, the ground lessor claimed that even if it was a party to the assignment, it had no actual or constructive knowledge that the parking lot had allegedly been defectively painted by the original ground lessee. 2010 WL 914928 at *3. The court held that the ground lessor was in privity of estate with the new ground lessee (regardless of whether it was in privity of contract by virtue of being a party to the assignment between the original ground lessee under the ground lease). Because privity of estate forms one basis on which the ground lessor could potentially be liable to Kroger (the ground lessee’s



tenant), according to the court, the issue was whether the ground lessor had either actual or constructive knowledge of the allegedly defective, slippery paint used in the parking lot. However, because the knowledge of the ground lessor was a factual issue, Kroger was not entitled to summary judgment on its claim of common-law premises liability against a landlord (the ground lessor) who did not control the premises. 2010 WL 914928 at *3. The parties (and the court) apparently focused not on the timing of the original lease as the point at which the ground lessor gave up control over the premises, but on the timing of an assignment by the original ground lessee as the basis for determining whether any of the common-law bases for holding a landlord liable to a third party discussed in §§7.25 – 7.27 of this handbook might apply, even though the ground lease itself (and the date the ground lessor had relinquished control over the land) had been entered into many years earlier at a time well before the parking lot in which the injured Kroger customer slipped and fell was even constructed. Thus, as discussed in §7.29, even a ground lessor needs to be sure it is covered as an additional insured by its ground lessee’s insurance, so that it will have coverage (and a defense) in claims made by tenants for accidents and injuries to third parties occurring in the premises common areas. Add after the last paragraph on p. 7-92: Likewise, in Fan v. Auster Co., 389 Ill.App.3d 633, 906 N.E.2d 663, 329 Ill.Dec. 465 (1st Dist. 2009), a case brought by the special administratrix of a deceased, an employee of a subtenant who was killed by a fall into an open elevator shaft when the doors opened without a cab present, the court needed to determine whether the landlord, its tenant/sub-landlord, or the subtenant had been obligated to repair the faulty elevator doors or install an interlock system that would have prevented the doors from opening if the elevator cab was not there. The lease made the landlord solely responsible “to maintain the roof, foundation and structural elements of the building” in which the premises was located, and the tenant responsible for “all non-structural portions . . . (except to the extent the Lessor is obligated to maintain the same, as provided in [the Section dealing with the landlord’s obligations]) in good repair.” 906 N.E.2d at 667. The language of the sublease required the subtenant to “keep the Premises and appurtenances in a clean, sightly, orderly and healthy condition and in good repair,” and stated that the subtenant “shall perform all acts required to maintain Premises in accordance with applicable statutes, ordinances and other governmental requirements.” 906 N.E.2d at 668. Because the case involved an appeal of an order by the circuit court granting summary judgment to the landlord and the parties had not briefed the issue as to whether the elevator was a structural element of the building or a nonstructural element, the court held there was a material issue of fact as to whether the elevator was a structural or nonstructural element of the building and vacated the summary judgment order for the landlord, because if it were a structural element, the landlord would potentially be liable, and remanded for further proceedings. 906 N.E.2d at 681. The court also identified another genuine issue of material fact that existed that prevented summary judgment for the tenant/sub-landlord. That issue was whether the tenant/sub-landlord had, through its conduct, retained control over elevator maintenance for the building even after the sublease had been entered into by the tenant/sub-landlord. The court held that if the



tenant/sub-landlord had done so, even if the elevator was a nonstructural element to be maintained by the tenant under the lease and that responsibility had been assigned to the subtenant under the sublease, the tenant could be liable for the injuries to the subtenant’s employee under the principles discussed in the cases in §7.24 of this handbook. The opinion contains numerous examples from testimony by the tenant/sub-landlord’s president and bookkeeper as to activities and involvement by them in the day-to-day operation and maintenance of the premises from which it could be inferred the tenant/sub-landlord had, in fact, retained control over the elevator. F. Breach by Landlord 2. [7S.71] Rights of Tenant Add at the end of the section: The lease for a child daycare center in Bright Horizons Children’s Centers, LLC v. Riverway Midwest II, LLC, ___ Ill.App.3d ___, 931 N.E.2d 780, 783, 341 Ill.Dec. 883 (1st Dist. 2010), restricted the use of the leased premises to a child-care center for children and obligated the tenant to operate it as “a high quality and reputable operation (i) licensed by the Illinois Department of Children and Family Services [(DCFS)] . . . and (iii) throughout the term of this Lease, providing a minimum service level equal to or greater than 1) any material DCFS regulations which are in effect during any Term of this Lease” and further required the tenant to “comply with . . . all laws, rules, regulations, orders, ordinances, directions and requirements of any governmental authority or agency, now in force or which may hereafter be in force.” The lease also contained a provision allowing the landlord “upon at least one hundred eighty (180) days’ prior written notice to Tenant to relocate Tenant and to substitute for the Leased Premises other space in a building in the [complex in which the premises were located] or in another building owned by Landlord, or an affiliated entity of Landlord, in the vicinity containing at least as much square footage as the Leased Premises, in a location and on such terms as may be mutually satisfactory to Landlord and Tenant.” Id. Finally, the lease provided that if the landlord and tenant could not agree on the relocation space within 30 days after the landlord gave the tenant the relocation notice, the landlord could terminate the lease effective 180 days after the landlord’s original notice. 931 N.E.2d at 784. The landlord gave the tenant notice of a proposed relocation to a second floor space in another building. The tenant sent the landlord a letter stating the proposed new space did not meet the requirements of the lease because it was not located at ground level and did not have adjacent playground space. The landlord then notified the tenant it would relocate the tenant to the first floor space in a different building, but shortly thereafter withdrew that notice and the tenant remained where it was. About six months later, the landlord sent another notice that it would relocate the tenant to a third alternative space, which was on the second floor of another building in a different but nearby village. The notice also stated that if the landlord and tenant could not agree on the new space, the landlord would have the right to terminate the lease by the date specified in the lease (180 days after the date of the notice). 931 N.E.2d at 786 – 787.



The tenant attempted to obtain an exception to the ground floor location required by DCFS regulations from the Illinois State Fire Marshall so that it could occupy the most recent proposed space without violating DCFS regulations, but when the Fire Marshall’s Office informed the tenant it would not grant an exception, the tenant informed the landlord the space would not meet the DCFS licensing standards. Instead of withdrawing its relocation notice, the landlord sent a letter claiming the tenant was in default under the lease and stating that if it did not cure the default by relocating to the most recent proposed second floor space, the landlord would terminate the lease and enforce the accelerated rent provision in the lease. 931 N.E.2d at 787. The tenant then filed a declaratory judgment complaint asking the court to declare the landlord’s third relocation notice ineffective, the tenant was not in breach of the lease by rejecting that notice, the landlord could not terminate the lease, and any alternative space the landlord offered must be usable as a child-care facility consistent with the only permitted use of the space allowed in the lease. The tenant also asked for an award of attorneys’ fees and costs under the lease provision requiring a defaulting party to reimburse the non-defaulting party for its reasonable attorneys’ fees if it obtained judgment against the defaulting party. The trial court granted summary judgment for the tenant on all counts other than the one dictating what alternative space could be proposed by the landlord in the future because it simply did not want to declare what the landlord must do in the future. The trial court also awarded attorneys’ fees and costs to the tenant in the amount of $48,470. The landlord appealed. 931 N.E.2d at 788 – 790. The appellate court agreed with the trial court that as a matter of law the tenant did not have to specify in the relocation clause of the lease that only a ground floor space was acceptable when the lease required the tenant to use the space only for a child-care center and to comply with all DCFS regulations, one of which was that the space be at ground level. Accordingly, the tenant was within its rights not to be satisfied with the proposed second floor space because to accept it would have run the risk that it would lose its DCFS license. 931 N.E.2d at 791, 793. The appellate court also affirmed the trial court’s award of attorneys’ fees and costs to the tenant. According to the court, while provisions for attorneys’ fees are to be strictly construed, the appellate court held the trial court had correctly found the fee-shifting provision of the lease was triggered by the landlord’s persistence in offering space that was unusable by the tenant. 931 N.E.2d at 798. The decision in the Bright Horizons was specifically related to the language in the lease, but it illustrates how a landlord must carefully read the lease and apply its terms to the specific tenant and its use before assuming a general relocation clause such as the one in this lease might not be enforceable under the circumstances. Also, when the lease contains a mutual fee-shifting provision such as the one here, the landlord needs to be prepared to reimburse the tenant for its attorneys’ fees if the landlord takes actions later found to be wrongful or a breach of the lease on its part.



XI. TERMINATION OF TENANCY A. Landlord’s Obligation To Mitigate Damages upon Tenant’s Breach 1. [7S.74] Statutory Duty To Mitigate Damages Add at the end of the section: The landlord’s duty to mitigate its damages under Code of Civil Procedure §9-213.1 does not arise, however, until the tenant abandons or vacates the premises. Block 418, LLC v. Uni-Tel Communications Group, Inc., 398 Ill.App.3d 586, 925 N.E.2d 253, 258, 338 Ill.Dec. 756 (2d Dist. 2010). 3. [7S.76] What Constitutes “Reasonable Measures” To Mitigate Damages Add at the end of the section: Danada Square, LLC v. KFC National Management Co., 392 Ill.App.3d 598, 913 N.E.2d 33, 332 Ill.Dec. 438 (2d Dist. 2009), illustrates the problems landlords can find themselves in even if they have a creditworthy assignor of a commercial lease that stands behind the credit of the assignee of that lease. In Danada, the original tenant under a retail lease, KFC National Management Company (KFC), assigned its lease to a KFC franchisee, TEC Foods (TEC). The then landlord’s consent to the assignment provided that KFC remained the guarantor of the lease obligations, including those under exercised extensions of the term. TEC extended the lease for 5 years after expiration of the initial term, but within 15 months after the extension term began TEC filed for bankruptcy. TEC rejected the lease and the then landlord, Danada Square LLC (Danada), and KFC entered into negotiations for either a new lease to KFC for the remainder of the extended term or terms under which KFC might otherwise satisfy its obligations under the original lease. While the negotiations were progressing, KFC paid the rent under the original lease. 913 N.E.2d at 35. Although Danada tendered a proposal to KFC in December 2005 under which Danada could lease the premises on essentially the same terms as those in the lease, Danada’s proposal also asked for a right to retake possession of the premises on 60 days’ notice to KFC. Danada’s rationale for this “60-day out” clause was so that Danada could raze the building and build a larger one. KFC responded to Danada’s proposal in an April 2006 letter stating it would accept all of the terms other than the 60-day out provision and ceased making rent payments, which it had made from December 2005 through April 2006. Danada did not respond to KFC’s response, but sued KFC for damages and sought possession of the premises. Id. Nine months after KFC stopped paying the rent under the lease, Danada leased the premises to another KFC franchisee, but at a lesser rent than called for under the lease and without a 60-day out provision. Danada filed a motion for summary judgment seeking damages from KFC equal to the difference in the rent, as well as the costs Danada incurred to relet the premises. The



trial court held KFC was liable only for the rent it had paid between TEC’s default and May 2006, the date KFC stopped paying rent, which was when its counteroffer to Danada’s new lease proposal was rejected by the landlord’s failure to respond. It also held Danada had breached its duty to take reasonable measures to mitigate its damages under the Illinois statute, 735 ILCS 5/9-213.1. 913 N.E.2d at 39. Danada appealed the trial court’s decision, and the appellate court held Danada had indeed breached its duty to mitigate its damages when it forwarded a lease proposal with a 60-day out proposal to KFC and did not otherwise respond to KFC’s letter stating it was unwilling to enter into a new lease with that provision in it. The appellate court further held the April 2006 KFC letter showed KFC was ready, willing, and able to enter into a lease without that clause, and yet Danada refused to proceed. Although Danada had every right to refuse KFC’s proposal and “explore other opportunities that might eventually be more profitable,” according to the appellate court, that was an exercise of business judgment by Danada, and Danada could not compel KFC to bear the costs of that decision when it could have avoided them altogether by accepting KFC’s offer. 913 N.E.2d at 42. Because it could reasonably have avoided all of the damages it incurred after April 2006, Danada was not entitled to any recovery. The moral of the Danada story for landlords is that they need to be reasonable when the assignee later defaults in attempting to recover damages from an assignor that had not been released from liability under the lease assignment. In Danada, the landlord’s predecessor had fully protected itself from a defaulting assignee by explicitly obligating the assignor to remain fully liable in the event of a default by the assignee. However, the successor landlord, in an effort to gain an advantage it was not entitled to under the consent to the assignment or the lease, cost itself a significant loss of rent and added costs to release the premises ($300,000 was what Danada had claimed as its damages), as well as the attorneys’ fees it had to spend to fight a losing battle in court. In Becknell Development, L.L.C. v. Linamar Corp., No. 07 C 5455, 2008 WL 576334 (N.D.Ill. Feb. 28, 2008), the landlord was entitled to summary judgment on the issue of whether it had made reasonable efforts to mitigate its damages as a result of a tenant’s default in failing to take occupancy of an industrial building and to commence paying rent as of the date the landlord substantially completed construction of the building to the tenant’s specifications, as required under the lease. After the tenant’s default, the landlord hired a broker and cooperated with the tenant in trying to find a subtenant, and found a direct tenant for 100,000 of the 160,000 total square feet the tenant was to have leased with a lease commencement scheduled for a date approximately nine months after the tenant’s default at a rental rate very similar to the to be paid by the tenant. 2008 WL 576334 at **3, 5. B. Expiration or Termination of Lease 1. [7S.80] Expiration of Lease Term Add after the first paragraph: When the lease has expired but the tenant holds over (i.e., remains in possession) after the expiration date of the lease, the tenant is considered either a tenant at sufferance or a holdover



tenant. See Amcor Trust Co. v. Minnesota Diversified Products, Inc., No. 97 C 0614, 1998 WL 433770 (N.D.Ill. July 29, 1998). See also Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2008 WL 192986 (N.D.Ill. Jan. 18, 2008). Whether the tenancy created when a tenant holds over is a tenancy at sufferance or a holdover tenancy depends on the reaction of the landlord to the tenant’s holdover, not what the tenant intends. “In cases where courts have determined that a tenancy at sufferance was created, the landlord either notified the tenant to vacate the premises or filed a forcible entry and detainer action.” Amcor Trust, supra, 1998 WL 433770 at *3. The interest of a tenant at sufferance in the premises is only “naked possession,” and the tenant may be evicted at any time. Rexam, supra, 2008 WL 192986 at *2. In addition, unless the lease under which the tenant previously occupied the premises provides otherwise, the landlord is entitled to “rent at a rate equal to double the fair market rental value of the property” under 735 ILCS 5/9-202 if the holdover is willful and continues after a demand in writing for possession. 2008 WL 192986 at *4. The relevant provisions of Code of Civil Procedure §9-202 provide:

Wilfully holding over. If any tenant or any person who is in or comes into possession of any lands . . . by, from or under, or by collusion with the tenant, wilfully holds over any lands . . . after the expiration of his or her term or terms, and after demand made in writing, for the possession thereof, by his or her landlord, or the person to whom the remainder or reversion of such lands . . . belongs, the person so holding over, shall, for the time the landlord or rightful owner is so kept out of possession, pay to the person so kept out of possession, or his or her legal representatives, at the rate of double the yearly value of the lands . . . so detained to be recovered by a civil action. 735 ILCS 5/9-202.

In Stride v. 120 West Madison Building Corp., 132 Ill.App.3d 601, 477 N.E.2d 1318, 1321 – 1322, 87 Ill.Dec. 790 (1st Dist. 1985) (case involving holdover on termination of lease by landlord’s assignee under lease clause allowing landlord to terminate lease if building or land under building were sold and requiring tenant to pay both double rent during holdover and all of landlord’s damages), the Illinois Appellate Court for the First District held that for double rent to be awarded under §9-202 of the Code of Civil Procedure, the holdover must be in “bad faith,” even if the lease itself contained a double rent provision that did not require bad faith. In Stride, the court also held the provision was an unenforceable penalty rather than an enforceable liquidated damages clause because the lease also had language calling for the tenant to pay the landlord’s actual damages. A subsequent case, J.M. Beals Enterprises, Inc. v. Industrial Hard Chrome, Ltd., 271 Ill.App.3d 257, 648 N.E.2d 249, 251 – 252, 207 Ill.Dec. 793 (1st Dist. 1995), held that a bona fide dispute over possession would bar the statutorily required finding of willfulness. Beals involved an alleged holdover by an industrial tenant completing repairs to its former premises after moving out its equipment. The tenant began the repairs in December after entering into a settlement agreement with the landlord that confirmed whether the landlord or the tenant owned certain equipment on the premises. The settlement agreement had been entered into only 21 days before the end of the lease term. Under the settlement agreement terms, certain repairs were to be performed by the tenant and certain equipment was to be left “in operating condition” by



December 31. The landlord then had until March 1 to inspect the premises to determine whether the tenant had complied. On January 18 the landlord supplied a list of work it determined the tenant was still required to complete (which took two workers full-time for one week in March to complete, and which was performed without disrupting the landlord’s use of the premises). 648 N.E.2d at 252 – 253. Based on these facts, the court reversed the trial court’s order for summary judgment in favor of the landlord because it held §9-202 of the Code of Civil Procedure required a finding the tenant’s holdover was “knowingly wrongful” and it was a factual matter whether the tenant’s actions were “knowingly wrongful” under the statute. 648 N.E.2d at 253. Applying the willful test in §9-202, the court in Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2007 WL 2156674 at *9 (N.D.Ill. July 24, 2007), had found Rexam’s holdover was willful (in an earlier opinion) because it “was aware that its retention of the property after the termination of [the] lease was wrongful” based on correspondence between the landlord and Rexam’s representatives and because the landlord “explicitly notified” the tenant in a letter sent a month before the expiration date of the lease that it expected Rexam to vacate the premises in a month. Rexam had no “colorably justifiable reason for retaining possession of the property [when] . . . Illinois law is clear that renewal options require strict compliance,” and Rexam’s own attempts to have the landlord confirm it had accepted the notice of renewal showed even Rexam did not believe its notice had been effective to renew the lease. Id. Consequently, Rexam was found liable for double the fair market rental value of the property (double rent) for the period of time Rexam held over after its lease had ended — a period of 17 months from April 1, 2006, to August 31, 2007 (some of which time was required in order for Rexam to find alternative space, move its equipment, and complete other repairs to the building that could not be performed until the building was empty). Rexam, supra, 2008 WL 192986 at **1, 5. Another subsequent opinion held the landlord’s right to double rent did not preclude the landlord’s claim for structural damages to the building caused by Rexam during its occupancy of the building under the lease because the obligation was a continuing one that survived the expiration of the lease. Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2008 WL 217114 at *4 (N.D.Ill. Jan. 22, 2008). Accordingly, Rexam was held liable to the landlord not only for double rent (less certain building expenses paid by Rexam), but also for damages to the roof and dock levelers of the building totaling over $1.5 million, although most of the award consisted of the double rent. 2008 WL 217114 at *11. Because Code of Civil Procedure §9-202 requires a demand for possession by the landlord, followed by a willful holdover, what happens if a tenant holds over and continues to pay rent at the same rate paid under its prior lease, and the landlord continues to accept the rent payments? Amcor Trust, supra, addressed these questions in a case involving a dispute between the landlord and the holdover tenant over the nature and term of the holdover tenancy. The tenant claimed it had an oral agreement with the landlord to hold over on a month-to-month basis after the expiration of its lease, based on a conversation the president of the tenant had with the landlord’s on-site operations and maintenance supervisor prior to the expiration of the lease. The tenant argued this individual had apparent authority to represent the landlord in lease negotiations and could bind the landlord “by virtue of his position and daily contact with the [tenant] in connection with the operation and maintenance of the leased premises.” 1998 WL 433770 at *4.



The court had no difficulty finding no oral month-to-month holdover tenancy had been created — to believe a maintenance supervisor had the authority to negotiate lease terms was not reasonable, particularly when that employee had not been involved in the negotiation of the original lease or the extension amendment the tenant had previously negotiated with another landlord’s representative and the landlord’s legal counsel. As a result, the court held, as a matter of law, that the holdover tenancy created was a year-to-year tenancy as the landlord had claimed, based on the landlord’s acceptance of the tenant’s rent payments made during the months of April through September. 1998 WL 433770 at **2, 4. The landlord did refuse the final rent payment tendered by the tenant for October because the check had some “accord and satisfaction language” on it, and sued the tenant for that rent, as well as rent through the end of what would have been one year following the written lease term. 1998 WL 433770 at *2. Rather than granting summary judgment in favor of the landlord on the issue of the damages due from the tenant to the landlord, the court denied the motion. Neither party had presented any evidence on what the landlord had done to mitigate its damages following the tenant’s vacating the premises and refusing to pay rent thereafter. The court, citing Snyder v. Ambrose, 266 Ill.App.3d 163, 639 N.E.2d 639, 640 – 641, 203 Ill.Dec. 319 (2d Dist. 1994), noted that the landlord had the burden of proof on this issue, which generally was a question of fact. 1998 WL 433770 at *6. The Amcor Trust court did not cite Code of Civil Procedure §9-205 in holding the holdover tenancy was extended on a year-to-year basis, nor Code of Civil Procedure §9-207 to defeat the claim by the tenant that the lease was extended on a month-to-month basis, but these statutes may affect the arguments of the parties dealing with a holdover tenancy. However, Code of Civil Procedure §9-207 would not have assisted the tenant in Amcor Trust because the original lease was not a month-to-month lease. Add at the end of the section: Code of Civil Procedure §9-207 reads:

Notice to terminate tenancy for less than a year. In all cases of tenancy from week to week, where the tenant holds over without special agreement, the landlord may terminate the tenancy by 7 days’ notice, in writing, and may maintain an action for forcible entry and detainer or ejectment. In all cases of tenancy for any term less than one year, other than tenancy from week to week, where the tenant holds over without special agreement, the landlord may terminate the tenancy by 30 days’ notice, in writing, and may maintain an action for forcible entry and detainer or ejectment. 735 ILCS 5/9-207.

It covers not only month-to-month tenancies, but also other tenancies for less than a year, and after giving the required termination notice, the landlord may bring a forcible entry and detainer action if the tenant holds over. Nevertheless, the landlord should still review its lease before filing such an action because another notice may be required if the lease contains a notice and cure period to expire without the tenant vacating the premises.



The landlord in Amcor Trust, supra, might have been able to rely on Code of Civil Procedure §9-205, however, in arguing the holdover created a year-to-year tenancy. Under this section, which applies to tenancies from year-to-year unless the tenancy is for farm land, a 60-day notice in writing given at any time within 4 months preceding the last 60 days of the year is sufficient to terminate a year-to-year lease. Thus, if a landlord wishes to be sure it can terminate a year-to-year lease, it must comply with this Code of Civil Procedure provision. What happens if a lease does not have a stated expiration date? Does that make the lease unenforceable? This issue was addressed in Lakeview Collection, LLC v. Bank of America, N.A., No. 09 CV 3933, 2009 WL 4674136 (N.D.Ill. Dec. 9, 2009). In Lakeview, the bank entered into three separate agreements in connection with the sale of a bank property to Lakeview — a purchase agreement under which Lakeview purchased the bank’s property (the purchase agreement), a lease back to the bank of the property on which the bank had a branch bank and drive-through facility (the lease), and a temporary space agreement under which the bank agreed to continue to lease the parcel on which it operated its drive-through facility after the termination of the lease (the drive-through lease). The purchase agreement required Lakeview to begin demolition and clearing of the property no later than February 28, 2007, and to begin construction of its planned mixed-use development by June 30, 2008. The lease stated it would terminate on the later of August 31, 2006, or 120 days after Lakeview notified the bank that it intended to demolish the existing structures on the property and commence construction of the new development. The drive-through lease contained an expression of the bank’s intent to lease space for a new branch bank at the new development. 2009 WL 4674136 at **1 – 2. Lakeview never gave the bank notice that it intended to begin demolition or construction as contemplated under the lease, which would have terminated the lease. However, the bank vacated the branch bank building in May 2008 but continued to operate the drive-through facility. After vacating the branch bank building, the bank paid only a portion of the rent due under the lease, and Lakeview filed suit for a declaratory judgment that the lease had not terminated and the bank remained liable for rent and real estate taxes under the lease. 2009 WL 4674136 at *2. The bank claimed the lease contained only illusory promises on the part of Lakeview because it was not obligated to do anything, and the lease was therefore void. Alternatively, the bank argued that because the lease was of potentially perpetual duration, it was terminable at will and had terminated. The bank also claimed Lakeview breached the implied covenant of good faith and fair dealing, which excused the bank from performing any further obligations under the lease. 2009 WL 4674136 at *3. On a motion to dismiss filed by the bank, the court had no difficulty determining the lease was enforceable and the bank was not entitled to an order dismissing Lakeview’s complaint. While acknowledging that under Illinois law illusory promises are not sufficient to support a contract, the bank’s claim that Lakeview’s promises with respect to commencement of demolition and commencement of construction under the lease gave Lakeview the unilateral and unlimited right to determine the term of the lease and thus were illusory was not persuasive because the court found the lease contained multiple termination provisions — not just the ones the bank was complaining were illusory. The court pointed out the lease expressly provided it could be



terminated if the bank defaulted (after ten days’ notice) or if a condemnation or eminent domain action by any public entity occurred. Those provisions were sufficient for the court to find the lease was not terminable at will. 2009 WL 4674136 at **3 – 4. The court also denied the bank’s motion to dismiss Lakeview’s complaint on the basis Lakeview had breached the implied covenant of good faith and fair dealing. Because the bank failed to include any arguments in its briefs or citations to any authority under which a breach by Lakeview of its obligation under the purchase agreement to complete demolition of the existing buildings by February 28, 2007, could be considered added to and a part of the lease when the parties had not included it themselves, the court declined to address the issue. 2009 WL 4674136 at *5. Lakeview procedurally involved a denial of the bank’s motion to dismiss Lakeview’s complaint on the basis that it failed to state a claim. Thus, the opinion may provide insight only as to what an ultimate decision on the merits might be as to Lakeview’s request for declaratory judgment that the bank remained liable for rent and real estate taxes under the lease. The lesson to be learned, however, is that what might appear to be a lease that is terminable at will because it has no definite expiration date may not be the case, particularly because most leases do provide the option for the landlord to terminate the lease in the event of a default by the tenant, and many also provide for termination if the property is taken in a condemnation or eminent domain proceeding. 4. [7S.83] Exercise of Termination Option Add at the end of the section: The holding in Thompson Learning, Inc. v. Olympia Properties, LLC, 365 Ill.App.3d 621, 850 N.E.2d 314, 302 Ill.Dec. 877 (2d Dist. 2006), is consistent with MXL Industries requiring strict compliance with the terms of an option to terminate. In Thompson Learning, the appellate court reversed the district court’s grant of summary judgment in favor of the tenant (Thompson Learning) on the question of whether Thompson Learning had sufficiently complied with the terms of an option to terminate its commercial lease such that the lease was considered terminated. 850 N.E.2d at 315. Thompson Learning’s lease allowed it to terminate its lease by August 31, 2005 (rather than the scheduled expiration date of December 31, 2009), if it gave the landlord written notice of cancellation and paid a cancellation fee by September 1, 2004, and the cancellation option expressly stated that time was of the essence. In April 2004, Thompson Learning orally advised the landlord it was considering exercising the termination option. To convince Thompson Learning to stay, the landlord offered it new lease terms and agreed to forgive the payment of the cancellation fee if Thompson Learning accepted. Instead, Thompson Learning asked the landlord to specify the amount of the cancellation fee, which the landlord did. A few days before the September 1 deadline, Thompson Learning called the landlord to tell the landlord it intended to exercise the cancellation option and requested instructions for paying the cancellation fee, which the tenant wired to the landlord and the landlord received on August 31. 850 N.E.2d at 316.



However, according to the landlord, it did not receive written notice of cancellation by September 1, and it so informed Thompson Learning on September 9. Because of this, the landlord told Thompson Learning the cancellation option had not been effectively exercised and the lease would continue. Id. Thompson Learning claimed it had sent the written cancellation notice in a Federal Express package received by the landlord on August 20 with another letter about a power outage at the building. The landlord claimed the envelope had contained only the power outage letter. 850 N.E.2d at 317. Thompson Learning then sued the landlord for a declaratory judgment that it had properly exercised the cancellation option and filed a motion for summary judgment, arguing it had complied with the requirements of the cancellation option or, alternatively, if it had not, that it was entitled to summary judgment on equitable grounds because the landlord knew it intended to exercise the cancellation option and it had paid the required cancellation fee. 850 N.E.2d at 317 – 318. In denying the tenant summary judgment the court reiterated the Illinois law requiring strict compliance with an option to cancel or extent a commercial lease, relying on the precedents established in Dikeman v. Sunday Creek Coal Co., 184 Ill. 546, 56 N.E. 864 (1900), discussed in §7.51 of this handbook and MXL Industries. 850 N.E.2d at 320. According to the court, the strict compliance standard was both fair and consistent with “the realities of commercial transactions.” 850 N.E.2d at 321. It was fair because when a landlord agrees to grant the tenant an option to terminate the lease, the tenant receives something of great value, such as avoiding the adverse effects of a downturn in local economic conditions, for which the landlord ought to be able to demand performance by the tenant with the parties’ agreement. It was also consistent with the fact that parties to commercial leases are sophisticated business people and the tenant should not be permitted to demand protection under the law from its failure to comply with its written agreement. 850 N.E.2d at 322. The court did find there was a material issue of fact as to Thompson Learning’s actual compliance with the terms of the cancellation option, but the court also found that Thompson Learning could not be excused on equitable grounds if it had not complied. This was because it had failed to plead sufficient facts to establish the delay in strictly complying was slight, it would suffer undue hardship if strict compliance were not excused, and the landlord would not be prejudiced by excusing compliance. 850 N.E.2d at 323 – 324. It also had not pled any facts to defeat the landlord’s claims that Thompson Learning had unclean hands by lying about sending the written cancellation notice, which meant further proceedings were needed. 850 N.E.2d at 325 – 326. A more recent case involving a tenant’s attempted exercise of its option to terminate a lease for a retail shoe store is Genesco, Inc. v. 33 North LaSalle Partners, L.P., 383 Ill.App.3d 115, 889 N.E.2d 769, 321 Ill.Dec. 504 (1st Dist. 2008). The tenant made a number of errors in attempting to exercise its option to terminate, and when the landlord refused to acknowledge the lease had terminated, the tenant sued for a declaratory judgment. Both the landlord and the tenant filed motions for summary judgment, which the circuit court granted to the landlord. The tenant appealed on an equitable basis, claiming its noncompliance with the lease terms in attempting to exercise its option to terminate were trivial, it would suffer hardship if the lease was not terminated, and the landlord had not suffered any harm. 889 N.E.2d at 771, 772.



The facts are complicated because the tenant had a direct lease from the landlord that commenced at the expiration of its sublease from a tenant whose lease (and the sublease) expired after the time the tenant was required to give notice to exercise the option to terminate. To further complicate matters, the original landlord under the lease sold the property to 33 North LaSalle Partners, L.P., during the term of the sublease (and before notice of exercise of the option to terminate had to be given), but 33 North LaSalle Partners, L.P., as the new owner, did not notify the tenant of the change in ownership. 889 N.E.2d at 772 – 773. Approximately a month before the tenant was required to give notice of its exercise of the option to terminate, the tenant’s agent attempted to renegotiate the base rent rate. The tenant’s agent orally informed the landlord’s agent that the tenant would exercise its option to terminate if the negotiations on rent were not successful. When the negotiations were not successful, the day before written notice was due, the tenant’s agent again orally notified the landlord’s agent the tenant wished to exercise the termination option and that written notice would be forthcoming. That same day the tenant then erroneously sent the written notice and a check for the termination fee to its sub-landlord with a copy of the notice to the former landlord’s managing agent (the notice also contained a minor error in that agent’s address). 889 N.E.2d at 772. When the sub-landlord returned the check to the tenant a week later (which was after the date for exercise of the option to terminate), the tenant contacted the landlord (through the prior owner’s managing agent) and asked for a completed W-9 tax form before reissuing the check. When the tenant received the completed W-9 form, it reissued the check jointly to the party identified in the W-9 and the landlord. The landlord later returned the check to the tenant, refusing to accept the termination notice as valid. Id. The court’s opinion affirming the circuit court’s summary judgment in favor of the landlord, as well as the separate concurring opinion, contains a lengthy analysis of the Illinois caselaw on strict compliance with lease options — both options to extend, renew, or expand, based on the Illinois Supreme Court case, Dikeman, supra, and later First District Appellate Court cases, Gold Standard Enterprises, Inc. v. United Investors Management Co., 182 Ill.App.3d 840, 538 N.E.2d 636, 131 Ill.Dec. 261 (1st Dist. 1989), Providence Insurance Co. v. LaSalle National Bank, 118 Ill.App.3d 720, 455 N.E.2d 238, 74 Ill.Dec. 208 (1st Dist. 1983), and Linn Corp. v. LaSalle National Bank, 98 Ill.App.3d 480, 424 N.E.2d 676, 53 Ill.Dec. 885 (1st Dist. 1981), and options to terminate based on Thomson Learning, supra. Dikeman, Linn Corp., Providence Insurance, and Gold Standard are discussed in more detail in §7.51 of this handbook. The Genesco court cautioned against departing from Dikeman’s strict compliance standard unless some requirement is waived by the other party (which was not the case in Genesco) or there is a “just excuse for non-compliance,” (889 N.E.2d at 773, quoting Dikeman, supra, 184 Ill. at 551) and stated, “We are troubled by the fact that these cases [Thomson Learning, Gold Standard, and Providence Insurance] extending and applying the narrow, express language offered in Dikeman offer no basis in law upon which courts are purportedly empowered with a blanket ability to provide equitable relief” (889 N.E.2d at 774). Despite its concerns, it tested the tenant’s actions in this case against the standards articulated in Thomas Learning, which required a lessee seeking relief from strict compliance with an option to cancel or extend a commercial



lease to “at a minimum establish: (1) the delay in strictly complying was slight; (2) the lessee would suffer undue hardship if strict compliance were not excused; and (3) the lessor would not suffer prejudice if strict compliance were excused.” 889 N.E.2d at 775, quoting Thomson Learning, supra, 850 N.E.2d at 324. Applying these tests, the Genesco court found the tenant’s careless or negligent errors in giving notice were not entitled to be “justly excused” and did not agree that the tenant would suffer undue hardship, offering suggestions such as breaking the lease, which would require the landlord to mitigate its damages, or attempting to sublease or assign the lease. 889 N.E.2d at 776 – 777. The court also stated it did not address whether the landlord would have been harmed or prejudiced because failing the first two parts of the test meant the tenant was not entitled to any relief. 889 N.E.2d at 778. The concurring opinion disagreed somewhat with the majority opinion’s analysis of the Illinois precedents and also considered other authorities as to when equity should relieve strict compliance with the terms of an option, but ultimately agreed with the decision to affirm the circuit court’s granting of summary judgment in favor of the landlord. 889 N.E.2d at 778 – 781 (Theis, J., concurring). Both landlords and tenants should take heed of the Genesco opinion when drafting and exercising options to terminate or renew leases. While the court did not believe the landlord’s failure to advise the tenant of the sale and its new address for notices, it is easy to see from this case that had the tenant’s failure to send the notice to the new landlord’s address been the only defect in Genesco, the Genesco court’s opinion might have been different. However, until a case arises in which the courts are willing to excuse a failure to strictly comply, the law in Illinois still demands strict compliance with the requirements of an option to terminate or renew or extend. D. [7S.84A] Effect of Tenant’s Bankruptcy New section: The first questions that a commercial landlord whose tenant has just filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §101, et seq., usually asks are “What will I be entitled to be paid, and when will I be paid?” There is no one answer to these questions. First, it depends on the ability of the tenant, who is now a “debtor in possession,” to pay because some rent obligations under leases are treated as general unsecured claims (sometimes further subject to a statutory cap) that are paid along with all other general unsecured claims after the bankrupt tenant’s plan of reorganization is confirmed, usually at some cents on the dollar out of the money left over after other items with a higher priority are paid. Second, it depends on whether the tenant elects to assume or reject the lease. Third, it depends on when the obligation of the tenant to make a particular payment arises. Finally, it depends on whether the payment is base rent, percentage rent, common area maintenance or operating expense charges, real estate taxes, or some other charge. The ability of the tenant to pay will depend on many factors that are beyond the scope of this chapter, such as whether the reason for the filing was related to cash-flow problems, how many secured creditors versus unsecured creditors the tenant’s filing discloses, and what its

§7S.84A COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


reorganization plan calls for (e.g., selling of certain assets to pay off debt or continuing to operate and generating cash through operations or additional loans). Whether the tenant decides to accept or reject the lease is also beyond the scope of this chapter. Bankruptcy issues affecting leases are addressed in more detail in Chapter 11 of this handbook. For a more detailed analysis of this topic and other issues related to the effect of a bankruptcy by a commercial tenant, see David R. Kuney, BANKRUPTCY ISSUES FOR COMMERCIAL LANDLORDS, TENANTS AND MORTGAGEES (2d ed. 2008). What is discussed in this section are cases dealing with one of the three distinct time periods during which the tenant’s obligation to pay could arise that affect the amount that may be paid to the landlord and how various courts have determined what portions of the various components of rent (base rent, real estate taxes and common area maintenance or operating expense charges, and percentage rent) must be paid. The three distinct time periods are the “prepetition” period (i.e., the time before the tenant files its petition for relief), the “post-petition, pre-rejection” period (i.e., the time period after the tenant files its petition and before it decides whether to assume or reject the lease, sometimes called the “option phase” or the “post-petition” period for short), and the “post-rejection” period. A subset of the post-petition, pre-rejection phase identified in some cases is the “stub period,” meaning the period of time after the filing of the petition that is included in the month in which a rent payment due on the first of the month before the filing of the petition for that calendar month. The rules with respect to prepetition rent are relatively simple — all amounts properly due to the landlord by the tenant from obligations that arise prior to the filing of the bankruptcy petition are classified as general unsecured claims. The landlord must file a proof of claim with respect to this amount. It will not be paid on an ongoing basis, but the allowed amount of its claim for prepetition rent will be paid pro rata with the claims of other unsecured creditors under the debtor’s plan of reorganization. If the tenant rejects the lease, those obligations that are deemed to arise after the effective date of rejection of the lease (i.e., during the post-rejection period) are also classified as general unsecured claims and are subject to a cap under Bankruptcy Code §502(b)(6)(A). These obligations must be included in the proof of claim filed by the landlord. The landlord will be paid the amount of its allowed claim pro rata with the other unsecured creditors under the debtor’s plan of reorganization. Special rules apply to rent obligations that arise during the post-petition period, which is the primary focus of §§7S.84B – 7S.84D below. In general, under Bankruptcy Code §365(d)(3), a tenant, as the debtor, is required to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property.” 11 U.S.C. §365(d)(3). Thus, from the date it files its petition until the date it assumes or rejects the lease, the tenant is obligated to timely pay all sums due under the lease that are deemed to arise during that period, regardless of whether the debtor subsequently assumes or rejects the lease. If the tenant assumes the lease, under Bankruptcy Code §365(b)(1), it is required to cure all defaults under the lease as a condition of assumption of the lease. Thus, in addition to having paid the post-petition obligations, the tenant must also pay all sums necessary to cure the lease default.

LANDLORD’S DUTIES AND LIABILITIES §7S.84B


However, what rent claims are actually prepetition claims and post-petition claims, as well as the amount of each, very often give rise to disputes between landlords and tenants. While not an exhaustive analysis of the caselaw, the cases discussed in §§7S.84B – 7S.84D below address the issue as to whether an amount claimed due by the landlord is really a prepetition claim or a post-petition claim, or whether a portion of it is a prepetition claim and a portion of it is a post-petition claim. Very often the answer will depend on the jurisdiction in which the bankruptcy proceeding is filed. 1. [7S.84B] Payment of Real Estate Taxes and Other Pass-Through Expenses New section: In In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001), Montgomery Ward’s Illinois property lease with CenterPoint Properties obligated Montgomery Ward to pay all real estate taxes assessed for periods of time during its lease term, which expired September 1, 1997. However, unlike many smaller tenant leases under which the tenant is to pay monthly estimated payments on account of real estate taxes to the landlord to be held by the landlord to pay the taxes when they come due, Montgomery Ward was obligated to pay each installment of taxes upon receipt of an invoice from CenterPoint, but before any fine, penalty, or interest was added to the amount of taxes. In addition, Montgomery Ward was obligated to pay an estimated amount of taxes to the landlord for the last two years of the lease (to the extent it had not previously paid such taxes) no later than 30 days prior to the date the lease expired. Montgomery Ward filed for bankruptcy in July 1997. Later that month, CenterPoint sent Montgomery Ward three invoices for real estate taxes. The first covered the first installment of 1996 taxes, which was due in 1997. The second covered an estimated amount for the second installment of 1996 taxes, which was to become due later in 1997 (but after Montgomery Ward’s lease expired). The third covered an estimated amount of taxes for 1997. Montgomery Ward did not pay the first two invoices, and sent a prorated payment of the amount shown on the third invoice for the 1997 taxes. The prorated portion paid represented the portion of the invoiced amount Montgomery Ward calculated was allocable to the period of time from the date its petition for relief in the bankruptcy proceeding had been granted through the date its lease expired, based on Montgomery Ward’s claim this was the only post-petition amount of real estate taxes for which it was liable. CenterPoint filed a motion for an order requiring Montgomery Ward to pay the remainder of the invoiced taxes. The bankruptcy court agreed with Montgomery Ward, and CenterPoint appealed. On appeal, the Third Circuit Court of Appeals held that Montgomery Ward was liable for the entire amount of taxes billed by CenterPoint. It agreed with CenterPoint’s argument that, under the terms of Montgomery Ward’s lease, all of the taxes at issue were post-petition obligations arising under the lease after the date of the order for relief because Montgomery Ward was not obligated to pay the amounts until the date they were billed. According to the court, even though the taxes related in part to periods of time during the lease term that had elapsed prior to the date of the order for relief in Montgomery Ward’s bankruptcy proceeding, nothing in Bankruptcy Code §365(d)(3) authorized proration of the amounts billed. In its decision, the Third Circuit

§7S.84B COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


cited prior decisions from other courts that had agreed with its analysis. For example, it cited In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir. 2000), a case in the Sixth Circuit that had addressed the question of whether the monthly rent due on the first of the month should be prorated. The Koenig holding is discussed in §7S.84C below. The decision in Inland’s Monthly Income Fund, L.P. v. Duckwall-Alco Stores, Inc. (In re Duckwall-Alco Stores, Inc.), 150 B.R. 965 (D.Kan. 1993), is consistent with the Montgomery Ward opinion. In Duckwall-Alco Stores, the court held that the bankrupt tenant was liable under Bankruptcy Code §365(d)(3) for only the installment payment of real estate taxes due under a lease for premises in Illinois after the order for relief but before the date the lease was rejected, because the lease expressly required the tenant to pay “only those installments falling due during the term” (150 B.R. at 974) and “did not provide for payment of taxes to the landlord as they accrued” (150 B.R. at 976). Under the language of the lease, the court found the tenant was not liable for the installment payment due to the taxing authority after the lease was rejected, even though the landlord paid it (as was its right by law) at the same time it paid the first installment and billed the tenant for the full amount prior to the date the lease was rejected. The holding in the Third Circuit Montgomery Ward case conflicts with the Seventh Circuit’s holding in In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), however. In Handy Andy, the Seventh Circuit held that proration of the real estate taxes claimed due by the landlord was appropriate. According to the Handy Andy court, any rule that would have made Handy Andy’s obligation to pay a tax bill related to periods of time prior to the entry of the order for relief in its bankruptcy case “turn on the happenstance of the dating of tax bills and the strategic moves of landlords and tenants” was not appropriate. 144 F.3d at 1128. As a result, it ordered Handy Andy to pay a prorated amount of the taxes at issue, based on the time periods over which they accrued. The Handy Andy decision will be binding on cases arising under similar circumstances in the federal district courts in Illinois. The Southern District Court for the State of New York in Child World, Inc. v. Campbell/Massachusetts Trust (In re Child World, Inc.), 161 B.R. 571 (S.D.N.Y. 1993) (citing additional cases in New York, Ohio, and Pennsylvania), considered the purpose behind the adoption of §365(d)(3) in concluding that prorating real estate taxes was the appropriate approach. It concluded, based on the legislative history behind §365(d)(3) of the Bankruptcy Code, that the purpose was to provide to landlords of bankrupt tenants current payments for current services. This purpose would be thwarted to the detriment of other unsecured creditors if a landlord could receive payment for amounts that related to prepetition periods of time by reason of billing them during the post-petition, pre-rejection or assumption period. As a result, it remanded the case to the bankruptcy court to determine the portion of the taxes due, prorated to cover only the post-petition, pre-rejection period. When the issue was additional real estate taxes due as a result of reassessment bills issued after the tenant filed for bankruptcy, the bankruptcy court in In re R.H. Macy & Co., 152 B.R. 869 (Bankr. S.D.N.Y. 1993), held a bankrupt tenant (Bullock’s, Inc.) was liable under Bankruptcy Code §365(d)(3) for the entire amount of the additional real estate taxes due to its landlord as a result of reassessment bills. Even though the reassessment occurred as a result of an event that had occurred four years earlier (the sale of Bullock’s, Inc., to R.W. Macy & Co., Inc.),

LANDLORD’S DUTIES AND LIABILITIES §7S.84B


and was for tax years prior to the filing by Bullock’s of its petition for relief, the reassessment bills were not issued by the county tax collector until 11 months after Bullock’s petition was filed. Thus, the court held that they became obligations under the lease after the order for relief was entered and were payable in full under Bankruptcy Code §365(d)(3). There have been a plethora of opinions issued after the cases cited above in a number of jurisdictions, some of which have sided with the courts in Koenig, Montgomery Ward, Macy, and Duckwall-Alco Stores, and others of which have sided with the Handy Andy and Child World courts. A number of courts have begun using the terms “billing method” or “performance date rule” or other similar terms to describe the Koenig, Montgomery Ward, Macy, and Duckwall-Alco Stores approaches to determining the amount and “accrual method” or “proration rule” or other similar terms to describe the Handy Andy and Child World approaches. See, e.g., Heathcon Holdings, LLC v. Dunn Industries, LLC (In re Dunn Industries, LLC), 320 B.R. 86, 88 – 89 (Bankr. D.Md. 2005) (accrual method and billing method); El Paso Properties Corp. v. Gonzales (In re Furr’s Supermarkets, Inc.), 283 B.R. 60, 66 – 67 (B.A.P. 10th Cir. 2002) (performance date rule and proration rule). While not all of the cases are cited here, the trend appears to be in the direction of siding with the accrual method, not the billing method. The following are citations to some selected billing method cases: HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794, 800 (7th Cir. 2003) (agreeing with Koenig, supra, in stating “equity as well as the statute favors full payment”); In re Garden Ridge Corp., 321 B.R. 669, 676 – 677 (Bankr. D.Del. 2005) (critical date is date when tenant became obligated to pay monthly rent or tax payments; and when due date for rent called for in lease was prior to filing of petition, entire month’s rent or tax payment was considered prepetition and thus not within amounts due under Bankruptcy Code §365(d)(3), but when tax payments were not required to be made until after filing of bankruptcy petition, they would be considered post-petition obligations); In re DVI, Inc., 308 B.R. 703, 707 (Bankr. D.Del. 2004) (critical date is date when tenant became obligated to pay monthly rent or tax payments; and when due date for rent under lease was prior to filing of petition, entire month’s rent was considered prepetition and thus not within amounts due under Bankruptcy Code §365(d)(3)); Trizechahn 1065 Avenue of the Americas, L.L.C. v. Thomaston Mills, Inc., 273 B.R. 284, 289 (M.D.Ga.), aff’d in part, rev’d in part, 45 Fed.Appx. 886 (11th Cir. 2002) (landlord entitled to full amount of rent for two full months that became due prior to tenant’s rejection of lease based on Koenig, supra); In re Comdisco, Inc., 272 B.R. 671, 675 (Bankr. N.D.Ill. 2002) (on basis that payments for real estate taxes that were due in arrears, but distinguishing Handy Andy, supra, when considering base rent because it was due and payable in advance in holding that obligation to pay rent that came due on first of month could not be prorated between pre-rejection and post-rejection periods). The following are citations to some selected accrual method cases: In re Bachrach Clothing, Inc., 396 B.R. 219 (N.D.Ill. 2008) (as condition to order authorizing assignment and assumption of lease, under Bankruptcy Code §365(b)(1) and Handy Andy, supra, debtor tenant not assignee was obligated to pay real estate taxes that had accrued during time lease was in effect and before date it was assumed and assigned but not billed by taxing authority until after effective date of assignment); In re Winn-Dixie Stores, Inc., 333 B.R. 870 (Bankr. M.D.Fla. 2005) (adopting accrual method of determining when obligation of tenant to pay its share of shopping center insurance, common area maintenance expenses, and real estate taxes arose to deny landlord right

§7S.84C COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


to recover amounts that accrued prepetition but billed post-petition); Dunn Industries, supra, 320 B.R. at 90 (adopting accrual method for real estate taxes paid in advance); In re Phar-Mor, Inc., 290 B.R. 319, 320, 328 (Bankr. N.D. Ohio 2003) (adopting accrual method for real estate taxes assessed and paid in same year); Furr’s Supermarkets, supra, 283 B.R. at 65, 68 (when leases called for quarterly rent payments in arrears and payment for taxes when due directly to taxing authority, adopted proration approach from Handy Andy, supra); In re Trak Auto Corp., 277 B.R. 655, 673 (Bankr. E.D.Va. 2002) (discussing treatment of both rent for month in which leases were rejected when rent was due on first of month under applicable leases and real estate tax obligations), rev’d on other grounds, 367 F.3d 237 (4th Cir. 2004); In re Warehouse Club, Inc., 184 B.R. 316 (N.D.Ill. 1995) (debtor-tenant not obligated to pay real estates coming due during period after filing and before lease was rejected because taxes accrued for periods prior to filing; Bankruptcy Code §365(d)(3), which requires trustee to perform obligations of debtor-tenant under unexpired lease during period prior to assumption or rejection, is intended to provide payment to landlord for providing post-petition services, and payment of real estates accrued prior to filing are sunk costs, not current expense of allowing debtor-tenant to remain in possession). Some of these cases discuss the issue of what monthly base rent is due during the post-petition and pre-rejection or pre-assumption time period. This issue is discussed in §7S.84C below. 2. [7S.84C] Payment of Monthly Base Rent New section: The Sixth Circuit in In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir. 2000), held the tenant was liable under Bankruptcy Code §365(d)(3) for the entire month’s rent because the tenant’s obligation to pay rent for the month in which the lease was rejected arose on the first day of the month. Also, the tenant remained in possession as of that date, and the effective date for its rejection of the lease was on the second day of the month. Similarly, in In re Comdisco, Inc., 272 B.R. 671 (Bankr. N.D.Ill. 2002), the Bankruptcy Court for the Northern District of Illinois held the tenant was liable for the full month’s base rent when the tenant’s trustee in bankruptcy sent a notice on August 1 that the lease would be rejected effective August 11. However, the court also held that, under In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), pass-through expenses, such as taxes and common area maintenance charges, needed to be prorated and charged only for the period from August 1 through August 11. 272 B.R. at 676. In In re UAL Corp., 291 B.R. 121 (Bankr. N.D.Ill. 2003), the Bankruptcy Court for the Northern Illinois District discussed the differences between the Handy Andy decision, which dealt with a payment obligation (for real estate taxes) that became due during what it called “the option phase” (meaning the 60-day period of time allowed under §365(d)(4) for the debtor to assume or reject a lease), and the payment date cases, such as In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001), in which the decision was that if the payment due date falls within the option phase, the entire bill must be paid. In either of such cases, the court noted the trustee for the debtor has no choice but to pay rent that comes due during the option phase, but the question becomes how much the rent payment should be, which the Seventh Circuit in Handy Andy, supra, decided should be determined by prorating the obligation. 291 B.R. at 125.

LANDLORD’S DUTIES AND LIABILITIES §7S.84C


The unpaid rent at issue in UAL was not rent payable on account of real estate taxes, nor was it rent that became due during the option period. Instead, it was rent that became due prior to the bankruptcy filing for the month in which the bankruptcy case was filed, and the rent being sought by the landlords was “stub period rent” — for the period from the date of the filing through the end of the month in which the case was filed. 291 B.R. at 122 – 123. Thus, the bankruptcy court concluded neither the Handy Andy nor Montgomery Ward approaches applied to the stub period rent because Bankruptcy Code §365(d)(3) did not apply to stub period rent. However, as was the case before the adoption of Bankruptcy Code §365(d)(3), the court reminded landlords that they were entitled to seek payment as an administrative expense under Bankruptcy Code §503(b) for the prorated portion of rent due for the “stub period.” 291 B.R. at 127. Other cases addressing what base rent is due for the month in which the lease is rejected by the tenant include In re Ames Department Stores, Inc., 306 B.R. 43, 63, 80 (Bankr. S.D.N.Y. 2004) (disagreeing with Koenig, supra, In re R.H. Macy & Co., 152 B.R. 869 (Bankr. S.D.N.Y. 1993), Comdisco, supra, and HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794 (7th Cir. 2003), decisions in discussing treatment of rent for month in which leases were rejected when rent was due on first of month under applicable leases, but not discussing real estate tax obligations), and In re NETtel Corp., 289 B.R. 486, 496 (Bankr. D.D.C. 2002) (disagreeing with Comdisco, supra, in holding rent obligations for occupancy after date of rejection arises post-rejection because service being provided by landlord for which it sought compensation occurred post-rejection). Subsequent cases in other jurisdictions addressed the allowance and payment of administrative claims under Bankruptcy Code §503(b) made on behalf of a landlord for the use and occupancy of real estate when the lease has expired or been rejected post-petition but the debtor tenant remains in occupancy. For example, in In re Goody’s Family Clothing, Inc., 392 B.R. 604, 614 (Bankr. D.Del. 2008), the Delaware bankruptcy court held that “the mere fact that the Debtors are occupying the Landlord’s premises is sufficient, in and of itself, to establish that payment for that use and occupancy is an actual, necessary expense of preserving [a debtor’s estate] under section 503(b)(1).” Likewise, in In re Sportsman’s Warehouse, Inc., No. 09-10990, 2009 WL 2382625 (Bankr. D.Del. Aug. 3, 2009), the Delaware bankruptcy court again addressed a similar issue, quoting extensively from Zagata Fabricators, Inc. v. Superior Air Products, 893 F.2d 624, 627 (3d Cir. 1990). In Zagata, the Third Circuit stated that when a debtor owns no real estate, its only choice is to become a tenant, which in turn means it will have an obligation to pay something for its use and occupancy of the premises, but that something is “only a reasonable value for the use and occupancy of the landlord’s property, which may or may not equal the amount agreed upon in the terms of the lease.” 893 F.2d at 627. Further refining the Zagata holding, the court in Sportsman’s Warehouse went on to caution that the debtor’s “use and occupancy of the premises may provide little or no benefit to the estate. At the very least, the contractual rent, which may include the payment of real estate taxes as additional rent, may be reduced to the market rate to reflect the actual value or benefit the debtor is receiving.” 2009 WL 2382625 at *5. Thus, while the landlord might argue the contract rate of rent is the amount of the benefit to the tenant-debtor’s estate, the court did not feel bound to honor the lease terms; rather, it concluded it would have to analyze the evidence provided by the debtor on a case-by-case basis to determine whether the actual benefit

§7S.84D COMMERCIAL LANDLORD-TENANT PRACTICE — SUPPLEMENT


to the estate is less than the rent called for in the lease. 2009 WL 2382625 at *6. The court also stated this conclusion extended to claims by various Sportsman’s landlords for real estate taxes that accrued between the date of the filing of the bankruptcy petition and the date the debtor-tenant rejected the leases, which the court held would be considered along with the amount the debtor-tenant owed as an actual and necessary expense. 2009 WL 2382625 at *7. 3. [7S.84D] Payment of Percentage Rent New section: When a lease also called for payments of percentage rent in addition to the base rent, the Bankruptcy Court for the Northern District of Illinois adopted a third method, called the “breakpoint method,” in In re Kmart Corp., 286 B.R. 345 (Bankr. N.D.Ill. 2002). Under this approach, “developed to address the peculiarities of percentage rent . . . percentage rent is not viewed as accruing over the lease year. Whether the percentage rent is owing at all is contingent on the debtor reaching a certain level of sales. Once that level is met, the contingency is satisfied and the obligation comes into being, or in other words, arises.” 286 B.R. at 349 – 350. Thus, if the “breakpoint” (i.e., the specified sales level) is not reached until after the bankruptcy filing, percentage rent is to be calculated based only on sales made post-petition, and the entire amount of percentage rent would be considered a post-petition obligation of the tenant. If the breakpoint is reached prior to filing of the bankruptcy petition, then the post-petition obligation would be calculated only on those sales occurring after the filing of the petition. 286 B.R. at 350, citing John C. Murray, Percentage Rent Provisions in Shopping Center Leases: A Changing World?, 35 Real Prop.Prob. & Tr.J. 731, 784 (2001). The Kmart court distinguished the percentage rent situation from the decision in In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), which involved the payment of real estate taxes, on the basis that payment of percentage rent was not inevitable, as was the obligation to pay taxes. 286 B.R. at 351. 4. [7S.84E] Comment New section: Based on the cases identified in §§7S.84B – 7S.84D above and others around the country, only one thing is clear. The amount of post-petition rent or real estate taxes or other items of rent a bankrupt tenant is required to pay under Bankruptcy Code §365(d)(3) will depend on both the jurisdiction in which the tenant files for bankruptcy and the terms of the lease itself. For example, even under the decision of the Third Circuit in In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001), had the lease obligated Montgomery Ward to make monthly estimated payments for the taxes due under the terms of its lease as they accrued, the Third Circuit likely would have sided with Montgomery Ward and found estimated tax payment amounts due but not paid prior to filing a petition for bankruptcy were prepetition obligations, and estimated tax payment amounts due post-petition would continue to be payable under Bankruptcy Code §365(d)(3) until the tenant elected to reject the lease (or, as in Montgomery Ward’s case, the lease expired). See also Gwinnett Prado, L.P. v. Rhodes, Inc. (In re Rhodes, Inc.), 321 B.R. 80 (Bankr. N.D.Ga. 2005) (holding Bankruptcy Code §365(d)(3) ambiguous and requiring landlords and

LANDLORD’S DUTIES AND LIABILITIES §7S.84E


tenant to file supplemental briefs on subject of when, as matter of contract interpretation under terms of each lease, tenant became obligated to pay rent for period of November 4 – 30, 2004, on and after filing of tenant’s bankruptcy petition). Under §1408 of the portions of the United States Code now addressing the proper venue for bankruptcy proceedings, 28 U.S.C. §1408, many entities seeking relief under the Bankruptcy Code have some choice as to where they must file their petitions. An entity’s choices include a court in the jurisdiction in which it is formed, the jurisdiction where its principal place of business is located, or the jurisdiction where its principal assets in the United States have been located during the 180 days prior to its filing for protection under the Bankruptcy Code. 28 U.S.C. §1408(1). In addition, if one of its affiliates, or a partnership or general partnership in which it is a partner, has a bankruptcy case pending in a jurisdiction, then it may chose to file in that jurisdiction. 28 U.S.C. §1408(2). Many retail and office tenants are entities formed under Delaware law, but have principal offices or assets located in many different jurisdictions. Under these venue provisions of the United States Code, such tenants may have a number of jurisdictions to choose from in deciding where to file. Many large tenants are able to negotiate real estate tax payment provisions similar to that in Montgomery Ward’s lease, unlike smaller tenants that are often required to make real estate tax deposits in advance with their monthly rent payments. In such cases, the bankrupt tenant and its other unsecured creditors may find under Bankruptcy Code §365(d)(3) that the tenant’s landlord is entitled to the payment of real estate taxes accruing during time periods other than the post-petition, pre-rejection period if it files in the Third Circuit, the Sixth Circuit, or the Ninth Circuit, but entitled only to a prorated portion of those taxes in the Seventh Circuit or the Second Circuit. In Montgomery Ward, the amount of the additional taxes taken out of the hands of the unsecured creditors (which were all paid approximately 30 cents on each dollar of claim) and required to be paid to the landlord at $1 for each $1 of the claim was over $970,000. Any landlord with a tenant in shaky financial condition would be well-advised to seek counsel from its attorneys before billing that tenant for taxes or other amounts due under the lease or, at a minimum, to review the tenant’s lease to determine whether it is possible to engage in any preventive or preemptive planning. Once the tenant files for bankruptcy, the landlord must also engage in some quick planning in order to determine what amounts might be due under the tenant’s lease during the post-petition, pre-rejection period of time. Even in those jurisdictions where the courts side with the Sixth Circuit’s approach, the time period for payments under Bankruptcy Code §365(d)(3) is only 60 days from the order for relief unless the court extends the time period for acceptance or rejection of the lease on a motion made during the 60-day time period. Otherwise the lease is deemed rejected at the end of the 60-day period and, at least according to the court in Inland’s Monthly Income Fund, L.P. v. Duckwall-Alco Stores, Inc. (In re Duckwall-Alco Stores, Inc.), 150 B.R. 965 (D.Kan. 1993), all obligations owed to the landlord under Bankruptcy Code §365(d)(3) are fixed as of that date.



XII. COMMERCIAL REAL ESTATE BROKER LIEN ACT A. [7S.86] Statutory Provisions The third and fourth paragraphs are replaced: Once the broker records its notice of lien, it must mail a copy to the owner of record of the commercial real estate by registered or certified mail, return receipt requested, or personally serve the owner of record or its agent within ten days of recording its notice of lien, unless it is recorded within ten days prior to closing. 770 ILCS 15/10(f). Mailing is effective when deposited in the U.S. mail and if sent to the address of the commercial real estate that is the subject of the notice of lien. Failure to mail a copy of the notice as required under the Commercial Real Estate Broker Lien Act makes the lien unenforceable. Id. The lien notice must contain specific information stated in the Act, including the amount claimed and the real estate license number of the broker. 770 ILCS 15/10(h). A person claiming such a lien must begin proceedings by filing a complaint within two years after recording the lien. 770 ILCS 15/10(g). The Commercial Real Estate Broker Lien Act also extends to “persons” claiming a lien based on an option to purchase. Id. A person claiming a lien must begin proceedings to foreclose the lien claim by filing a complaint within six months after the transfer or conveyance of the commercial real estate under the exercised option. Id. The owner of the real estate against which the lien is claimed, or its authorized agent, may accelerate the time period within which the suit to enforce the lien claim must be commenced by serving a demand on the broker to commence the suit. If this notice is served, the broker claiming the lien must commence its suit within 30 days. 770 ILCS 15/10(j). The Commercial Real Estate Broker Lien Act outlines the contents of lien notices and complaints to foreclose liens under the Act. See id.; 770 ILCS 15/10(h). Costs of proceedings, including reasonable attorneys’ fees, costs, and prejudgment interest, are awarded to the prevailing party. 770 ILCS 15/10(l). The court is also allowed to apportion the costs, fees, and prejudgment interest between multiple responsible parties. Id. Once the claim for lien is paid or if the broker has failed to file suit to enforce its lien within the statutory time period, the broker must release the lien within five days after written demand of the owner. 770 ILCS 15/10(k). A broker’s lien is subordinate to all prior recorded liens and mortgages, including a valid mechanics lien claim even if recorded after the broker’s lien if it relates back to a date prior to the date the broker’s lien was recorded and prior recorded liens securing revolving credit and future advances of construction loans. 770 ILCS 15/15. To assist in closing transactions when a lien claim has been filed, the Act provides a mechanism for establishing an escrow account from the proceeds in an amount sufficient to release the claim for lien. No party can refuse to close when an escrow is to be provided, and the funds are to be held until the parties agree on the disposition of the funds or a determination is made by a court of law. Once the funds are escrowed, the broker claiming the lien must release its lien claim. However, if the proceeds from the transaction are not sufficient to release all liens



against the commercial real estate, including the broker’s lien, or if there are alternative procedures that would allow the closing to occur that the transferee finds acceptable, the parties are not required to follow the escrow procedure. 770 ILCS 15/20. This exception was critical to the result in West Suburban Bank v. Attorneys’ Title Insurance Fund, Inc., 326 Ill.App.3d 502, 761 N.E.2d 346, 260 Ill.Dec. 502 (2d Dist. 2001), which is discussed in §7S.88 below. B. [7.87] Caselaw Interpretations of Commercial Real Estate Broker Lien Act This section is revised: Three cases have interpreted the Commercial Real Estate Broker Lien Act. See Brian Properties, Inc. v. Burley, 278 Ill.App.3d 272, 662 N.E.2d 522, 214 Ill.Dec. 956 (1st Dist. 1996); West Suburban Bank v. Attorneys’ Title Insurance Fund, Inc., 326 Ill.App.3d 502, 761 N.E.2d 346, 260 Ill.Dec. 502 (2d Dist. 2001); Grubb & Ellis Co. v. First Colonial Trust Co., No. 94 C 3706, 1995 U.S.Dist. LEXIS 13256 (N.D.Ill. Sept. 6, 1995). These cases are discussed in §§7.88 and 7.89 below. 1. [7S.88] Different Agreements and Interplay with Real Estate License Act Add at the end of the section: West Suburban Bank v. Attorneys’ Title Insurance Fund, Inc., 326 Ill.App.3d 502, 761 N.E.2d 346, 260 Ill.Dec. 602 (2d Dist. 2001), provides some instructions on how the statutory escrow provisions and requirement on the part of the broker to release its lien works in conjunction with the lien priority provisions. In West Suburban Bank, the owner of a commercial property engaged Coldwell Banker as its broker to sell the property, which had two mortgage liens for debts owed to West Suburban Bank. Coldwell Banker found a buyer whose offered price, after accounting for expenses of sale, real estate taxes, and other selling costs, was not sufficient to fully pay off the bank’s two mortgages and the broker’s commission. 761 N.E.2d at 347. The bank’s attorneys sent the broker a letter informing Coldwell Banker that if it claimed a lien, the bank considered it subordinate to the bank’s mortgage, but an amount equivalent to the lien claim would be deposited in escrow and Coldwell Banker would be required to provide a release at closing. Coldwell Banker recorded its lien claim prior to closing for $35,000, and at closing the bank ordered $52,000 be deposited into an escrow with Attorneys’ Title Insurance Fund, Inc., to satisfy the lien claim under an agreement in which the seller and the buyer agreed to satisfy or remove the lien claim prior to March 8, 1999 (the day of the closing). The closing occurred, and the bank received a payoff that left a deficiency of over $201,000 owed to the bank. 761 N.E.2d at 348. Because the bank was providing two new mortgage loans to the buyer, it instructed the title company to insure the liens of the new mortgages that secured those loans were first and second liens, and four days after the closings provided releases for its prior mortgage liens, which were recorded several weeks later. Coldwell Banker did not release its lien. In June, the bank filed a complaint for declaratory relief against Coldwell Banker and Attorneys’ Title directing



Attorneys’ Title to pay the escrowed funds to the bank and Coldwell Banker to release its lien. The trial court granted the bank summary judgment, stating the bank was entitled to all of the escrowed funds, and extinguished Coldwell Banker’s lien. It denied attorneys’ fees to the bank and to Attorneys’ Title. 761 N.E.2d at 348 – 349. All three parties appealed. The Second District court held the escrow provisions of §20 of the Commercial Real Estate Broker Lien Act did not require the parties to establish the escrow in this situation because the proceeds from the transaction would not be sufficient to pay off all items against the property including the broker’s commission. 761 N.E.2d at 350 – 351. Thus, Coldwell Banker was expressly excluded from compliance with §20. Moreover, when West Suburban Bank released its liens, it extinguished any priority and interest it had in the property and was estopped from claiming any interest in the escrowed funds. The bank had released its prior mortgage liens in order to obtain the title insurance it demanded for its new mortgage liens, which the court found Attorneys’ Title would not have agreed to provided without the escrowed funds and prior mortgage releases, particularly if it had known the bank would later claim a right to the funds for liens it had already released. 761 N.E.2d at 351. This decision meant the bank was not the prevailing party and thus was not entitled to its attorneys’ fees, but the court also stated that because it had not yet decided the rights of the other parties to the funds in the escrow, it could not decide whether Attorneys’ Title was entitled to its attorneys’ fees, so it remanded the case for a final decision on the remaining issues. By the time the appeal was to be heard, Coldwell Banker must have realized its two-year time period to file a complaint to foreclose its lien claim was about to expire because it asked the court in its appellate brief to stay the two-year statute of limitations. The court declined to act on the issue because it was raised for the first time on appeal without any authority, which meant by the time the opinion was issued (on December 19, 2001), the two-year statute of limitations had passed. 761 N.E.2d at 351 – 352. The facts in West Suburban Bank are unusual because the mortgage lien holder with priority over the broker’s lien claimant agreed to allow the closing to occur and released its lien without a release from the broker. However, it does illustrate how closely the statute needs to be read and followed by the parties involved whenever a broker’s lien claim has been filed. XIII. VISUAL ARTISTS RIGHTS ACT OF 1990 A. [7S.90] Statutory Obligations and Rights Add after the first paragraph: VARA also does not protect site-specific art according to the First Circuit in Phillips v. Pembroke Real Estate, Inc., 459 F.3d 128, 129 (1st Cir. 2006) (reversing district court’s determination that VARA’s “public presentation” exception in 17 U.S.C. §106A(c)(2) allowed manager of public sculpture park to move artist’s sculptures located in public park to different location, thereby necessarily destroying site-specific work of art, which allowed its removal from public park). The Phillips opinion was relied on by the court in Kelley v. Chicago Park District,



No. 04 C 07715, 2008 WL 4449886 (N.D.Ill. Sept. 29, 2008), in holding that a wildflower planting area in Grant Park was not protected by VARA. The Kelley opinion also contains a detailed analysis of the two tests an object must meet to be protected by VARA — it must meet the statutory definition of “a work of visual art,” and it must be subject to copyright protection. According to the court, the wildflower planting met the test of a visual work of art as either a painting or a sculpture, but it failed the test of being subject to copyright protection. Even if it had met both tests, the court held it was site-specific art and thus not eligible for protection under VARA under the reasoning in Phillips. 2008 WL 4449886 at **3 – 7.

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