Our firm was recently retained to provide an amicus brief to an Arbitration Board, for purposes of helping the arbitrator to resolve a commercial landlord tenant dispute, in which the Tenant had stopped paying rent, ostensibly due to habitability defects, affecting both the leased premises and the common area. The Landlord responded by declaring a default in the commercial lease and promptly sought eviction based on that default. The questions before the arbitrator were the following:
- Who bears responsibility for curing habitability defects to the roof and the common area?
- Does the Tenant’s failure to pay rent constitute a Default that would result in termination of the tenancy?
- Is the Tenant entitled to a set-off or abatement of rent due to the alleged habitability issues?
- What effect, if any, should the Landlord’s failure to obtain a Certificate of Occupancy, have on the outcome of this matter?
The premises was rented as an unfinished space, and under the lease, the Tenant was responsible for the construction and fit-out of the interior of the premises. The parties further agreed that the Tenant would receive a rent credit for the first eight years of the lease. Under the terms of the lease, the Tenant accepted the property in “as-is” condition and the Tenant agreed to be responsible for any repairs necessary in the premises.
The dispute between the parties began when the Tenant encountered roof leaks above the premises. It should be noted that the Tenant had no knowledge of the roof leaks when he signed the lease and the issue with the roof was not one that could have been discovered during the Tenant’s initial inspection of the premises. Upon discovering the defect, the Tenant made multiple efforts to contact the Landlord to ask the Landlord to pay for the repairs. The Landlord did not respond to the Tenant’s requests, and the Tenant eventually paid for a temporary repair to the roof. However, the Tenant also began to withhold rent. The Landlord argued that that the failure to pay rent, for any reason, constitutes a default under the terms of the written lease. Under the terms of the lease, Defaults are not curable and shall result in eviction of the Tenant.
In addition to the problems with the roof, there were also problems with the condition of the parking lot, which prevented the Landlord from obtaining a Certificate of Occupancy. At one point, the town issued an Order to Vacate the entire shopping center due to the poor condition of the parking lot. As of the time of the proceeding, the Landlord had not complied with that Order, nor had the Landlord repaired the condition to the parking lot.
The Landlord argued that (a) the Tenant has no right to make any counterclaims against the Landlord, and (b) that the premises was rented in “as-is” condition, and (c) that the condition in the roof was previously disclosed to the Tenant and that the rent credits received by the Tenant have already taken that fact into consideration.
- Habitability Defenses and Methods Available to Tenant
The Tenant argued that he only withheld rent in response to the Landlord’s failure to make repairs. The matters of Marini v. Ireland, 56 N.J. 130 (1970) and Berzito v. Gambino, 63 N.J. 460 (1973) (infra), each set forth its own procedure under which a Tenant who is encountering a habitability problem may address the problem by withholding rent. However, the Landlord argued that the Tenant accepted the premises in “as-is” condition and further argues that, under the terms of the written lease, the Tenant was responsible for all repairs. Additionally, the Landlord argued that the terms of the lease do not allow the Tenant to withhold rent for habitability defects. The Landlord further argued that, under the lease, the Tenant accepted that the Landlord’s construction may be incomplete and that the Tenant acknowledged that the Landlord shall complete its portion of the construction as soon as practicable. Finally, the Landlord argued that he had not breached the Covenant of Habitability.
We noted that neither the condition concerning the roof nor the condition concerning the parking lot were the types of conditions that could have been repaired by the Tenant. In the case of the roof, which covered the entire strip mall, no single Tenant could have effectively repaired the condition without having to perform work on portions of the roof above neighboring Tenants. Additionally, the condition concerning the roof was arguably a latent defect, of which the Landlord was aware, but the Tenant was probably not. The condition of the parking lot was likely the more minor of the two issues, notwithstanding the fact that its condition had prevented the Landlord from obtaining a Certificate of Occupancy.
The Landlord’s position was that he informed the Tenant of the leaking roof prior to the Tenant accepting possession, and that the rent credit provided to the Tenant took that fact into consideration. The Tenant denied having received any rent credit and further denies having ever received any information regarding the roof prior to taking possession. We noted that the Landlord did include a provision with regard to repair of conditions as soon as practicable; however, it is illogical to believe that the Landlord contemplated the roof as part of those conditions, since the Landlord made no effort to repair the roof during the several months that precipitated the withholding of rent by the Tenant. There was also a great deal of uncertainty as to which items the “as-is” provision is applicable, and to which items the Landlord’s duty to repair was applicable. After all, if the Tenant truly accepted the property “as-is,” why would the Landlord have the duty to make any repairs. We concluded that the repairs to the roof and any other structural components were more likely the responsibility of the Landlord.
In light of the totality of the circumstances, including the Tenant’s multiple attempts to contact the Landlord to perform the repairs, the Landlord’s position did not seem credible. Had the Tenant been previously informed of the problem with the roof, the Landlord would have returned his calls with a response to that effect. Instead, the Landlord did not offer any response. Based on the foregoing circumstances, we concluded that it was more likely than not that the Tenant had never received any advance communication or offers from the Landlord prior to taking possession that there was any problem with the roof. Therefore, we did not believe that the Tenant was ever given the responsibility of repairing the roof.
In the matter of Reste Realty Corporation v. Cooper, 53 N.J. 444 (1969), the Court said “[i]t has come to be recognized that ordinarily the lessee does not have as much knowledge of the condition of the premises as the lessor. Building code requirements and violations are known or made known to the lessor, not the lessee. He is in a better position to know of latent defects, structural and otherwise, in a building which might go unnoticed by a lessee who rarely has sufficient knowledge or expertise to see or to discover them. A prospective lessee, such as a small businessman, cannot be expected to know if the plumbing or wiring systems are adequate or conform to local codes. Nor should he be expected to hire experts to advise him. Ordinarily all this information should be considered readily available to the lessor who in turn can inform the prospective lessee. These factors have produced persuasive arguments for reevaluation of the caveat emptor doctrine and, for imposition of an implied warranty that the premises are suitable for the leased purposes and conform to local codes and zoning laws…. Our judgment present day demands fair treatment for Tenants with respect to latent defects remediable by the Landlord … it is immaterial whether the right is expressed in terms of a breach of covenant of quiet enjoyment, or material failure of consideration, or material breach of an implied warranty against latent defects.”
Accepting that repairs to the roof and the parking lot are the responsibility of the Landlord in this case, we then had to determine if the Tenant was justified in withholding rents based on the defects. Prior matters concerning the breach of the warranty of habitability have established that in the event of a habitability problem, the Tenant may:
- declare a constructive eviction and vacate the premises. See Reste Realty, Id.;
- repair and deduct the cost of the repair from rents. See Marini v. Ireland, 56 N.J. 130 (1970);
- withhold rent and seek a rent abatement when the Landlord eventually brings an action against the Tenant for non-payment of rent. See Berzito v. Gambino, 63 N.J. 460 (1973);
- file a civil action against the Landlord. See Berzito, Id.; or
- file an action for the appointment of a receiver or administrator to collect rents and make repairs, see N.J.S.A. 2A:42-82. See also Drew v. Pullen, 172 N.J. Super 570 (App. Div. 1980).
In light of the substantial investment made by the Tenant, the first option of declaring a constructive eviction and moving out of the premises would not have been practical in this matter. The second option, which requires the Tenant to make the repairs himself and deduct those costs from the rent would not have been particularly appropriate either. Although the Tenant did perform some initial repairs to the roof to minimize the leaking, it was not feasible for the Tenant to properly fix the roof above the premises without making repairs to the entire roof, covering the whole strip mall. The third option, which involves withholding rent and requesting an abatement of rent, is the preferred method of addressing habitability issues in most cases before the New Jersey Landlord Tenant Court. In prior decisions, the Court has ruled that the right of the Tenant to withhold rent applies not only to the physical condition of the leased premises, but also to off-site conditions, and even to the conditions of common elements such as the roof. See Williams v. Gorman, 214 N.J. Super 517 (App. Div. 1986).
The Landlord argued that the option of withholding rent was inappropriate in this matter due to the presence of a lease provision, specifically prohibiting that action. Accordingly, only the last two options, both of which involve continuing to pay the rent, and then suing the Landlord, would have been truly appropriate in this matter, since they are the only options that do not require the Tenant to withhold any rent. However, since the Tenant did withhold rent, we then had to determine the consequence of that action. In our next blog, we will discuss our recommendations to the arbitrator regarding this decision to withhold rent.