Know and Heed the Terms of Your Commercial Lease!

In its recently published decision in the case of Majestic Golf, LLC v Lake Walden Country Club, Inc., ___ Mich App ___; ___ NW2d ___ (Court of Appeals Docket No. 300140, released July 10, 2012), the Michigan Court of Appeals has given fair warning that a clear and unambiguous lease provision allowing forfeiture of the leasehold and improvements for a tenant’s default, other than non-payment of rent, will be enforced as written without regard to the materiality of the breach.

In this case, Fraser Trebilcock’s client, Majestic Golf, LLC, was the lessor of property in Livingston County which had been used for the construction and operation of a golf course by the tenant/lessee pursuant to a commercial lease entered into in 1992 between the lessee and Majestic’s parent entity and predecessor in interest, Waldenwoods Properties, LLC.  Under the terms of the lease, the tenant was required to grant approval of road and utility easements across the golf course property when requested by the lessor to facilitate the development of its adjoining property, subject only to agreement as to the location of a requested easement.  In October of 2006, Waldenwoods requested approval of an easement needed for joining two segments of its contemplated residential development adjacent to the leased golf course property, and it renewed its request for that approval on several subsequent occasions in 2007 and 2008.  The tenant did not grant the requested approval, although no objection was ever made to the location of the proposed easement.

In October of 2008, Majestic served a written notice which referenced the tenant’s failure to comply with the prior requests for approval of the proposed easement and demanded compliance within thirty days.  The tenant did not comply with or respond to this request within the thirty-day period for compliance, and its failure to do so constituted a default under the clearly-stated terms of the lease agreement.  The lease agreement also provided, in clear and unambiguous terms, that the lessor was authorized to terminate the lease for an established default, and that in that event, the tenant would forfeit its leasehold interest and all improvements to the leased premises.   In accordance with these provisions of the lease, Majestic sent notice of termination, demanding that its possession of the golf course property be restored.  The tenant disputed the validity of the termination, refused the lessor’s request to vacate the property, and instead, declared its intention to exercise an option to purchase the leased golf course property.

Majestic sued the tenant in the Livingston County Circuit Court, requesting specific enforcement of the lease terms providing for forfeiture of the leasehold and improvements, restoration of Majestic’s possession of the leased golf course property, and a declaration that the tenant’s attempt to exercise the option to purchase had been invalid because the option had expired upon the proper termination of the lease.  The circuit court agreed that the tenant had committed a default by virtue of its failure to grant the requested approval, but concluded that this had not been a “material” default sufficient to warrant termination of the lease.  Accordingly, the circuit court denied Majestic’s requests for specific enforcement and restoration of possession, although the court agreed that the option to purchase had not been validly exercised because the tenant had been in default when it attempted to exercise the option.

In its decision on appeal, the Michigan Court of Appeals upheld the circuit court’s finding that the tenant had defaulted in the performance of its obligations under the lease, but reversed the lower court’s holding that the breach was not sufficiently “material” to warrant the requested forfeiture of the lease and improvements.  As the Court noted in its opinion, this case presented a question of first impression as to whether enforcement of a clear and unambiguous forfeiture provision could be denied based upon an equitable weighing of the “materiality” of the breach involved. This question had been specifically addressed only once before, in an unpublished opinion of the Court of Appeals which was not binding as authority for disposition of other cases by virtue of its unpublished status an opinion which the circuit court had relied upon as support for its holding that the materiality of the breach must be considered and weighed against the relief sought.

The Court of Appeals rejected the holding of its prior unpublished opinion and similar holdings expressed in decisions from other states.  It held, consistent with recent authorities governing enforcement of contractual agreements, that a clear and unambiguous forfeiture provision in a lease should be enforced as written, without regard to the materiality of the breach in question, in the absence of a suitably supported finding that the agreement of the parties was unconscionable or contrary to public policy.  The Court found that the forfeiture provision at issue did not violate public policy because the Legislature had restricted the use of such provisions with respect to land contracts but had not chosen to do so in other contexts, and because similar forfeiture provisions had been commonly utilized in Michigan for more than a century.  And although enforcement of the forfeiture provision might be considered harsh by some, the Court found that this could not be considered procedurally or substantively unconscionable under the circumstances of this case, where there was no disparity of bargaining power and the tenant had been afforded an opportunity to avoid forfeiture by curing the breach of its obligations within thirty days after the notice of noncompliance.  Having concluded that the lease had been properly terminated and that the option to purchase had lapsed upon the  termination,  the Court of Appeals also agreed that the attempted exercise of the option had been invalid.

The Court’s holding in Majestic Golf  teaches two important lessons for lawyers and those engaged in commerce.  First, those who draft or approve leases or other contractual agreements must pay close attention to the default provisions and remedies provided therein, and second, the parties to these agreements must take special care to avoid a default if the governing agreement includes a forfeiture provision.   Questions concerning the holdings of the Court of Appeals in this case may be directed to Fraser Trebilcock’s appellate specialist, Graham K. Crabtree.


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