Cruz v. Byrd: Breach of Commercial Lease Agreement

On January 23, 2020, the Tennessee Court of Appeals released its ruling in the Cruz v. Byrd case. The case revolves around a breach of a commercial lease agreement. Mr. Byrd, the tenant, entered a one-year lease agreement for commercial property at 121-A Honest Street in Chattanooga. Mr. Byrd intended to use the property as a nightclub and performance hall, and this intended use was specifically stated in the lease agreement. The lease also stated that Mr. Byrd would comply with city and county licensing laws and accept the property “as is.”

As you may imagine, Mr. Byrd had visions of beer sales to go along with his nightclub and applied for a beer license. Because the property was located next to “an adult entertainment club,” a city ordinance would not allow Mr. Byrd to receive a beer license. The lease had a provision that stated Mr. Byrd had the right to terminate the lease with thirty (30) days written notice if the intended use of the property was prohibited by any law or ordinance.

Consequently, he never opened his nightclub. He also never paid any rent, to the disappointment of Mr. Cruz, the landlord. Oddly, Mr. Byrd never exercised his right to terminate the lease agreement.

Mr. Cruz filed a detainer action against Mr. Byrd for possession, back rent and damages to the property. At the General Sessions level, the court awarded Mr. Cruz possession, but in a separate hearing on damages, the court denied Mr. Cruz any unpaid rent and held that Mr. Cruz could offset any damages to the property caused by Mr. Byrd with the security deposit he held, which was $15,000.00.

The landlord appealed to the Circuit Court of Hamilton County, and a trial was held on October 31, 2018. The Circuit Court awarded Mr. Cruz a judgment for $113,692 for unpaid rent, damage to the roof, a water bill, city and county taxes, and attorney fees. The Circuit Court found that the Defendant was well aware of the condition of the property and specifically agreed to rent the property “as is.” He also agreed to comply with all licensing laws. In its ruling, the court held

Defendant contends there is no obligation for rent because the plaintiff materially breached the lease agreement because there was in existence a City ordinance that prevented the defendant from getting a beer license. The Court finds this interpretation of the contract would require a finding for the premises to be used as a nightclub and performance hall, alcohol would be served.

Further, the lease provides a remedy for the prohibition by law of a designated use of the premises. That remedy is the right of the tenant to terminate the lease by giving 30 days notice. This remedy was never invoked…The Court does not find this clause can be read into the contract. Accordingly, the Court finds this is an enforceable contract rent is owed by defendant to plaintiff for one year.

Mr. Byrd appealed the case to the Court of Appeals, but didn’t get the response he had hoped. The Court of Appeals held “the obligations under the lease, including the obligation to pay rent, were not conditioned on whether or not Defendant obtained the beer license; moreover, as noted by the trial court, there was no provision in the lease that alcohol necessarily would be served.”

The Court of Appeals also disagreed with Mr. Byrd’s argument that his performance of the lease was impossible or otherwise excused because he did not receive a beer license. The lease said that Mr. Byrd would “comply with all city and county licensing laws.” Furthermore, Mr. Byrd testified that he had operated the building as a teen club previously, without selling alcohol.

Finally, Mr. Byrd never availed himself to the opportunity to terminate the lease with 30 days’ notice, but rather maintained possession of the property throughout the one-year term. The Court of Appeals affirmed the trial court’s ruling in all respects, including the award of over $113,000.

The moral of the story is know your business can obtain any and all necessary licenses at a particular location BEFORE you sign the lease… and don’t open a night club next to a strip joint in Chattanooga.