Medico-Dental Building Company of Los Angeles v. Horton and Converse

Brief Fact Summary.

Defendant managed a drug store in a building owned by Plaintiff. In the lease agreement between Plaintiff and Defendant, there was a restrictive covenant, which forbids Plaintiff from leasing any other portion of the building to a competing drug store. Thereafter, Plaintiff leased a portion of the building to a doctor. In the doctor’s office, there was a pharmacy to provide drugs to the doctors patients. When Defendant was notified, he confronted Plaintiff about the problem, but plaintiff was unable to fix it. Defendant stopped paying rent. Plaintiff brought suit against Defendant seeking to recover the rent. The trial court held for Defendant, and Plaintiff appealed. 

Synopsis of Rule of Law.

When a landlord’s breach of a covenant will destroy the purpose of the lease, a tenant’s obligation to pay rent is dependent on the landlord’s compliance with a restrictive covenant in the lease.

Facts.

Horton and Converse, Defendants, managed a drugstore in a building that Medico-Dental Building Company, Plaintiff, owned. Defendant’s business was reliant on on support by the building’s tenants, such as medical practitioners. The lease between Defendants contained a restrictive covenant that prohibited Plaintiff from leasing any portion of the building to another drug selling entity. The restrictive covenant and Defendants’ responsibility to pay rent were attached in a rider, which was included in the lease. The lease established the terms and conditions and stated that a breach of such conditions may cause termination of the lease. Plaintiff leased part of the building to Dr. Boonshaft. In Dr. Boonshaft’s office, there was a pharmacy that would sell drugs to his patients. When Defendant became aware of the competing pharmacy in the building, Defendant demanded that Plaintiff forbid Dr. Boonshaft’s pharmacy from selling drugs. Thereafter, Plaintiff attempted to negotiate with Dr. Boonshaft, but Plaintiff was unsuccessful. When Plaintiff told Defendant of Dr. Booshaft’s refusal, Defendant rescinded its lease and stopped paying rent. Plaintiff sued Defendant to recover the rent. The trial court found that Defendant’s condition, protecting it from competition, was a material condition of the lease. Further, the trial court held that Plaintiff materially breached the lease when it leased a portion of the building to a tenant that managed a competing pharmacy and did not immediately try to forbid the competing pharmacy’s management. In the appellate court, Plaintiff alleged that Defendant’s obligation to pay rent was independent of Plaintiff’s obligation to comply with the restrictive covenant because the main purpose of Plaintiff’s lease with Dr. Boonshaft was not the management of a pharmacy. Thus, in the event that there was a breach by Plaintiff, it was not substantial.

Issue.

Whether a tenant’s obligation to pay rent is dependent on the landlord’s compliance with a restrictive covenant in the lease when a landlord’s breach of a covenant will destroy the purpose of the lease.

Held.

Yes, a tenant’s obligation to pay rent is dependent on the landlord’s compliance with a restrictive covenant in the lease when a landlord’s breach of a covenant will destroy the purpose of the lease.

Discussion.

When a landlord’s breach of a covenant will destroy the purpose of the lease, a tenant’s obligation to pay rent is dependent on the landlord’s compliance with a restrictive covenant in the lease. A lease encompasses both a contract and a conveyance of land. Further, contracts must be understood in light of the parties’ intent. Here, the lease provisions clearly states that the restrictive covenant and obligation to pay rent are interdependent of each other, as this restrictive covenant and the obligation to pay rent are included in a rider, which is distinct from the rest of the lease. Additionally, language used in the lease illustrates the conditional aspect of the lease terms. Likewise, covenants that impact the entire consideration of a contract are deemed to be mutual and dependent. In this case, Defendants’ exclusive right to manage a drugstore in the building is deemed to be a dependent covenant, as Defendants’ business was relied on customers within the building. Plaintiff breached this restrictive covenant when Plaintiff leased the portion of the building to the competing pharmacy, did not take immediate action to forbid the pharmacy’s operations, and informed Defendants that Plaintiff would not be able to reach a resolution with Dr. Boonshaft. Defendants did not immediately vacate the building when they learning of the breach. Instead, Defendants acted reasonably and gave Plaintiff time to fix the problem. Further, Plaintiff’s breach was material because Defendant’s loss of the exclusive right to operate the drugstore destroyed the entire purpose of the lease. Therefore, trial court’s holding is affirmed.