Material vs. Immaterial Breach of a Commercial Lease

Breach of Contract, Generally

When two parties are under contract to perform, any sort of deviation from the agreed upon terms is considered a breach. See Graham v. Asbury, 112 Ariz. 184, 185, 540 P.2d 656, 657 (1975) (“To bring an action for the breach of the contract, the plaintiff has the burden of proving the existence of a contract, its breach and the resulting damage.”) How great the breach is will determine whether the non-breaching party can recover damages or another form of relief.

An immaterial breach is a slight variance where the breaching party has still substantially performed. On the other end of the breach spectrum, a party has materially breached a contract when they have not substantially performed their specified duties. See Mining Investment Group, LLC v. Roberts, 217 Ariz. 635, 117 P.3d 1207 (App. 2008).

Application of Breach to a Commercial Lease

The Arizona Supreme Court, in Foundation Development Corp. v. Loehmann’s Inc., 163 Ariz. 438, 788 P.2d 1189 (1990), held that a material breach in a commercial lease can result in forfeiture of the property. Whereas when a party substantially performs, but still immaterially breaches the contract, a commercial lease cannot be terminated, but the landlord can sue for damages. Id.

Determining Materiality

The court in Loehmann’s applied a multi-factor test to determine whether the breach is material, or immaterial:

• the extent to which the injured party will be deprived of the benefit which he reasonable expected
  

• the extent to which the injured party can be adequately compensated [by damages] for the part of that benefit of which he will be deprived
  

• the extent to which the party failing to perform or to offer to perform will suffer forfeiture
  

• the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances
  

• the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
  

Id. (citing Restatement (Second) of Contract § (1984)).

Remedies

In Arizona, A.R.S. § 33-361 governs remedies of a landlord. When the breach is deemed material, such as a tenant’s failure to pay rent five days after being due, section (A) of the above-mentioned statute, allows the landlord to perform a lockout, meaning “the landlord may reenter and take possession, or without formal demand or reentry, commence an action for recovery of possession of premises.” The landlord still has the ability to sue for damages after forfeiture of the commercial property. See Roosen v. Schaffer, 127 Ariz. 346, 348 (1980). A lockout is unacceptable by the landlord when the tenant immaterially breaches, such as failure to pay a small common area fee. The appropriate remedy is to bring a suit for damages.

Conclusion

Every day, parties enter into commercial lease agreements. And, every day, parties breach the terms of the commercial lease agreement. The underlying question when a party is in breach is whether the breach is material pursuant to Arizona law. The analysis herein outlines what factors parties should analyze in making a determination whether a material breach has occurred. If it has, the injured party has extensive remedies under Arizona law, including, but not limited to, taking possession of the premises pursuant to A.R.S. § 33-361.