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Maleki v. Desert Palms Prof’l Props., L.L.C. - 7/28/2009

Arizona Court of Appeals Division One Holds That an Immaterial Breach of the Lease Did Not Deprive the Tenant of the Power to Renew, Even Though the Tenant Had to Be “In Compliance” with Lease to Renew.

In May 2002, Plaintiff Maleki entered into a five-year commercial lease with Defendant Desert Palms that required him to pay rent, taxes, and fees based on the rentable square footage, which was to be calculated when the lease began.  The lease also gave Maleki a right to renew the lease for an additional five year-term if he was “in compliance” with the lease.  In October 2002, Desert Palms notified Maleki that the rentable space was 1,418 square feet.  In August 2003, however, Desert Palms billed Maleki for 1,474 square feet.  Maleki disputed the increase and for the next three years only paid rent for 1,418 square feet.  In November 2006, Desert Palms informed Maleki that the rentable space was actually 1,466 square feet, and demanded payment of back rent and fees.  That same month, Maleki gave notice of his intent to renew the lease, but Desert Palms rejected his renewal because he failed to “maintain compliance” with the lease by not paying the proper amount of rent. 

Maleki filed a complaint seeking a declaratory judgment, alleged breaches of contract and the duty of good faith and fair dealing, and sought attorneys’ fees under A.R.S. § 12-341.01.  The trial court found that although the rentable space was actually 1,466 square feet, Maleki was in compliance with the lease and could therefore renew because Desert Palms was responsible for his failure to pay the proper amount of rent.  The Court found Maleki liable for $13,912 in back rent, fees and taxes, but found that Desert Palms violated its duty of good faith and fair dealing, and awarded Maleki $105,872.21 in attorneys’ fees.

The Arizona Appeals Court affirmed.  The Court first held that Maleki was in compliance with the lease for purposes of the renewal provision, citing Title Insurance & Guaranty Co. v. Hart, 160 F.2d 961 (9th Cir. 1947) and Foundation Development Corp. v. Loehmann’s Inc., 163 Ariz. 438, 788 P.2d 1189 (1990).  The court explained that because Maleki had faithfully complied with the lease by paying rent and fees based on the 1,418 square foot number originally calculated by Desert Palms, and had only committed an immaterial breach, he could renew. 

The Court next held that there was substantial evidence in the record to support the superior court’s conclusion that Desert Palms breached its duty of good faith and fair dealing.  Finally, the Court upheld the superior court’s award of Maleki’s attorneys’ fees under A.R.S. § 12-341.01 because he was the successful party.

Judge Johnsen authored the opinion; Presiding Judge Swann and Judge Gemmill concurred.

Posted On: 8/10/2009