2401 Pennsylvania Avenue Corp. v. Federation of Jewish Agencies , 507 Pa. 166 ( 1985 )

OPINION

NIX, Chief Justice.^*

This appeal¹ raises the question of whether there was an anticipatory breach of the lease agreement between the appellant owners of the building at 1528 Walnut Street (hereinafter referred to as “Walnut”), and the Federation of Jewish Agencies of Greater Philadelphia (“Federation”). At trial the Court of Common Pleas of Philadelphia County concluded that Federation had committed an anticipatory breach of its lease and entered judgment in favor of Walnut. Damages were assessed at Two Hundred Ninety-two Thousand Dollars ($292,000) plus interest.

On appeal a Superior Court panel determined that the lower court erred in its application of Pennsylvania contract law to the facts of this case. On the grounds that the evidence did not support the finding of an anticipatory breach and that the lower court had erroneously imposed on the Federation a duty to occupy the premises in addition to its obligation to pay rent, the Superior Court reversed and vacated the judgment against Federation. This Court granted Walnut’s petition for allowance of appeal on February 29, 1984.

I.

In 1971, Federation decided that its headquarters was inadequate and appointed a search committee to find a new site. After a year and a half the committee recommended that Federation demolish its own building and construct a new one at its location at 1509-13 Walnut Street rather than buy an existing building at another site.

The Federation developed a plan to implement this recommendation. Under that plan Federation was to relocate for the two years during which the demolition and construction at its own location would take place. Therefore, Federation entered a lease agreement with Walnut for the rental of four floors of the building at 1528 Walnut Street.

The lease, dated November 8, 1973, provided for rental by Federation of space for a period of two years beginning May 1, 1974 and ending April 30, 1976. Attached to the lease before its execution by Federation was a letter, also dated November 8, 1973. The letter indicated that, as Federation well knew,² part of the space referred to in the lease was then occupied by Catalytic, Inc. (“Catalytic”) whose lease would not expire until August 31, 1974. Every effort was promised to be made to tender delivery to Federation as close to May 1, 1974 as possible.

Catalytic estimated that it would be able to vacate the premises some time in May of 1974. That move was delayed, however, by a sheet metal worker’s strike in May, 1974, which prevented prompt completion of the Center Square building project into which Catalytic was to move. These circumstances indicated to Catalytic that not only would it be unable to vacate the premises on Walnut Street during May, 1974, but also that it would have trouble meeting the August 31st deadline. Catalytic, therefore, requested an option to extend its lease for up to ninety (90) days from the August 31, 1974, deadline. Walnut refused this request noting its obligations to lease the space to Federation.

During May and June of 1974 there was frequent correspondence between Catalytic, Walnut, Federation and those involved in the Center Square project on the subject of an extension of Catalytic’s lease at 1528 Walnut Street. During that time Federation indicated its disappointment but accepted the fact that it would not be able to obtain possession until September 1, 1974.³ In acquiescing to the delay until September 1st, Federation never agreed to any extension beyond that time even though repeatedly asked to agree.

Meanwhile, in late June Federation executives became aware of a building for sale at 226 South Sixteenth Street which would more than adequately meet Federation’s needs for permanent headquarters. On July 1st that building was purchased and Federation abandoned all plans to demolish and rebuild at its old location. A newspaper account of this transaction indicated that Federation had been motivated to make this purchase by the amount of money it would save on construction costs and rental fees in the temporary location.

Subsequent to Federation’s purchase of its new site, Catalytic continued to endeavor to get an extension from Walnut. Walnut repeatedly refused stating that it would not agree to the extension unless Federation approved. Federation, however, refused to give its approval claiming that it did not wish to lend any validity to the contract by agreeing to the extension.

At a meeting on August 1, 1974 Federation stated its position more specifically. Federation claimed that its lease with Walnut was invalid because Walnut had failed to deliver possession by May 1st which it claimed to be the date for delivery under the lease. Therefore Federation claimed that it could not give its approval without abandoning its claim of invalidity of the contract. Contrastingly, however, Ronald Rnbin, then Assistant Treasurer of Federation, declared to Walnut agents that Federation “did not want to occupy [the four floors], had no use for it and would not consider any type of extension without a release of liability from the lease.” Exhibit 50, R. 796a.

On August 5, 1974, Walnut, relying on advice of counsel that Federation had anticipatorily breached the lease agreement, acquiesced to pressure by Catalytic and granted the ninety-day (90) extension on Catalytic’s lease. Catalytic exercised its option to extend its lease beyond August 31st and remained in the space until October 31, 1974.⁴

Despite Catalytic’s continued tenancy Walnut sent a bill to Federation on October 24, 1974 for rent due from October 6th through the 31st. Federation refused to pay reiterating its claim that the lease was void. Walnut commenced this action in February, 1975, seeking damages alleged to have occurred as a result of Federation’s breach of the lease agreement.

II.

To resolve the dispute between these two parties this Court must address two issues. The first is whether there was an anticipatory breach by Federation of its lease agreement with Walnut. Secondly, if we conclude that there was no breach by Federation we must determine whether Walnut’s grant of the extension to Catalytic constituted a material breach of the lease.⁵

In analyzing the issues presented here we note that the Court is bound by the trial judge’s findings of fact unless those findings are not based on competent evidence. Conclusions of law, however, are not binding on an appellate court whose duty it is to determine whether there was a proper application of law to fact by the lower court. Lawner v. Engelbach, 433 Pa. 311, 249 A.2d 295 (1969). Our inquiry here, therefore, is limited to whether the trial court properly concluded that Federation had anticipatorily repudiated its lease and excused any subsequent performance by Walnut of its obligations under the contract.

A.

The requisite elements of an anticipatory breach were established by this Court in McClelland v. New Amsterdam Casualty Co., 322 Pa. 429, 185 A. 198 (1936). This Court, following the standards set out by the U.S. Supreme Court in Dingley v. Oler, 117 U.S. 490, 6 S.Ct. 850, 29 L.Ed. 984 (1886), stated that to constitute anticipatory breach under Pennsylvania law there must be “an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so.” McClelland v. New Amsterdam Casualty Co., supra 322 Pa. at 433, 185 A. 198. The McClelland standard is still the rule of law in Pennsylvania. See, William B. Tanner v. WIOO, Inc., 528 F.2d 262 (3d Cir.1975); McCloskey v. Minweld Steel Co., 220 F.2d 101 (3d Cir.1955); Alabama Football, Inc. v. Greenwood, 452 F.Supp. 1191 (D.C.Pa.1978); Wolgin v. Atlas United Financial Corp., 397 F.Supp. 1003 (E.D.Pa. 1975), aff’d. mem., 530 F.2d 966 (3d Cir.1976); Shafer v. A.I.T.S., Inc., 285 Pa.Super. 490, 428 A.2d 152 (1981).

The facts of this case indicate no statement or action which constituted an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so. There are only three instances that could arguably be interpreted as amounting to an anticipatory breach. Upon analysis, it is apparent that these instances do not meet the McClelland standard either standing alone or considered in combination.

The relevant facts as found by the trial court are as follows:

(a) on July 24, 1974 [Federation’s] statement that “he was advised that the lease would have no effect because of the inability of [appellant] to give possession in May as called for in the lease;”

(b) an inconclusive meeting with [Federation] on July 30, 1974, followed by

(c) a meeting with [Federation] on August 1, 1974, at which time [Federation] declined to grant an extension because “they were being advised by their attorneys that any extension given by the Federation would in essence, acknowledge the validity of the lease,” and

(d) on this same date [Federation’s] ... informing [Walnut] that “the Federation did not want to occupy [the four floors], had no use for it, and would not consider any type of extension without a release, of liability from the lease.” [Emphasis in original].⁶

Whether viewed individually or collectively these statements are insufficient to meet McClelland’s requirement of an absolute and unequivocal refusal. The July 24th statement that appellee had been advised that the lease would have no effect because of appellant’s failure to deliver the space in May is insufficient because it does not provide a definitive indication that appellee intends to act on this advice or treat the contract as void. Appellee’s August 1st statement that it did not wish to approve an extension for Catalytic because it would lend validity to the lease does not indicate that it will in fact not perform. Moreover, appellee’s statement that it had no use for the space and would not consider approving the extension without a release from its obligations under the lease indicates that appellee did recognize at the very least a possible obligation under the contract. The fact that a party seeks to preserve what it deems to be a legal defense to the required performance does not reflect an intention to deliberately breach the agreement. To the contrary, it reflects an intention to avoid performance only if there is a legal basis for the refusal of performance.

The rationale behind the rule of anticipatory repudiation is the prevention of economic waste. An obligee/plaintiff should not be required to perform a useless act as a condition of his right to recover for a breach when the obligor has demonstrated an absolute and unequivocal refusal to perform. Baldwin v. Transitone Automobile Radio Corp., 314 Pa. 10, 169 A. 755 (1934); Weinglass v. Gibson, 304 Pa. 203, 155 A. 439 (1931); Clavan v. Herman, 285 Pa. 120, 131 A. 705 (1926); Greenlee v. West, 71 Pa.Super. 468 (1919). However, we reject any argument suggesting a dilution of our long recognized standard of an “absolute and unequivocal refusal to perform.”⁷ Our efforts to avoid economic waste must not be allowed to encourage precipitous breaches of contract. Such an approach undermines the stability of contracts and encourages unnecessary litigation.

In conclusion we hold that there was no anticipatory breach of the lease agreement by Federation since it did not utter an absolute and unequivocal refusal to perform or a definite and positive statement of an inability to fulfill its obligations under the contract.⁸

III.

Having concluded that Federation did not anticipatorily breach its lease agreement with Walnut we must now address the issue of whether Walnut materially breached the lease by granting the extension of Catalytic’s lease for ninety days. That extension allowed Catalytic to remain lawfully in the space until November 31, 1974.

Appellant claims that it was under no obligation to deliver possession to Federation on September 1, 1974 because the lease agreement contained a clause prohibiting forfeiture by the Federation by reason of delay in delivery where that delay was caused by the failure of the existing tenant to vacate the space. Clause 22 of the contract states:

22. In the event that the herein demised premises are not ready for lessee’s occupancy at the time herein fixed for the beginning of the term of this lease, because ... of the failure or refusal of the tenant of the said demised premises ... to vacate and surrender up the same ... this lease ... shall not be effected [sic] thereby.

Regardless of whether we agree with Walnut’s assertion that it had no duty to deliver possession by September 1, 1974 if its existing tenant refused to leave the demised premises by the August 31, 1974, deadline, we must conclude that this clause is inapplicable to the facts of this case. Since Clause 22 refers only to the instance where the existing tenant holds over it is irrelevant to our determination in the instant case where the tenant remained on the premises by written agreement with the lessor. Thus, it is Walnut’s approval of the extension rather than Catalytic’s recalcitrance which prevented Federation from taking possession by September 1, 1974.

More importantly we conclude that because Walnut signed the extension of Catalytic’s lease and affirmatively acted to keep Catalytic on the premises despite its lease with Federation Walnut materially breached its own obligations under the lease. As the Superior Court properly stated there is an implied covenant of quiet enjoyment accompanying every lease of real property. When the tenant is prevented from taking possession under the lease by affirmative acts of the lessor then that covenant is breached. Pollock v. Morelli, 245 Pa.Super. 388, 369 A.2d 458 (1976); Easton Theatres v. Wells Fargo, 265 Pa.Super. 334, 401 A.2d 1333 (1979), appeal dismissed, 498 Pa. 557, 449 A.2d 1372 (1982). Walnut breached this covenant by the affirmative act of signing the agreement to extend Catalytic’s lease.⁹

We therefore hold that Federation did not breach anticipatorily its lease with Walnut and that Walnut, whose actions were not excused by a prior breach, must be held liable for its failure to perform under the terms of the lease. Accordingly, we affirm the order of the Superior Court for the reasons herein stated.

LARSEN, J., files a dissenting opinion. HUTCHINSON, J., files a dissenting opinion in which ZAPPALA, J., joins.

* This case was reassigned to the writer on December 4, 1984.

1 . This Court is vested with jurisdiction pursuant to 42 Pa.C.S. § 724.

2 . The text of the letter indicates specifically that the Federation had been apprised of Catalytic’s occupancy and the tenure of its lease. The letter states:

As you understand, the premises being demised are now occupied by Catalytic, Inc., whose lease expires August 31, 1974. They have indicated to us and we have advised you accordingly, that they will make every effort to give the Federation possession as close to May 1st as possible.

If, however, they are unable to move into the new quarters, it may be necessary for them to remain beyond May 1, 1974 on these floors, but in no event beyond August 31, 1974, which is the expiration date of their lease.

In order for this to be a matter of record, will you please sign and return a copy of this letter acknowledging receipt of the Lease Agreement indicated above.

3 . In his letter of June 20, 1974 Donald B. Hurwitz, Executive Vice President of the Federation, stated: "Obviously we have no alternative, but I sincerely hope the problem will be resolved and that the period of delays will therefore, be curtailed.” (R. 742a).

4 . Part of the space was vacated on October 6th but the entire area was not delivered until October 31st.

5 . Walnut alleges that it should have been granted reargument by the Superior Court because Judge Phyllis Beck, a panel member, failed to recuse herself. Walnut claims that Judge Beck’s participation in the consideration and determination of this case by the Superior Court’s panel gives the appearance of impropriety since she was a substantial contributor and had paid dues to the Federation and because her law clerk was the mother of one of the Federation’s attorneys. In view of our independent entertaining and disposition of the matter, the request for reargument before the Superior Court need not be considered. Our independent consideration also moots any issue of the possible appearance of impropriety on the part of Judge Beck.

6 . Appellant, Walnut, has asserted that the Superior Court misread the findings of fact made by the trial court. Therefore, to avoid confusion the findings above were cited directly from the trial court’s opinion.

7 . We reject Walnut’s argument that the definition of anticipatory breach stated in Section 250 of the Restatement (Second) of Contracts is a mere explication of the McClelland standard. Section 250 would allow a finding of anticipatory breach in a situation where there was only an apparent inability to perform under the contract. That provision clearly represents an unacceptable dilution of the McClelland rule.

8 . We note that both lower courts addressed the issue of whether Federation had a duty to occupy under the lease. We agree, however, with Judge Spaeth’s concurring statement that it is unnecessary to decide this issue since the opportunity for Federation to occupy the premises was thwarted by Walnut’s grant of an extension to Catalytic the tenant then in possession.

9 . There can be no dispute that preventing the tenant from taking possession for three months of a two-year lease constitutes a material breach.