LANDLORD OFF HOOK FOR $186,000 BILL INSOLVENT TENANT OWED CONTRACTOR

August 6, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Depending on the circumstances, when a tenant fails to pay for construction work on leased premises, remedies for restitution can be used to hold the landlord liable. But based on a Colorado Supreme Court case, the Illinois Appellate Court concluded that the remedies of quasi-contract, unjust enrichment and quantum meruit did not apply to the facts of a Chicago case. Hayes Mechanical Inc. v. First Industrial L.P., 2004 WL 1322410 (1st Dist., June 14).
The tenant, Stiffel Co., allegedly stiffed a contractor, Hayes Mechanical, for $186,000 worth of construction work on leased premises.

When Stiffel became insolvent, Hayes filed a complaint seeking to hold the landlord, First Industrial, liable for the unpaid bill.
Here are some highlights of Justice Margaret Stanton McBride's opinion (with various omissions not noted in the quoted text):
"A quasi-contract, or contract implied in law, is one in which no actual agreement between the parties occurred, but a duty is imposed to prevent injustice. The prevention of unjustness is the fundamental aspect of the doctrine of quasi-contracts.

"Quasi-contract claims include unjust enrichment and quantum meruit actions. The two types of actions are similar, in that the plaintiff must show that valuable services or materials were furnished by the plaintiff, received by the defendant, under circumstances which would make it unjust for the defendant to retain the benefit without paying.

"In a quantum meruit action, the measure of recovery is the reasonable value of work and material provided, whereas in an unjust enrichment action, the inquiry focuses on the benefit received and retained as a result of the improvement provided by the contractor.

"Notably, even when a person has received a benefit from another, he is liable for payment only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for him to retain it. The mere fact that a person benefits another is not of itself sufficient to require the other to make restitution therefor.
"Thus, the focus of our analysis will be whether Hayes Mechanical alleged, not only that First Industrial received a benefit from the renovation work, but also that it received the benefit under circumstances which would make it unjust for First Industrial not to pay restitution.

"Hayes Mechanical relies primarily on Midcoast Aviation Inc. v. General Electric Credit Corp., 907 F.2d 732 (7th Cir. 1990), which involved significantly different circumstances from the present dispute. In that case, a plane refurbisher, knowing that the party it contracted with was unable to pay for the refurbishment, went directly to the third party that was financing the project and asked for assurances that it would be paid for its work. The assurances were given, and work began.

"Subsequently, the financier urged the refurbisher to finish the work on schedule, which the refurbisher did. The refurbishment immediately benefited the financier because it increased the value of the project it had invested in. However, when the bill was presented, the financier, which controlled which bills were paid, refused to see it paid.

"The refurbisher sued and obtained a judgment in contract against the party that hired the refurbisher and a judgment in quasi-contract against the third-party financier. The financier appealed, arguing in part that courts generally will not impose a quasi-contractual obligation upon a third party for work done under an explicit contract between two different parties merely because the third party benefitted from the work.

"The court remarked, however, that these circumstances differed from the usual scenario, in that the financier not only benefited from the increased value of the project it had invested in, but also enticed the first party to undertake the work in the first place and then refused to see it paid.

"The court concluded that the first party had reasonable expectations that it would be paid with the financier's money and, therefore, it had stated an exception to the general rule barring recovery from a third party.

"In contrast, here, there is no indication that the landlord enticed the contractor to complete the renovation work requested by the tenant. Furthermore, although the lease and attached work letter indicate the landlord helped finance the renovation and that the tenant agreed to pay its bills on time in order to protect the real property from mechanic's or materialmen's liens, there is no indication the landlord had any control over which bills the tenant paid.

"In fact, First Industrial has contended that it had no contact with Hayes Mechanical before or during the renovation project, and that it had 'never even heard of' Hayes Mechanical before it received the lien claim. Midcoast Aviation's analysis and conclusion only suggest that the present circumstances are the run-of-the-mill scenario in which a party providing services pursuant to a contract is disappointed by its co-party's failure to pay and thus unreasonably turns to a third party for compensation.

"First Industrial contends that cases such as Vanderlaan v. Berry Construction Co., 119 Ill.App.2d 142 (1970), in which subcontractors have been barred from recovering from property owners because there was no employment between the parties are dispositive. No Illinois court has specifically addressed whether a contractor hired by a tenant that fails to pay for improvements to real property may assert quasi-contract claims against the owner of the property. However, our research discloses that other jurisdictions have concluded that quasi-contract relief is not available to a contractor unless the owner has engaged in some type of improper, deceitful, or misleading conduct making it unjust for the owner not to pay for the improvement.

"In DCB Construction Co. v. Central City Development Co., 965 P.2d 115 (Colo. 1998), the Supreme Court of Colorado began its analysis of the question with two basic propositions. 'First, there is the general rule that when an individual who is not the owner orders improvements on the owner's land and then fails to pay the contractor or supplier, the owner is not liable to the contractor or supplier unless he agreed to pay them.'

"This general rule seeks to protect rights of choice and personal autonomy, and ordinarily, an owner should not be forced into a legal relationship with someone other than the partner he has chosen.
"The second basic relevant principle, found in the Restatement of Restitution, provides that, 'A person who has conferred a benefit upon another as the performance of a contract with a third person is not entitled to restitution from the other merely because of the failure of performance by the third person.' Restatement of Restitution 110, at 455 (1937).

"These two principles led the Colorado Supreme Court to conclude that a property owner that had never agreed to pay for a tenant's renovations should not be forced into a quasi-contractual relationship with the contractor who provided the renovation materials and services. It was not enough that the tenant breached a contract to pay for improvements and that the landlord owned an improved building.

"Rather: 'There must be more. It is unjust for a contractor to bear the loss of a debt unpaid. However, it is not necessarily just or right to impose that debt upon the owner of the property merely to rectify the first injustice. If that were so, anyone [benefiting] from another's services could be liable for those services. We all enjoy the protection that we are generally not liable for services or goods for which we did not contract. The courts should be slow to impose obligations in the absence of a contract; slow to impose the debts of one party upon another.

" 'Hence an injustice that warrants the court's imposition of the remedy of restitution must rest not only in the loss to the contractor, but also in the conduct of the owner.'

"In addition, the court gave examples of unjust circumstances likely to warrant imposition of quasi-contractual relief against a landlord, such as where a landlord engaged in coercion or fraud to induce a contractor to enter into a contract with a tenant or to continue performance when the contractor might otherwise have ceased.

"The concept which 'connects these examples is that "injustice" involves some form of improper conduct by the party to be charged.' Furthermore, the rule that 'injustice' in this context requires some form of improper, deceitful or misleading conduct on the part of the landlord is in harmony with the Restatement of Restitution and the weight of authority in other jurisdictions.

"The Colorado landlord gave permission for the work, had the right to approve all plans, was on the premises fairly regularly during the construction, and contracted to retain the improvements upon lease termination, yet never directed or communicated with the contractor regarding the renovation work.

"Accordingly, the court rejected the contractor's argument that the nature of the landlord's involvement in the renovation project was sufficient to render its retention of the benefit unjust, stating: 'A landlord will virtually always retain the right to give or withhold permission for work to be done on its premises. As owner of the premises, the landlord is generally required to apply for and execute building permits or other necessary documents. The landlord has a strong and legitimate interest in pre-approving and monitoring any significant construction. Similarly, the landlord's participation in creating and/or approving specifications is a natural product of its interest in the property and is a matter of concern solely between the landlord and the tenant.'

"The court further remarked that it would not adopt a rule that essentially made landlords the insurers of risk assumed by contractors in extending credit to tenants.

"A similar concern was expressed in Industrial Lift Truck Service Corp. v. Mitsubishi International Corp., 104 Ill.App.3d 357, 361 (1982), as follows: 'When parties enter into a contract they assume certain risks with an expectation of a return. Sometimes, their expectations are not realized, but they discover that under the contract they have assumed the risk of having those expectations defeated. As a result, they have no remedy under the contract for restoring their expectations. In desperation, they turn to quasi-contract for recovery. This the law will not allow.

Quasi-contract is not a means for shifting a risk one has assumed under contract.'

"In light of these principles and the principles governing leave to amend, we find that the Circuit Court did not abuse its discretion in denying Hayes Mechanical leave to file its proposed amended complaint.

"Hayes Mechanical concluded but did not factually allege why 'it would be unjust for First Industrial to retain the benefit' of Hayes Mechanical's services and why 'First Industrial would be unjustly enriched if it was permitted to retain the benefit' of Hayes Mechanical's services. The mere fact that Hayes Mechanical's labor and materials may have benefited First Industrial is not sufficient in itself to require First Industrial to make restitution to Hayes Mechanical.

"Illinois is a fact-pleading jurisdiction, and it was therefore incumbent upon Hayes Mechanical to state specific facts disclosing why it would be unjust for First Industrial not to make restitution. Further, before a trial court can be found to have abused its discretion in denying leave to amend, it must be clear from the record that reasons of fact were presented to the court as a basis for requesting leave to amend.

"Not only did Hayes Mechanical fail to allege or otherwise present specific facts to the trial judge, the record discloses no facts upon which Hayes Mechanical could state quasi-contractual claims against First Industrial.

"In keeping with the analysis of DCB Construction Co., 965 P.2d 115, we note that it is unjust for the contractor to bear the loss of the unpaid debt; however, the unpaid debt was incurred by the building's tenant, and an injustice that warrants the imposition of restitution includes not only a loss to the contractor but also improper conduct by the landlord. Because there were no indications of improper conduct here on the part of the landlord, it would be unjust to impose the burden of the unpaid debt upon the innocent landlord.

"There was no direct contract between the landlord and contractor from which it might be inferred the landlord had enticed, coerced or misled the contractor into believing it would be paid by the landlord. The contractor assumed the risk of loss when it contracted with the tenant alone.

"The contractor acknowledged that the party it was contracting with had a mere leasehold on the property, and there is no indication that the contractor misunderstood or was misled about the nature of the tenant's interest in property.

"Furthermore, the landlord's right to approve the renovation plans was a matter between the landlord and the tenant, and it reflects the landlord's interest in the real estate, rather than the landlord's desire to shape the renovation for its own use and benefit.

"In addition, the landlord and tenant expressly acknowledged in the tenant improvements letter that the landlord's right to approve the plans would not subject it to liability to any party, and the letter was expressly incorporated into the contractor's written agreement with the tenant. The landlord's right to inspect the work in progress also reflects the landlord's interest in its property. Additional facts such as the landlord's right to be named as an additional insured and to be indemnified and defended by the tenant from any claims arising from the contractor's work, indicate only that the landlord was not to be harmed as a result of the renovation project desired and undertaken by its tenant.

"These facts do not suggest in any way that the contractor could state quasi-contractual claims against the landlord.

"Hayes Mechanical further contends that quasi-contractual relief may be available despite the absence of any wrongdoing on the part of the party against whom restitution is sought. The cases that Hayes Mechanical relies on for this proposition involved the mistaken payment of a neighbor's property taxes, and the erroneous payment of taxes pursuant to a statute that was actually unconstitutional and void. There is nothing in these cases that conflicts with the views expressed above. The circumstances are simply not analogous to the present dispute in which there were no allegations that money was mistakenly or erroneously conveyed.

"In sum, none of the cases that Hayes Mechanical relies upon sways us from our conclusions that Hayes Mechanical did not and could not allege sufficient facts to state quasi-contract claims against First Industrial."

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