## Facts

- A commercial tenant operated a prescription drug store on the ground floor of a Los Angeles medical office building under a long-term written lease.
- The lease restricted the premises to use as a drug store and contained an exclusive-use covenant under which the landlord agreed not to lease any part of the building for maintaining a drug store or selling drugs or ampoules (and also barred competing food-service uses).
- The tenant’s business relied heavily on prescription activity generated by physicians and dentists located in the building, making in-building exclusivity economically important.
- The landlord later leased the building’s ninth floor to a physician-led medical group under a lease stating the space would be used for medical and dental offices and would not include a drug store or dispensary, except limited dispensing in connection with treatment of the group’s own patients.
- Despite the written limitations, a pharmacy operation on the ninth floor filled prescriptions and dispensed drugs in a manner found to compete with the tenant’s ground-floor drug store.
- The tenant protested and demanded enforcement of the exclusive-use covenant; the landlord was unable to stop the competing activity.
- The tenant declared rescission, vacated, and stopped paying rent.
- The landlord sued for unpaid rent accruing after the tenant left, a small electricity charge, and costs allegedly incurred for renovations after the tenant’s departure.
- After a bench trial, judgment was entered for the tenant on the rent and renovation claims (with only a small admitted electricity amount awarded to the landlord); the judgment was affirmed on review.

## Issues

1. Whether the landlord’s exclusive-use covenant and the tenant’s covenant to pay rent were dependent such that a material breach excused further rent obligations and permitted rescission.
2. Whether the landlord breached the exclusive-use covenant by leasing space that resulted in an in-building competing pharmacy operation.
3. Whether any breach was sufficiently material to justify rescission rather than limiting the tenant to damages.
4. Whether the tenant waived the breach by delay, continued performance, or other conduct.

## Decision

- The court affirmed judgment for the tenant, denying the landlord recovery of rent claimed after the tenant’s rescission and vacancy.
- The landlord’s exclusive-use covenant was treated as material and dependent, forming a substantial part of the consideration for the lease.
- The landlord breached that covenant by leasing and permitting use of building space in a manner that created competing drug sales within the building.
- The breach was substantial and justified the tenant’s rescission, terminating the tenant’s duty to pay further rent.
- The tenant did not waive the breach because it objected upon learning of the competing operation and did not continue under the lease after it became clear the condition would not be cured.

## Legal Principles

- Lease covenants may be treated as dependent when the breached covenant goes to the essence of the bargain; a material breach by the landlord can excuse further rent obligations.
- An exclusive-use or noncompetition covenant in a commercial lease may constitute a central part of the consideration where the tenant’s business depends on protection from on-site competition.
- A landlord breaches an exclusive-use covenant when the landlord’s leasing conduct and acquiescence foreseeably enable a competing operation within the restricted scope, even if the later lease contains nominal restrictions inconsistent with actual use.
- A material breach that substantially defeats the lease’s purpose may support rescission rather than limiting the tenant to damages.
- Waiver of a landlord’s breach is not established where the tenant timely objects and disaffirms the lease by vacating after the breach proves uncured.

## Conclusion

The court held that the landlord’s failure to preserve the tenant’s bargained-for exclusivity against in-building drug competition was a material breach going to the essence of the lease, permitting the tenant to rescind and ending liability for rent accruing after rescission.


Medico-Dental Bldg. Co. of L.A. v. Horton & Converse, 21 Cal. 2d 411 (Cal. 1942)