Lessee's Failure To Make Advance Royalty Payment Is A Material Breach Of The Lease, Even If No Royalty Payment Is Ultimately Due
ILLINOIS INVESTMENT TRUST NO. 92-7163 v. AMERICAN GRADING CO. (April 8, 2009)
Resource Technology Corp. ("RTC") collected methane gas at landfills and converted the gas into energy. In 1995, RTC entered into a ten-year lease at the McCook landfill. RTC was to install and operate a methane collection and conversion system in exchange for royalties. Although the actual royalties were computed on the sale of electrical energy, the lease required RTC to pay a $100,000 royalty advance at the beginning of each year. RTC entered bankruptcy in 1999. The bankruptcy proceeded for several years. When the 2006 royalty advance payment became due, the trustee did not pay it. A few weeks later the owner of the landfill requested that the trustee refrain from entering the premises. In March of 2006, the trustee entered into a settlement agreement with some of RTC's creditors. Illinois Investment sought an order under the agreement compelling the estate to assume the McCook lease. The lessor objected, asserting that the ten-year lease term had expired. The court ruled that the lease had been extended for a five-year term. The lessor then sent a notice of termination of the lease. The bankruptcy court determined that the lessor validly terminated the lease as a result of RTC's failure to make the royalty payment. Illinois Investment appeals.
In their opinion, Judges Manion, Wood and Williams affirmed. The Court ruled that the failure to pay the advance royalty was a material breach and allowed the lessor to terminate the lease. Even if no royalties were generated during the year, as Illinois Investment argued, the Court concluded that the advance royalty was still required, as security for RTC's performance under the lease.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select