Landlord’s Termination of Lease Precludes Future Damages

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A landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy.”  275 West Washington Street Corp. v. Hudson River Intern., LLC, 987 N.E.2d 194 (2013).

 

The case: 275 Washington Street Corp. v. Hudson River International, 987 N.E.2d 194 (Mass. 2013). 

Issues: lessor’s attempt to recover accelerated damages after a tenant default and after termination of the lease pursuant to a lease indemnity clause.

Facts:

– 12 year lease for operation for a Boston dental office (term 2006-2018);

– tenant abandons premises in 2007 and stops paying rent in 2008 – less than 2 years into term;

– lease contains indemnification provision which allows landlord to recover all damages resulting from tenant’s lease breach;

2008: landlord terminates the lease and files breach of contract suit seeking money damages for lost rents through 2018;

– 2010: landlord relets to new tenant for term that goes beyond 2018 (the original lease expiration year);

– current tenant is paying much less than defendant was under the breached lease;

Trial court and Appeals Court rulings: Trial court grants landlord’s summary judgment motion and enters judgment in landlord’s favor for over $1,000,000 (damage elements: (i) pretermination rent, (ii) lost rents through 2010 reletting, (iii) rent differential through lease conclusion)).  Appeals court reverses and requests further appellate review from the Mass. Superior Court.

Supreme Judicial Court holding: Trial court reversed. Landlord can’t recover post-termination damages pursuant to indemnity clause until end of lease term (2018).

Why?:  Landlord made the mistake of terminating the lease (as opposed to terminating possession).  This foreclosed landlord’s ability to recover any post-termination damages.  Where a landlord terminates a lease following a tenant default, the tenant has no further rental obligations after termination unless the lease says otherwise.  Hudson River, 987 N.E.2d at 198 citing Restatement (Second) of Property, Landlord and Tenant, s. 12.1, comment g, at 389 (1977).  The Court also held that under common law principles, the lease’s indemnification clause only allowed the landlord to recover damages at the lease’s conclusion “because the precise amount of those losses cannot be ascertained until the end of the [term].”  Hudson River, at 199-200.

The Court further held that commercial lease parties are free to specify what damages are due and when in the event of a premature lease breach.  However, since the Hudson River lease was silent on damage specifics, the Court followed the common law rule that indemnification damages don’t “come due” until the end of the lease term.  Id. at 200.

Take-aways: The landlord’s nearly $1.1M judgment is now reduced to less than $40K (the pre-termination amount owed by the tenant).  Ouch.  The termination of lease vs. termination of possession dichotomy is a bit cryptic but clearly important as almost all commercial leases reference both options.  

Hudson River illustrates in stark relief that if a landlord terminates a lease (as opposed to terminating the tenant’s right to possession), it runs the risk of having its future damages barred.  The lesson for landlords is clear: the lease should contain clear acceleration or liquidated damages language permitting the landlord to recover future rents if the tenant prematurely breaches the lease.  Otherwise, the landlord could have its damages cut off at the date of lease termination, or, like the Hudson River plaintiff, have to wait several years to recover damages. 

My guess is that in 2018 when the lease is set to expire, the corporate tenant/defendant will be dissolved, non-existent and judgment-proof.

 

Square Footage Discrepancy Not Material Term in Chicago Office Lease Dispute

smart-office-furniture-image-2(photo credit: www.smartofficefurniture.ca)

 123 Madison Street Corp. v. Power & Dixon, 2013 IL App (1st) 122795-U examines a commercial lease dispute involving a law firm tenant.

The facts: in 2002, plaintiff’s predecessor (the former office building owner) entered into lease with defendant law firm. Over the next few years, the Lease was amended three times to cover three different office suites – each bigger than the last and each requiring increased rent payments. Tenant defaulted and the building’s management company filed suit. Tenant vacated and the parties went to trial on money damages. Over the course of several hearings, and after the court substituted in the current building owner as the plaintiff, the trial court entered judgment for landlord, awarding nearly $70,000 in back rent plus attorneys’ fees over over $12,000. The Tenant law firm appealed.

Held: Judgment for landlord affirmed.

Reasoning: The appeals court rejected the law firms three key arguments: (1) that there was no privity of contract between plaintiff and tenant; (2) plaintiff materially breached the lease by renting less space than called for in the lease and over-charging the tenant; and (3) the trial court erroneously found that tenant was leasing the office suite for a “flat-rate” instead of leasing for a specific square footage amount. (¶¶ 45-56).

On the privity issue (privity doctrine basically requires that a party have some contractual relationship with the party being sued), the Court noted that the plaintiff wasn’t the lessor.  

The original plaintiff was the former owner’s management company and the substituted plaintiff was the building’s current owner.

The Court held that privity was a question of standing (only a party to a contract has standing to sue on it) and an affirmative defense that had to be pled and proved by the tenant.  Since the tenant failed to raise the privity/lack of standing defense by affirmative defense or motion to dismiss, the tenant didn’t meet his burden of proving the plaintiff’s lack of standing to sue. (¶¶ 50-51).

Tenant also argued that the landlord’s material breach precluded it from suing to enforce the lease.  The tenant claimed that while the lease provided for nearly 4,000 square feet of rentable space, the landlord was only leasing under 3,000 square feet.  The tenant claimed it overpaid the landlord nearly $100,000 for the shortened space.

The court rejected this argument stating that there was no evidence that the precise number of square feet of rentable space was a material term.  One of the law firm’s principals even testified that the square footage wasn’t a make-or-break issue:  the firm simply wanted “more space” than the prior suite.

 The Court also affirmed the trial court’s finding that the tenant was agreeing to pay a “flat rate” rather than a specific price per square foot.  (¶¶ 52-55).

 Take-aways: I’ve represented commercial landlords where the lease will have changed hands multiple times from lease signing to the date of trial.  When representing a property manager whose name differs from the one on the lease, I move to admit in evidence any management agreement between the owner/lessor and the property manager.

Another case lesson is that a lease square footage discrepancy will only be considered a material term if the lease says so.

Fee Petition Doesn’t Extend Time to Appeal Trial Verdict In Commercial Lease Spat

In Naperville South Commons, LLC v. Nguyen, 2013 IL App (3d) 120382-U, a Will County shopping center landlord filed its notice of appeal too late and so a money judgment for the tenant stands.

The case involves a multi-year shopping center lease for tenant’s operation of nail salon. Several months into the lease’s fourth year, the landlord unilaterally increased the tenant’s rent by over $1,200 per month.  Tenant balked and landlord filed joint action for rent and possession.

At trial, the court entered judgment for the tenant on landlord’s rent claim because the landlord failed to prove that the tenant owed rents or other monies at the time landlord served its 5-day notice.  The court also awarded the tenant some $54,000 in attorneys’ fees based on fee-shifting language in the lease.  Landlord appealed.

The appeals court held it lacked jurisdiction over landlord’s appeal and affirmed trial court’s award of attorneys’ fees.

The trial court entered judgment in November 2011 and the landlord didn’t file its appeal until nearly six months later in May 2012 – the day after the court ruled on tenant’s attorneys’ fee petition (which the tenant filed within 30 days of the trial court judgment). 

In Illinois, a notice of appeal must be filed within 30 days of a final judgment or within 30 days of the order which disposes of the “last pending postjudgment motion.”  Ill. Sup.Ct. R. 303.  Here, contrary to landlord’s position, the tenant’s attorneys’ fee petition was not a postjudgment motion since it didn’t directly challenge any of the trial court’s findings but was instead “collateral to” the trial court’s judgment.  ¶ 15.

The Court held that since tenant’s fee petition was not a post-judgment motion, the landlord did not have additional time – beyond the 30 days – to file its notice of appeal.  Because the landlord didn’t file its notice of appeal within 30 days of the underlying judgment, the court lacked jurisdiction to consider the landlord’s appeal.

The Third District did accept landlord’s appeal of the trial court’s fee award for the prevailing tenant.  The Court first held that the tenant was in fact the prevailing party.  The landlord argued that since it obtained possession of the premises, it won the case, since the primary purpose of the case was to dispossess the tenant.

In Illinois, “a party can be considered a prevailing party for the purposes of awarding fees when he is successful on any significant issue in the action and achieves some benefit in bringing suit, receives a judgment in his favor, or obtains some affirmative recovery.” ¶ 17.

The Court held that the landlord didn’t prevail on the possession issue since the tenant voluntarily left the premises: there was no adjudication of possession in landlord’s favor.  ¶ 18.

On the rent issue, the tenant clearly won since the trial court ruled that the tenant owed nothing based on landlord failing to carry its burden of proof that the tenant owed monies at the time landlord served its 5-day notice.

The Court affirmed the fee award to the tenant, noting that the tenant properly supported its fee petition with competent evidence that quantified its fees in defending the landlord’s eviction suit. ¶ 20.

Take-aways:

– When in doubt, file a Notice of Appeal within 30 days of the trial date order, regardless of what motions are filed by other parties after the judgment.  If the notice turns out to be premature, it will take effect automatically when the post – judgment motion is disposed of.

– A fee petition filed by a prevailing party is not a Rule 303 post-judgment motion that extends the 30-day period to file a notice of appeal;

– to be considered a prevailing party for purposes of an attorneys’ fees petition, the party must obtain an on-the-merits adjudication in its favor on a particular issue.