Commercial Landlord Not Entitled to Double Rent Under Holdover Statute Where Tenant Had Legitimate Belief It Had Right to Possess Space – IL 1st Dist.

I’ve written on here before about how a tenant holding over after a lease expires can lead to a serious case of option paralysis for the landlord.  Questions abound in rapid-fire fashion: should the landlord accept the holdover and continue the lease on the same terms as before? Should the landlord seek double rent under the forcible statute?  Should the landlord refuse to cash any rent checks from the tenant after the lease expires?  What if the landlord desperately needs that post-expiration rent payment?  These are all issues that need to be addressed.  And fast. 

Spatz v. 2263 North Lincoln Corporation, 2013 IL App (1st) 122076, a somewhat dated but relevant case, examines the requirements for a holdover tenancy and the features of an enforceable option to purchase in the context of a commercial lease dispute.

That case’s plaintiff, a successor property owner (to the original landlord), sued the commercial tenant for eviction and past rent damages. The tenant defended the suit, and argued that it exercised an option to purchase the premises from the plaintiff’s predecessor before the lawsuit was filed and therefore was immune from eviction.

The trial court sided with the plaintiff awarding it possession and rental damages but only awarding about half of its claimed attorneys’ fees. The court also denied plaintiff’s request for double rent under Illinois’ holdover statute (735 ILCS 5/9-202).  Both sides appealed.

Affirming the possession order, the appeals court rejected the defendant’s argument that it exercised a purchase option on the property and was therefore a property vendee rather than a lessee.

In Illinois, where a lease contains a purchase option, and the option is exercised and accepted according to its terms, there is no longer a lease.  What results instead is a present contract for the sale of the property.  The parties relationship then morphs from a landlord-tenant one to a vendor-vendee one.  The lessee (now the vendee) then has no further lease obligations.

However, the lessee must exercise the option to purchase to the property in exact conformance with the option. If it fails to do so, the option is deemed unexercised and the landlord can pursue rights under the lease. (¶¶ 27-28).

Here, the court found that the lessee’s purported acceptance of the purchase option was too conditional to be considered a proper exercise of the option.

The court next held that the lessor failed to extend the lease or create a holdover tenancy by accepting partial rent payments from the tenant after the lessor served its 30-day termination notice.

Under Illinois law landlord-tenant law, it is the landlord’s intention, not the tenant’s, that determines whether a holdover tenancy is created. While a landlord’s acceptance of rent following the expiration of a lease can be viewed as an intent to treat a tenant as a holdover, a court objectively looks to landlord’s other conduct – such as efforts to regain the premises – to determine whether the landlord intended to treat a tenant as a holdover. (¶ 37)

The lease specifically allowed the landlord to accept post-default rent payments without extending the lease.  In addition, the landlord sued to evict the defendant. Taken together, this served as clear evidence of a landlord’s intent not to treat the tenant as a holdover.

The First District also affirmed the trial court’s denial of the plaintiff’s claim for double rent under Section 9-202 of the Forcible Statute.

This statute allows a landlord to recover double rent where a tenant willfully holds over. The statute is penal in nature and only applies where a tenant stays in possession in bad faith – basically where it knows it has no right to stay after the lease ends. (¶¶ 44-45).

Where a tenant stays on site “for colorably justifiable reasons” (i.e., under a reasonable claim of right), the landlord cannot recover double rent under the willfully holding over statute. (¶ 44)

Here, the tenant offered evidence at trial showing that it had a legitimate dispute as to whether it had a right to stay in possession after lease expires. Consequently, the appeals court affirmed the trial court’s finding against the landlord on the double rent issue.

Afterwords:

1/ An option to purchase must be exercised in strict conformity with the purchase option;

2/ For a lessor to recover double rent under the holdover statute, the lessor must prove the lessee’s willfull conduct: that the lessee refused to vacate the premises without a good faith basis for doing so;

3/ 30-days’ written notice is required to terminate a month-to-month tenancy.

“You Do An Awfully Good Impression Of Yourself . ” (An Ode To ‘Less Than Zero’)(With Some Law Thrown In)

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Less Than Zero, the 1987 movie adapted from Bret Easton Ellis’ first novel, easily makes my short-list of decade-defining movies for multiple reasons. There’s the sterling soundtrack, for one. The Cult’s “Lil Devil” (from Electric – one of the best alt-rock albums of all-time IMHO) and the Bangles’ saturnine yet up-tempo reworking of Simon & Garfunkel’s ethereal “Hazy Shade of Winter” are just two of the songs that snugly fit the film’s alternately decadent and foreboding tone.

There’s also the “BEE” cool factor. Mr. Ellis would later pen seminal 80s and 90s tomes American Psycho (the chapter titled “Rat” is one of the most disturbing chapters in all of literature I’d venture), Glamorama, and The Informers among others. These offerings, written in Ellis’ acid satirical style, firmly entrenched him in the pop-culture pantheon of fiction writers (BEE, Douglas Coupland, Jay McInerney) from that “brat pack” Era.

LTZ’s acting is stellar, too. (Where to start) Andrew McCarthy gives a frantic, wide-eyed rendering of the straight-laced protagonist Clay Ellis who returns home from his sheltered East Coast college to find an unrecognizable and degenerate LA cityscape.

80s poster queen Jami Gertz’s sultry turn as Blair – the good-girl-gone-bad (or at least Fast) and James Spader’s sinister and chilling Rip (“old habits don’t die; they just hibernate”) – the sadistic and morally bankrupt drug dealer – each add character texture and visceral complexity to the film.

Then (you knew this was coming) there’s the star-crossed Julian Wells character. Robert Downey Jr.’s feverish, foaming-at-the-mouth portrayal of the rock-bottom, tragi-comic addict for whom “one is too many; a thousand is never enough” serves as a lurid example of life imitating art and cements Downey Jr’s status as a cinematic force for the next three decades (or more?).

So, why am I rhapsodizing about LTZ in a law blog? Well, I’m obsessed with the 80s for one.  Also because in Southern Financial Group, LLC v. McFarland State Bank, 2014 WL 3973787 (7th Cir. 2014), the Seventh Circuit – applying Wisc. law – analyzed whether a contractual damages provision that resulted in “less than zero” recovery for the plaintiff loan buyer was enforceable.

The plaintiff bought a portfolio of 19 distressed properties from the defendant loan seller for about 28 cents on the dollar. The contract limited the buyer’s damages to the repurchase price of the loan portfolio or actual damages, which were capped at the amount plaintiff paid for the various loans.

When the plaintiff found out that three of the 19 properties had been released, it sued the defendant for the lost profits that plaintiff attributed to those three properties. Before it sued though, the plaintiff sold 13 of the properties and earned about a $400,000 profit over what it paid to buy the loans.

Defendant moved for summary judgment based on the contractual damage limitation provision that capped the defendant’s damages at (a) the amount plaintiff paid for the loan package, minus (b) any amounts plaintiff received in mortgage payments on any of the properties.

The defendant argued that the plaintiff actually received more than it would have received under this repurchase formula when it liquidated 13 of the 16 properties. As a result, according to the defendant, the plaintiff’s actual damages under the contract’s repurchase formula were less than zero since the plaintiff made more by selling the properties than it would have gotten if the defendant bought back the loans.

The Court agreed and granted summary judgment for the defendant.

Held: Affirmed.

Q: Why?

A: In Wisconsin, contracting parties are able to agree to limit damages for breach of contract and to disclaim consequential damages, as long as the damage limitations are not unconscionable. Wisconsin also allows parties to a contract to limit each side’s risk of default at the outset of a contract.

The Court rejected defendant’s argument that the damage limitation failed its essential purpose under UCC Article 2 (where a limited remedy fails its essential purpose, the limitation is void). It held that a contract remedy fails of its essential purpose where the remedy is completely ineffectual, is illusory or deprives the buyer of the benefit of his bargain.

A contract law axiom posits that a contract should give at least a “fair quantum of remedy” to the non-breaching parties. A prime example of a contract remedy failing its essential purpose is where a goods contract limits a buyer’s remedy to repair and replacement and the seller refuses to repair or replace the defective item. (*3-4).

Here, the contract remedy was basically rescission: it allowed the loan buyer to have its loan purchase price repaid in exchange for returning the loan portfolio to the seller. However, the plaintiff chose not to rescind the contract (rescission puts each side back to its pre-contract setting). Instead, it sold 13 of the 16 properties and ended up earning several hundred thousand dollars in profits.

Since the plaintiff got more by selling the various properties than it would have gotten had it exercised the contractual repurchase provision, plaintiff suffered no actual damages. It would have reaped a windfall if, in addition to collecting the profits from the sale of the properties, plaintiff could have forced the defendant to buy back the loans under the contract’s damage formula. (*5).

Take-aways: Another example of the Court holding commercially sophisticated parties to the terms of their contract. Absent a disparity in bargaining power or a stronger party taking advantage of a weaker one, a contractual damage limitation will be upheld. The case also reaffirms the policy against double-recovery.

Where a plaintiff is able to earn more by accepting the benefits of the contract than he would have received by suing for breach, the plaintiff will be held to that choice. He can’t have it both ways by keeping monetary profits on one hand and simultaneously suing to undo or rescind the same transaction.

Shufflin’ Crew’s Right of Publicity Claim Not Pre-Empted by Copyright Law – IL Northern District Rules

Dent v. Renaissance Marketing Corp., 2015 WL 3484464 (N.D.Ill. 2015) involves a royalty dispute over the 1985 “Super Bowl Shuffle” – a storied (locally, at least) song and video performed by several Chicago Bears football players – the Shufflin’ Crew – to commemorate the Bears’ Super Bowl thrashing of the New England Patriots that year.

And while the case’s connection to football coupled with its celebrity-slash-nostalgia sensibility naturally piques a reader’s interest, the case is legally post-worthy mainly for its useful, quick-hits discussion of the operative rules governing Federal removal jurisdiction and copyright preemption.

The lawsuit pits former Bears players against a marketing firm and an individual who held a now-expired license to market the Shuffle video in an action challenging the defendants’ unauthorized use of the plaintiffs’ identities.

Removal and Remand

Removal (from state court to Federal court) is controlled by 28 USC s. 1441, which provides that any state court suit of which a Federal district court has original jurisdiction may be removed by the defendant;

Only state court cases that could have originally been filed in Federal court are subject to removal;

Once a case is removed to Federal court, it can be remanded (sent back) to the removing state court at any time where the Federal court loses subject matter jurisdiction;

Whether a case is ripe for removal is determined at time of removal – any post-removal amendments to a complaint normally won’t strip the Federal court of jurisdiction over the removed action;

A Federal court can retain supplemental jurisdiction over state law claims where the Federal claim is dismissed.  However, if all claims that gave the Federal court original jurisdiction are dismissed, the Federal court can (and most likely will) relinquish jurisdiction over the state law claims.

What About Preemption?

Preemption applies where a Federal law proverbially “covers the field.”  That is, the Federal law is so broad that it completely displaces state-law claims that cover the same topic.  If a state law complaint implicates (but doesn’t specifically mention) an expansive Federal law that touches on a complaint’s subject matter, that state law case can be removed to Federal court.

The Federal Copyright Act (17 U.S.C. s. 101 et seq.) is a prime example of a Federal statute that pre-empts equivalent state-law rights.  If a state law complaint involves legal and equitable rights that are within copyright’s subject matter, then that state law claim – even though it makes no mention of copyright law can still be removed to Federal court.  (**2-3).

To avoid copyright pre-emption in a royalty dispute, a state law claim must involve a right that is “qualitatively distinguishable” from the five copyright rights – the right to reproduce, distribute, perform, adapt (perform derivative works) and display a work. 17 U.S.C. ss. 106, 301.

Illinois Right of Publicity Act – Is it Pre-empted by the Copyright Act?

In a close call, the answer here was “no.”  The reason: there is a fine-line distinction between using a plaintiff’s identity or persona (which implicates a right to publicity) and infringing on a that plaintiff’s rights to publish (or distribute or reproduce or display) a given work (which invokes copyright law protections).

The Illinois Right of Publicity Act (“IRPA”) gives individuals the right to control and choose whether and how to use an individual’s identity for commercial purposes.  765 ILCS 1075/10.  IRPA bans the unauthorized use of a plaintiff’s personal identity for a commercial purpose.

The crux of the plaintiffs’ IRPA claim was that the defendants held themselves out as having an affiliation with or connection to the Shufflin’ Crew and used the Crew members’ personas in marketing defendants’ products and services.

The court found that the plaintiffs’ IRPA claim wasn’t pre-empted by copyright law.  The reason was because the plaintiffs’ IRPA claim was based on more than the defendants’ unauthorized marketing of the Super Bowl Shuffle music video.  Instead, the plaintiffs alleged the defendants traded in and profited from the crew members’ identities or “personas” in trying to sell Shuffle copies – an action distinct from performing or distributing the work itself.  Since plaintiffs’ IRPA claim was not based on unauthorized reproductions or distributions of the Shuffle music video, copyright law didn’t pre-empt the plaintiffs’ IRPA suit. (**4-5).

Once plaintiffs dropped their displaced state law claims (conversion, injunctive relief, declaratory relief), the Federal court remanded the remaining claims (IRPA, unjust enrichment, equitable accounting) to state court finding the state court better equipped to handle those claims.

Afterwords:

1/ When all Federal claims drop out of a removed case, a Federal court will likely remand the case to state court unless there is a compelling reason to keep it in Federal court;

2/ A state court action can be pre-empted by a Federal statute (like the Copyright Act) where the state court claims implicate Federal statutory rights and obligations even where the state claims make no mention of the Federal claims;

3/ The case illustrates that the respective legal interests vindicated by the Illinois Right to Publicity Act and Federal Copyright statute are similar yet still different enough to avoid pre-emption in certain factual contexts.