Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.

Afterwords:

1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Landlord’s Duty to Mitigate Damages

 

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When a commercial tenant defaults under a multi-year lease, say by abandoning the premises with several years left on the lease, the law requires the landlord to mitigate its damages.  So, if retail tenant skips out on a 10-year lease after year 2,  the landlord cannot sit idly by for 8 years and then recover 8 years’ worth of rent damages from the tenant.  Instead, the landlord must make measurable efforts to try to relet the property and reduce its monetary loss.

Section 9-213.1 of the Illinois eviction statute codifies the landlord’s duty to mitigate: “a landlord or his or her agent shall take reasonable measures to mitigate the damages recoverable against a defaulting lessee.” 735 ILCS 5/9-213.1.

Whether a landlord has met its duty to mitigate damages is a fact question for the judge or jury.  If a landlord tries to relet commercial property at a higher rate than was being paid by the breaching tenant, it might raise a red flag and result in a failure to mitigate.

What steps should a landlord take then when a tenant to breaches a multi-year lease?  There is no litmus test but Illinois state and Federal courts do provide some guidance.

One Illinois court found that the landlord mitigated its damages when it (1) engaged a building manager to market the site; (2) erected signage on the premises; (3) placed calls to real estate brokers and developers; (4) ran newspaper ads; and (5) offered trial witness testimony that placing advertisements and erecting signs constitute reasonable steps toward reletting the premises. MXL Industries, Inc. v. Mulder, 252 Ill.App.3d 18 (2d Dist. 1993).  (Note: now, in the computer age, a landlord should also list the property on Costar, Loopnet or similar sites.)

By contrast, the Seventh Circuit Appeals Court found a failure to mitigate where the suing landlord (1) waited five months to hire a broker to relet the property; (2) refused to improve the property; (3) attempted to re-rent the premises at a higher rental rate (than the defaulting tenant paid); and (4) didn’t rent the site for 2.5 years after the tenant abandoned. Kallman v. Radioshack Corp., 315 F.3d 731 (7th Cir. 2003).

A landlord should also be careful not to impose too harsh lease terms when dealing with a new tenant.  In Danada Square, LLC v. KFC National Management Co., 392 Ill.App.3d 598 (2d Dist. 2009), the court found that the landlord failed to mitigate when it offered a lease to the tenant with a 60-day “kick-out clause” – the landlord can terminate lease for any reason upon 60 days’ notice.

The take-away from all this is the landlord should promptly take steps to market a property once a tenant breaches a lease.  The landlord should also document its reletting efforts so it can prove in court that it mitigated its damages.