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Tortious Interference With Prospective Economic Advantage – An Illinois Case Note

In Davidson v. Schneider, 2014 WL 656780 (N.D.Ill. 2014), the Court describes the quantum of proof required for a plaintiff to survive summary judgment on both the damages element of a breach of contract claim and the “reasonable expectancy” prong of a tortious interference claim.

The plaintiff and defendant were competitors in the baseball vision testing business.  They were also parties to prior patent infringement litigation that culminated in a written settlement agreement that contained broad non-disparagement language.

 When the plaintiff found out that one of defendant’s employee’s was bad-mouthing the plaintiff to a college softball coach and prospective client, he sued in Federal court.  After discovery finished, the Court entered summary judgment for defendants on plaintiff’s breach of contract and tortious interference claims.

An Illinois breach of contract plaintiff must show (a) existence of a contract, (b) performance by the plaintiff, (c) breach by the defendant and (d) compensable damages resulting from the breach.  Davidson, *3, Asset Exch. II, LLC v. First Choice Bank, 2011 Ill.App. (1st) 103718. 

Damage to reputation or goodwill resulting in a diminished ability to make money as a result of a breach can be recovered in a breach of contract suit.  However, where a party shows a breach but no damages, the contract claim is “pointless” and must fail.  Davidson, *5.

Here, the plaintiff established a contract (the settlement agreement) and defendant’s breach (by disparaging plaintiff’s products and services).  However, the plaintiff was unable to pinpoint any measurable money damages resulting from the defendants’ denigrating the plaintiff’s vision training services.

 Plaintiff cited no lost clients or business opportunities traceable to the defendants disparaging comments.  Without any damages evidence, the plaintiff’s breach of contract claim failed as a matter of law.  Davidson, *4.

The Court also granted summary judgment on plaintiff’s tortious interference with prospective economic advantage claim.  Plaintiff’s tortious interference count was based on derogatory comments defendants’ employee made to another baseball coach and prospective customer of plaintiff. 

The elements of tortious interference with prospective economic advantage are: (1) a reasonable expectation of entering a valid business relationship, (2) defendant’s knowledge of the expectation, (3) purposeful interference by the defendant that prevents plaintiff’s expectation from ripening into a business relationship, and (4) damages to the plaintiff resulting from the interference.  *5

The mere  hope for or possibility of a future business relationship is insufficient to show a reasonable expectancy. 

Here, plaintiff’s evidence showed only a nebulous hope of a future business pairing with the baseball coach to whom defendants trashed plaintiff’s product.  He didn’t show any specific business arrangement that was in the works.  As a result, plaintiff failed to raise a triable fact question on whether he had a reasonable expectation of a future business relationship with the baseball coach.

Take-aways: A breach of contract plaintiff’s failure to prove damages with tangible evidence of financial loss at the summary judgment state will doom his case. 

To survive summary judgment on a tortious interference with prospective economic advantage claim, the plaintiff must offer tangible evidence that he had a specific, proposed business arrangement with an identified third party – instead of a wish or hope for one – to meet the tort’s reasonable expectancy test.

 

Commercial Lessor’s Acceptance of Rent After Lease Termination Notice Doesn’t Waive Termination

 Z&S Corp. v. Fill & Fly, Inc., 2014 IL App (3d) 130253-U examines whether a commercial lessor, who serves a 30-day notice to terminate an oral month-to-month lease, waives the termination  by accepting rents after the notice period expires.  The case also addresses what factual elements a plaintiff must prove to prevail on a specific performance claim under Illinois law.

The defendant operated gas stations on two properties owned by the plaintiff since 2008.  And while they had discussed the defendant’s purchase of the sites at various times – most recently in 2009 – they were operating under a verbal month-to-month tenancy pursuant to which the tenant paid monthly rents and real estate taxes to the plaintiff landlord.  When tenant defaulted under the oral lease, plaintiff served a 30-day notice (on February 28, 2012) to terminate the tenancy (effective March 31, 2012) and eventually filed a forcible suit seeking possession of both properties.  After the 30-day termination period expired, plaintiff accepted some rent payments from the tenant defendant.

The tenant filed a 2-619 motion to dismiss the forcible action on the basis that the landlord waived the 30-day termination notice by accepting rents after March 31, 2012 – the 30 day notice period’s expiration.  735 ILCS 5/9-207 (month-to-month tenancy terminable on 30 days’ notice); See  http://paulporvaznik.com/how-to-terminate-periodic-tenancies/23,

The trial court rejected this argument and denied the tenant’s motion on the basis that the parties were actively engaged in settlement talks and so the landlord’s lease termination notice wasn’t waived when the landlord accepted post-termination rents.  After a bench trial, the trial court found in favor of the plaintiff and awarded it possession of the properties.  The  trial court also entered judgment for plaintiff on the tenant’s specific performance counterclaim – which sought to enforce an earlier purchase contract for the sites – on the basis that the purchase contract lapsed.  The tenant appealed both the denial of its 2-619 motion and the trial result.  Z & S, ¶¶ 21-22.

The Third District affirmed the trial court.  On the termination notice issue, the Court held that a landlord’s acceptance of rent after a termination date usually results in a waiver of the notice.  Z & S, ¶ 30; Bismark Hotel Co. v. Sutherland, 92 Ill.App.3d 167, 173 (1980).  But Illinois case law provides that if the parties are involved in active settlement negotiations at the time the landlord accepts the rent payment, the landlord’s acceptance of the rent won’t waive the lease termination.  Z & S, ¶ 30; Yarc v. American Hospital Supply Corp., 17 Ill.App.3d 667, 671 (1974).  Here, since the record evidence demonstrated that the parties were engaged in settlement talks, the landlord’s acceptance of rent after the 30-day notice period ended didn’t nullify the notice.

The Court also upheld the trial verdict in landlord’s favor on the tenant’s specific performance claim. The tenant was trying to enforce a 2009 purchase contract for the two gas station properties.  A key component of a specific performance claim is whether the claimant (1) has complied with all terms of the contract or (2) was ready, willing and able to complete the contract but was prevented from doing so by the opposing party. Z & S, ¶ 37; Maywood Proviso State Bank v. York State Bank and Trust Co., 252 Ill.App.3d 164, 171 (1993).

The defendant’s failure to establish either element doomed its specific performance claim.  The trial evidence demonstrated that the defendant’s failure to pay real estate taxes on the properties – as required under the lease and aborted purchase contract – was the reason the properties’ mortgage lender wouldn’t permit defendant to assume the existing mortgages on the sites and consummate the purchase.  Also, the Court noted that the defendant’s principal’s trial testimony established that he was unable to complete financing for the purchase of the properties because he didn’t have a green card.  Without a green card, the bank wouldn’t allow the defendant to complete the purchase transaction.  Taken together, the evidence clearly demonstrated that the tenant couldn’t prove either that he complied with the purchase contract or was prevented from doing so by the plaintiff. Z & S, ¶¶ 37-39.

Z & S is useful for its discussion of how to terminate a month-to-month commercial lease and when a landlord can still accept rent payments after a termination notice lapses.  The case also shows that to plead and prove specific performance, a litigant must show that he either complied with the contract terms or stood ready to but was impeded by some act of the other contracting party.

 

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.