The Leasing Hotline

DUTY TO MITIGATE DAMAGES

A landlord has a duty to mitigate damages caused by a tenant even if the tenant abandons the parties' commercial lease; the landlord has a duty to mitigate damages reasonably; the “reasonableness” should be determined by the trier of fact. Frenchtown Square Partnership v. Lemstone, Inc. D.B.A. Lemstone Books, Nos. 2001-1165, 2259, Ohio S.Ct., July 23, 2003.

Frenchtown Square Partnership (Frenchtown) owned a mall in which Lemstone Books (Lemstone) leased space to operate a bookstore. The lease was for a period of 10 years. After entering into the lease with Lemstone, Frenchtown leased space to another retailer, Alpha Gifts, which sold similar items to those sold by Lemstone. Approximately 6 months prior to the expiration of its lease, Lemstone ceased operating its business and abandoned its store space. For the final 6 months of the lease term, Lemstone did not pay rent to Frenchtown and Frenchtown did not lease the Lemstone space to another retailer. Thereafter, Frenchtown commenced an action against Lemstone for rent due, fees, and taxes. In its answer, Lemstone argued that Frenchtown failed to mitigate its damages, and filed counterclaims, including a counterclaim for tortious interference with its business relationship with its franchisees. It argued that the competition from Alpha Gifts reduced its profitability to the point where it could no longer meet its rent obligations under the lease. The trial court granted summary judgment in Frenchtown's favor on all issues. Lemstone appealed to the Ohio Court of Appeals, which affirmed the summary judgment in part and reversed in part. The court of appeals held that Frenchtown had a duty to mitigate its damages after Lemstone breached its lease, and remanded the matter to the trial court to determine whether Frenchtown had properly mitigated its damages. Frenchtown appealed the order from the court of appeals. The Ohio Supreme Court held that the only issue before it was whether a landlord has a duty to mitigate damages caused by a tenant who breaches a commercial lease and abandons the leasehold. It held that the trend in modern real property law is that a landlord is required to mitigate its damages, despite common law to the contrary. It held there is a duty to mitigate in all commercial leases, as is the rule under contract law because a modern lease is actually a contracted, “bargained-for” relationship that encompasses covenants and duties. It is not merely the transfer of a property interest. The supreme court noted that unless the parties specifically agree to the contrary, there is a duty to mitigate damages under all leases, including commercial leases. The court noted that the landlord's effort to mitigate need only be reasonable, and that “reasonableness” is determined by the trier of fact. It also noted that the failure to mitigate damages is an affirmative defense.

PERCENTAGE RENT CLAUSE

A percentage rent clause in the lease did not entitle a landlord to a preliminary injunction ordering a tenant to reopen its store. Summit Towne Centre, Inc. v. The Shoe Show of Rocky Mount, Inc., No. 44WAP 2002, Pa. Sup.Ct., July 21, 2003.

Summit leased a retail space in its shopping center to Shoe Show under a lease containing a percentage rent clause and a use provision, stating that the tenant would use the space for the sale of shoes and related accessories and that no other entity would occupy the premises except with the written consent of the landlord. Shoe Show began to operate under a different name and eventually attempted to negotiate a termination agreement with Summit. It continued to lose money and notified Summit that it was vacating the premises, while promising to continue to pay base rent. Summit advised Shoe Show that it was obligated to continue to operate, but Shoe Show ceased operations. Summit filed a petition for an injunction seeking an order that Shoe Show reopen its store; its sole witness testified to the interdependence of the stores in the shopping center and the “domino effect” of the closing. Shoe Show countered that Summit's claim could be remedied at law by money damages and that the balance of harms favored Shoe Show because of its losses. The trial court denied Summit's preliminary injunction; the appellate court reversed and Shoe Show appealed. The Pennsylvania Supreme Court reversed, agreeing with Shoe Show's argument that the appellate court conducted an improper de novo review of the record and erroneously credited the testimony of a witness that the trial court had rejected. The trial court had found that Summit failed to prove immediate and irreparable harm, that it had an adequate remedy at law and that the injunctive relief would disproportionately harm Shoe Show. Summit failed to substantiate, through business records or expert testimony, its claim that damages would not provide an adequate remedy. Nor did Summit contest the losses proved by Shoe Show. The high court, therefore, reversed the appellate court's decision, concluding there were “apparently reasonable grounds” supporting the trial court's refusal of the preliminary injunction.

'YELLOWSTONE' INJUNCTION

A Yellowstone injunction is an appropriate remedy where the tenant has invested significant money in a commercial leased space and the tenant has the ability to cure the defaults. WPA/Partners LLC v. Port Imperial Ferry Corp., No. 1286N, New York Supreme Court, Appellate Division, First Department, July 31, 2003.

A tenant leased Pier 49 in New York City from the City of New York under a 49-year lease in 1997. The City's plan was to create a commercial attraction for visitors and residents, including a visitor's center. Under a sublease from the tenant, the City would operate a visitor's center at Pier 49 with minimal rent charged in exchange for the City's payment of a portion of the costs of renovating the building intended for the visitor's center. As of May 2002, the tenant had spent more than $22 million to conduct the renovations necessary to complete approximately 70% of the project. Thereafter, unanticipated circumstances involving funding for the project changed and the parties drafted an amendment to the lease – which the City never executed – regarding the tenant's entitlement to reduced rent. In August 2001, the tenant commenced an Article 78 proceeding (a declaratory judgment action) either to compel the City to sign the amendment or to declare the amendment effective notwithstanding the absence of the City's signature. The tenant also sought a determination of the amount of rent due. During this time, the tenant continued to pay only the amount of rent that would be due under the unexecuted amendment. After September 11, 2001, the tenant was essentially evicted from the premises because of the emergency situation that arose in the aftermath. The tenant continued to pay only the reduced amount of rent. In October 2001, the City commenced a Civil Court nonpayment proceeding against the tenant, but the matter was dismissed because the City improperly served the tenant. Thereafter, on July 19, 2002, the City served the tenant a notice of default with a cure period ending August 2, 2002. The tenant moved pursuant to New York law for a Yellowstone injunction, which maintains the status quo and tolls the “cure period” so that after a determination of the merits, the tenant has the opportunity to cure the default and avoid a forfeiture of the property. The civil court denied the motion, and the appellate court reversed. It held that the denial of the Yellowstone injunction was an improvident exercise of discretion. The appellate court held that the tenant made a sufficient showing to grant the Yellowstone injunction. It considered the valuable leasehold and the amount of funds already expended by the tenant and concluded that the law does not favor forfeiture and that the tenant need not demonstrate the probability of success on the merits. It also held that the tenant did not have to prove its ability to cure: the tenant only had to show that a basis exists for the motion court to believe that, without vacating the premises, the tenant has the ability to cure after an adjudication on the merits in the tenant's favor. The appellate court found that the tenant's declaratory judgment action showed that the tenant had plausible means to cure the default.

SUMMARY JUDGMENT

A landlord is not entitled to summary judgment on the issue of damages if it cannot show that it made an attempt to mitigate damages. Manufacturers Life Ins. Co. v. Mascon Information Technologies, U.S. Dist. Ct. N. Dist. Ill., July 2, 2003.

On August 25, 1997, the parties entered into a commercial lease. On November 5, 1998, the parties amended the lease. In November, 2001, the tenant ceased making rent payments due. The landlord commenced an action to pay rent due and received a money judgment award that was subsequently paid by the tenant. The tenant then paid February 2002 rent and a portion of the March 2002 rent. Thereafter, the tenant ceased its rent payments and also failed to pay real estate taxes and other financial responsibilities under the lease. The landlord then commenced an action to recover damages from the tenant's breach of contract. The court granted the landlord's motion for summary judgment with respect to the tenant's breach of contract. However, with respect to damages, the court stated that the evidence indicated that the landlord failed to mitigate its damages once it was clear that the tenant was in breach of the contract. Because there was no proof that the landlord attempted to mitigate its damages, the landlord could not be granted summary judgment on this issue and it was remanded for trial.

TERMINATION OF LEASE

A commercial lease contract may be terminated if a party fails to perform a condition precedent to the contract and the lease is silent on the issue of notice and an opportunity to cure. Woody's Steaks, Inc., v. Pastoria, A03A0679, Ga. Ct. App., 1st Div., June 19, 2003.

Pastoria owned and operated a restaurant since 1975. In 2001, Pastoria and Woody's Steaks, Inc., (Woody's) entered into a commercial lease and license agreement under which Woody's would operate the business commencing September 4, 2001. On that day, agents of Woody's attempted to open and operate the restaurant business, but failed to demonstrate to Pastoria that they had obtained the proper business license, food service permit, sale tax certificate, workers' compensation coverage and premises liability insurance required by the parties' lease and local law. Pastoria refused to allow the agents to operate the business on that day. Thereafter, Pastoria informed Woody's that it was in default of the agreement and returned Woody's deposit. Woody's sued Pastoria for breach of contract. It argued that Pastoria failed to give notice to them of the breaches and an opportunity to cure. Pastoria denied liability. After a period of motion practice and discovery, Woody's and Pastoria each moved for summary judgment. Pastoria was granted summary judgment by the trial court on the ground that Woody's failed to fulfill its condition precedent of obtaining the proper permits and licenses under the court's interpretation of the lease contract. In affirming the trial court, the appellate court held that the contract was ambiguous regarding whether Pastoria was required to give Woody's notice and an opportunity to cure its defaults. Because it was ambiguous and drafted by Woody's, the court was entitled to apply a construction that goes most strongly against the drafter. Because the drafter (Woody's) failed to perform the condition precedent, and the issues of notice and an opportunity to cure were silent in the contract, the court was permitted to interpret the contract to find that Woody's failed to fulfill its condition precedent and Pastoria was entitled to terminate the contract and return Woody's deposit.

The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.

TERMINATION AGREEMENT

A commercial contract containing a grace period that put the parties on notice that a delay in payment would accelerate the balance due was the equivalent of an agreement that time was of the essence. Sublime, Inc. v. Boardman's Inc., Case No. 4D02-1403, Fla.Ct.App., July 16, 2003.

A landlord and tenant executed a termination agreement providing that if the tenant defaulted on any of the payments of the termination fee, the balance of the remainder of the rent would be due and payable immediately. The tenant failed to make a payment and the landlord sent a letter demanding payment of the remainder of the lease, as specified in the termination agreement. The tenant tendered the defaulted payment 13 days past the grace period; the landlord rejected it and sued for breach of contract. The trial court rendered judgment only for the past-due payments under the termination agreement because the agreement did not state that time was of the essence. The landlord appealed and the appellate court reversed. It found that although the contract did not expressly state that time was of the essence, it did specifically state that the remainder of the lease payments would be “immediately” due and payable upon default. Thus, because the contract contained an express provision for payment of a sum certain on a specific date, the parties essentially agreed that time was of the essence.

DUTY TO MITIGATE DAMAGES

A landlord has a duty to mitigate damages caused by a tenant even if the tenant abandons the parties' commercial lease; the landlord has a duty to mitigate damages reasonably; the “reasonableness” should be determined by the trier of fact. Frenchtown Square Partnership v. Lemstone, Inc. D.B.A. Lemstone Books, Nos. 2001-1165, 2259, Ohio S.Ct., July 23, 2003.

Frenchtown Square Partnership (Frenchtown) owned a mall in which Lemstone Books (Lemstone) leased space to operate a bookstore. The lease was for a period of 10 years. After entering into the lease with Lemstone, Frenchtown leased space to another retailer, Alpha Gifts, which sold similar items to those sold by Lemstone. Approximately 6 months prior to the expiration of its lease, Lemstone ceased operating its business and abandoned its store space. For the final 6 months of the lease term, Lemstone did not pay rent to Frenchtown and Frenchtown did not lease the Lemstone space to another retailer. Thereafter, Frenchtown commenced an action against Lemstone for rent due, fees, and taxes. In its answer, Lemstone argued that Frenchtown failed to mitigate its damages, and filed counterclaims, including a counterclaim for tortious interference with its business relationship with its franchisees. It argued that the competition from Alpha Gifts reduced its profitability to the point where it could no longer meet its rent obligations under the lease. The trial court granted summary judgment in Frenchtown's favor on all issues. Lemstone appealed to the Ohio Court of Appeals, which affirmed the summary judgment in part and reversed in part. The court of appeals held that Frenchtown had a duty to mitigate its damages after Lemstone breached its lease, and remanded the matter to the trial court to determine whether Frenchtown had properly mitigated its damages. Frenchtown appealed the order from the court of appeals. The Ohio Supreme Court held that the only issue before it was whether a landlord has a duty to mitigate damages caused by a tenant who breaches a commercial lease and abandons the leasehold. It held that the trend in modern real property law is that a landlord is required to mitigate its damages, despite common law to the contrary. It held there is a duty to mitigate in all commercial leases, as is the rule under contract law because a modern lease is actually a contracted, “bargained-for” relationship that encompasses covenants and duties. It is not merely the transfer of a property interest. The supreme court noted that unless the parties specifically agree to the contrary, there is a duty to mitigate damages under all leases, including commercial leases. The court noted that the landlord's effort to mitigate need only be reasonable, and that “reasonableness” is determined by the trier of fact. It also noted that the failure to mitigate damages is an affirmative defense.

PERCENTAGE RENT CLAUSE

A percentage rent clause in the lease did not entitle a landlord to a preliminary injunction ordering a tenant to reopen its store. Summit Towne Centre, Inc. v. The Shoe Show of Rocky Mount, Inc., No. 44WAP 2002, Pa. Sup.Ct., July 21, 2003.

Summit leased a retail space in its shopping center to Shoe Show under a lease containing a percentage rent clause and a use provision, stating that the tenant would use the space for the sale of shoes and related accessories and that no other entity would occupy the premises except with the written consent of the landlord. Shoe Show began to operate under a different name and eventually attempted to negotiate a termination agreement with Summit. It continued to lose money and notified Summit that it was vacating the premises, while promising to continue to pay base rent. Summit advised Shoe Show that it was obligated to continue to operate, but Shoe Show ceased operations. Summit filed a petition for an injunction seeking an order that Shoe Show reopen its store; its sole witness testified to the interdependence of the stores in the shopping center and the “domino effect” of the closing. Shoe Show countered that Summit's claim could be remedied at law by money damages and that the balance of harms favored Shoe Show because of its losses. The trial court denied Summit's preliminary injunction; the appellate court reversed and Shoe Show appealed. The Pennsylvania Supreme Court reversed, agreeing with Shoe Show's argument that the appellate court conducted an improper de novo review of the record and erroneously credited the testimony of a witness that the trial court had rejected. The trial court had found that Summit failed to prove immediate and irreparable harm, that it had an adequate remedy at law and that the injunctive relief would disproportionately harm Shoe Show. Summit failed to substantiate, through business records or expert testimony, its claim that damages would not provide an adequate remedy. Nor did Summit contest the losses proved by Shoe Show. The high court, therefore, reversed the appellate court's decision, concluding there were “apparently reasonable grounds” supporting the trial court's refusal of the preliminary injunction.

'YELLOWSTONE' INJUNCTION

A Yellowstone injunction is an appropriate remedy where the tenant has invested significant money in a commercial leased space and the tenant has the ability to cure the defaults. WPA/Partners LLC v. Port Imperial Ferry Corp., No. 1286N, New York Supreme Court, Appellate Division, First Department, July 31, 2003.

A tenant leased Pier 49 in New York City from the City of New York under a 49-year lease in 1997. The City's plan was to create a commercial attraction for visitors and residents, including a visitor's center. Under a sublease from the tenant, the City would operate a visitor's center at Pier 49 with minimal rent charged in exchange for the City's payment of a portion of the costs of renovating the building intended for the visitor's center. As of May 2002, the tenant had spent more than $22 million to conduct the renovations necessary to complete approximately 70% of the project. Thereafter, unanticipated circumstances involving funding for the project changed and the parties drafted an amendment to the lease – which the City never executed – regarding the tenant's entitlement to reduced rent. In August 2001, the tenant commenced an Article 78 proceeding (a declaratory judgment action) either to compel the City to sign the amendment or to declare the amendment effective notwithstanding the absence of the City's signature. The tenant also sought a determination of the amount of rent due. During this time, the tenant continued to pay only the amount of rent that would be due under the unexecuted amendment. After September 11, 2001, the tenant was essentially evicted from the premises because of the emergency situation that arose in the aftermath. The tenant continued to pay only the reduced amount of rent. In October 2001, the City commenced a Civil Court nonpayment proceeding against the tenant, but the matter was dismissed because the City improperly served the tenant. Thereafter, on July 19, 2002, the City served the tenant a notice of default with a cure period ending August 2, 2002. The tenant moved pursuant to New York law for a Yellowstone injunction, which maintains the status quo and tolls the “cure period” so that after a determination of the merits, the tenant has the opportunity to cure the default and avoid a forfeiture of the property. The civil court denied the motion, and the appellate court reversed. It held that the denial of the Yellowstone injunction was an improvident exercise of discretion. The appellate court held that the tenant made a sufficient showing to grant the Yellowstone injunction. It considered the valuable leasehold and the amount of funds already expended by the tenant and concluded that the law does not favor forfeiture and that the tenant need not demonstrate the probability of success on the merits. It also held that the tenant did not have to prove its ability to cure: the tenant only had to show that a basis exists for the motion court to believe that, without vacating the premises, the tenant has the ability to cure after an adjudication on the merits in the tenant's favor. The appellate court found that the tenant's declaratory judgment action showed that the tenant had plausible means to cure the default.

SUMMARY JUDGMENT

A landlord is not entitled to summary judgment on the issue of damages if it cannot show that it made an attempt to mitigate damages. Manufacturers Life Ins. Co. v. Mascon Information Technologies, U.S. Dist. Ct. N. Dist. Ill., July 2, 2003.

On August 25, 1997, the parties entered into a commercial lease. On November 5, 1998, the parties amended the lease. In November, 2001, the tenant ceased making rent payments due. The landlord commenced an action to pay rent due and received a money judgment award that was subsequently paid by the tenant. The tenant then paid February 2002 rent and a portion of the March 2002 rent. Thereafter, the tenant ceased its rent payments and also failed to pay real estate taxes and other financial responsibilities under the lease. The landlord then commenced an action to recover damages from the tenant's breach of contract. The court granted the landlord's motion for summary judgment with respect to the tenant's breach of contract. However, with respect to damages, the court stated that the evidence indicated that the landlord failed to mitigate its damages once it was clear that the tenant was in breach of the contract. Because there was no proof that the landlord attempted to mitigate its damages, the landlord could not be granted summary judgment on this issue and it was remanded for trial.

TERMINATION OF LEASE

A commercial lease contract may be terminated if a party fails to perform a condition precedent to the contract and the lease is silent on the issue of notice and an opportunity to cure. Woody's Steaks, Inc., v. Pastoria, A03A0679, Ga. Ct. App., 1st Div., June 19, 2003.

Pastoria owned and operated a restaurant since 1975. In 2001, Pastoria and Woody's Steaks, Inc., (Woody's) entered into a commercial lease and license agreement under which Woody's would operate the business commencing September 4, 2001. On that day, agents of Woody's attempted to open and operate the restaurant business, but failed to demonstrate to Pastoria that they had obtained the proper business license, food service permit, sale tax certificate, workers' compensation coverage and premises liability insurance required by the parties' lease and local law. Pastoria refused to allow the agents to operate the business on that day. Thereafter, Pastoria informed Woody's that it was in default of the agreement and returned Woody's deposit. Woody's sued Pastoria for breach of contract. It argued that Pastoria failed to give notice to them of the breaches and an opportunity to cure. Pastoria denied liability. After a period of motion practice and discovery, Woody's and Pastoria each moved for summary judgment. Pastoria was granted summary judgment by the trial court on the ground that Woody's failed to fulfill its condition precedent of obtaining the proper permits and licenses under the court's interpretation of the lease contract. In affirming the trial court, the appellate court held that the contract was ambiguous regarding whether Pastoria was required to give Woody's notice and an opportunity to cure its defaults. Because it was ambiguous and drafted by Woody's, the court was entitled to apply a construction that goes most strongly against the drafter. Because the drafter (Woody's) failed to perform the condition precedent, and the issues of notice and an opportunity to cure were silent in the contract, the court was permitted to interpret the contract to find that Woody's failed to fulfill its condition precedent and Pastoria was entitled to terminate the contract and return Woody's deposit.

The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.