The Leasing Hotline

UNACCRUED RENT

Absent a specific provision in the lease, mere breach of lease does not entitle the landlord to collect unaccrued rent after notice of termination is delivered to the tenant. TSI v. American Gem Corporation, No. 02-253, Supreme Court of Montana, October 30, 2003.

On April 1, 1996, the landlord, TSI, and the tenant, AGC, entered into a 5-year lease in a commercial building. Thereafter, AGC had financial difficulties and vacated the premises on or about Nov. 10, 1997. On April 1, 1998, TSI sent a letter to AGC informing AGC that it was terminating the lease and had rented the premises to another tenant from May 1998 through November 1999. After that tenancy terminated, TSI sued AGC, seeking compensation for unpaid rent, utilities, real estate taxes and insurance premiums for the entire 5-year period of the lease. TSI moved for summary judgment, and the district court concluded that AGC had breached the lease as a matter of law. The parties stipulated to the maximum amount of damages and a hearing was held regarding whether TSI had failed to mitigate its damages.

The court concluded that under the lease TSI did not reserve its right to recover unaccrued rent, utilities, insurance or taxes past the date it terminated the lease on April 1, 1998. TSI then moved to recover unpaid rents and interest past April 1, 1998, arguing that AGC had failed to plead election of remedies. The district court denied the motion and TSI appealed.

The appellate court affirmed. It held that the trial court did not abuse its discretion when it did not award TSI unpaid rent after April 1, 1998. It held that AGC was not required to plead election of remedies as a defense. The court considered that under the facts presented, the lease did not contain a “savings clause” as to the rights reserved by each party. The lease simply stated that if AGC breached the lease, it could be held accountable for damages caused by its breach. The court did not consider this language clear enough to preserve TSI's right to unaccrued rent after termination of the lease.

UNJUST ENRICHMENT

The benefit received by lot owners from a ground lessee's entitlement to exclusive use of a certain number of parking spaces is not unjust enrichment where the benefit flows from the lessee's leasehold and is only incidental to the fee ownership. DR/CR Family, LLLP v. Burger, Court of Appeals No. 02CA0702, Court of Appeals of Colorado, Division Five, October 23, 2003.

Paula Burger and others (the lot owners) acquired unplatted land subject to a ground lease and succeeded to the previous owner's rights as lessor. The lease permitted the lessee to construct, own and operate a restaurant on Lot 4. The lessee was also entitled to nonexclusive use of common areas, parking areas and driveways and the exclusive use of no less than 32 parking spaces for its employees and patrons. Thereafter, the lot owners borrowed money, secured by a deed of trust, to construct a shopping center on the undeveloped portion of the lot. However, the lot owners defaulted on the loan, the lender foreclosed and DR/CR Family, LLLP (DR/CR) acquired the shopping center, less Lot 4. The lot owners retained ownership of Lot 4. At the time it acquired the shopping center, DR/CR had actual notice of the lessee's ground lease. Thereafter, DR/CR commenced proceedings seeking, inter alia, a declaratory judgment that the lot owners were unjustly enriched by the services provided by DR/CR for the lessee's use of the exclusive parking. After a trial, DR/CR was awarded past rent on its unjust enrichment claim and 20% of future rent payable by the lessee to the lot owners for the use of the exclusive parking. The lot owners appealed, arguing that the trial court erred in awarding past rent on the unjust enrichment claim. The appellate court vacated the judgment and remanded to the trial court with directions to dismiss with prejudice. It held that in this case, the agreement between the lot owners and the lessee was a servitude burdening the entire parcel acquired by DR/CR and existed for the benefit of the lessee (not the lot owners) for the duration of its lease. The appellate court considered that DR/CR was aware of the servitude at the time it acquired the parcel. It noted that the ownership in Lot 4 was separate from the rest of the shopping center and the servitude (the exclusive parking) is appurtenant to the lessee's leasehold interest in Lot 4, not the lot owner's fee ownership of Lot 4. Therefore, even though the lot owners (as the fee owners of Lot 4) benefited from the lessee's entitlement to exclusive parking in 32 spaces, the benefit flows from the leasehold and is only incidental to the fee ownership. The appellate court concluded that the lot owners were not unjustly enriched because under these circumstances, it was not inequitable for them to retain the benefit where the benefit to them was only incidental.

SUBJECT MATTER JURISDICTION

A federal district court does not have subject matter jurisdiction to reverse the decision of a state court that a lease was terminated prior to the filing of a bankruptcy petition. In re Willow Corporation, No. 03-182, United States District Court for the Eastern District of Pennsylvania, October 9, 2003.

Willow entered into a commercial lease with Callowhill. The lease prohibited Willow from subleasing the premises without the prior written consent of Callowhill. Thereafter, Willow and SFX Entertainment executed a Stock Purchase Agreement wherein certain assets, including the lease with Callowhill, would be transferred to SFX. Callowhill denied the transfer, and Willow commenced two lawsuits in Pennsylvania state court against Callowhill, seeking, inter alia, a declaration that Callowhill breached the lease by refusing to permit the transfer of the lease to SFX. Callowhill counterclaimed, seeking a declaration that the lease was terminated. The Pennsylvania court concluded that Willow breached the lease and declared the lease terminated.

Thereafter Willow filed a Bank-ruptcy Petition with the U.S. Bank-ruptcy Court, and Callowhill sought to dismiss the Bankruptcy Petition or remove the automatic stay so that Callowhill could proceed against Willow in state court for repossession of the premises. After a hearing, the bankruptcy court issued an order stating that the Bankruptcy Court, pursuant to the Rooker-Feldman Doctrine, was prohibited from reviewing the state court decision declaring the lease terminated. After further proceedings, the bankruptcy court granted Callowhill's motion for relief from the automatic stay and permitted Callowhill to proceed against Willow in state court for repossession. The bankruptcy court noted that it did not have jurisdiction to consider whether the lease was terminated or if the state court had committed error in its evaluation of evidence prior to terminating the lease.

Thereafter, Willow moved for a stay while it appealed the bankruptcy court's orders to the federal district court. The district court denied the stay pending appeal. It held that Willow could not show a likelihood of success on the merits of the appeal. It considered that the Bankruptcy Code specifically provides that a debtor is not entitled to assign a lease if the lease has been terminated pre-petition. The district court also considered that under the Rooker-Feldman Doctrine, lower federal courts do not have subject matter jurisdiction to engage in appellate review of state court determinations. The court stated that if it found that Willow could succeed on the merits, it would effectively reverse the decision made by the Pennsylvania state court, which would contradict the Rooker-Feldman Doctrine.

MEASURE OF DAMAGES

The cost of the repair or replacement of a new roof, rather than actual damages suffered by the tenant, is an appropriate measure of damages where the lease between the parties requires the landlord to repair or replace the roof. Samuel v. KTVU Partnership, No. 08-02-00010-CV, Court of Appeals of Texas, Eighth District, El Paso, October 22, 2003.

The landlord, Samuel, and the tenant, KTVU, entered into a 20-year lease for the purpose of KTVU to operate a television studio. Under the terms of the lease, Samuel was required to install a new roof and maintain the roof in good condition. Samuel failed to install and maintain the roof and KTVU filed a lawsuit against Samuel, alleging breach of the lease. After a jury trial, Samuel was found to have breached the lease and awarded KTVU $50,000 in damages because of Samuel's failure to maintain the roof. The jury was instructed to consider the cost of roof repair or a new roof in the calculation of damages. Samuel appealed, seeking a rehearing regarding, inter alia, the jury's measure of damages. He argued that the jury should have measured the damages by the damage actually caused to the tenant's property, eg, the cost of a new computer monitor or the ceiling tiles or the expense incurred for emergency repairs, rather than the cost of roof repairs or a new roof because it does not own or lease the roof. The appellate court affirmed, finding that the court below did not abuse its discretion in its direction to the jury. It considered Samuel's obligation under the lease to maintain, repair or replace the roof as a reasonable measure of damages, even though the only damages actually suffered by the tenant were damages to personal property and the cost of certain emergency repairs. In addition, the court upheld the lower court's finding that the tenant had a right to park on land adjacent to the leased premises that was owned by the landlord.

UNACCRUED RENT

Absent a specific provision in the lease, mere breach of lease does not entitle the landlord to collect unaccrued rent after notice of termination is delivered to the tenant. TSI v. American Gem Corporation, No. 02-253, Supreme Court of Montana, October 30, 2003.

On April 1, 1996, the landlord, TSI, and the tenant, AGC, entered into a 5-year lease in a commercial building. Thereafter, AGC had financial difficulties and vacated the premises on or about Nov. 10, 1997. On April 1, 1998, TSI sent a letter to AGC informing AGC that it was terminating the lease and had rented the premises to another tenant from May 1998 through November 1999. After that tenancy terminated, TSI sued AGC, seeking compensation for unpaid rent, utilities, real estate taxes and insurance premiums for the entire 5-year period of the lease. TSI moved for summary judgment, and the district court concluded that AGC had breached the lease as a matter of law. The parties stipulated to the maximum amount of damages and a hearing was held regarding whether TSI had failed to mitigate its damages.

The court concluded that under the lease TSI did not reserve its right to recover unaccrued rent, utilities, insurance or taxes past the date it terminated the lease on April 1, 1998. TSI then moved to recover unpaid rents and interest past April 1, 1998, arguing that AGC had failed to plead election of remedies. The district court denied the motion and TSI appealed.

The appellate court affirmed. It held that the trial court did not abuse its discretion when it did not award TSI unpaid rent after April 1, 1998. It held that AGC was not required to plead election of remedies as a defense. The court considered that under the facts presented, the lease did not contain a “savings clause” as to the rights reserved by each party. The lease simply stated that if AGC breached the lease, it could be held accountable for damages caused by its breach. The court did not consider this language clear enough to preserve TSI's right to unaccrued rent after termination of the lease.

UNJUST ENRICHMENT

The benefit received by lot owners from a ground lessee's entitlement to exclusive use of a certain number of parking spaces is not unjust enrichment where the benefit flows from the lessee's leasehold and is only incidental to the fee ownership. DR/CR Family, LLLP v. Burger, Court of Appeals No. 02CA0702, Court of Appeals of Colorado, Division Five, October 23, 2003.

Paula Burger and others (the lot owners) acquired unplatted land subject to a ground lease and succeeded to the previous owner's rights as lessor. The lease permitted the lessee to construct, own and operate a restaurant on Lot 4. The lessee was also entitled to nonexclusive use of common areas, parking areas and driveways and the exclusive use of no less than 32 parking spaces for its employees and patrons. Thereafter, the lot owners borrowed money, secured by a deed of trust, to construct a shopping center on the undeveloped portion of the lot. However, the lot owners defaulted on the loan, the lender foreclosed and DR/CR Family, LLLP (DR/CR) acquired the shopping center, less Lot 4. The lot owners retained ownership of Lot 4. At the time it acquired the shopping center, DR/CR had actual notice of the lessee's ground lease. Thereafter, DR/CR commenced proceedings seeking, inter alia, a declaratory judgment that the lot owners were unjustly enriched by the services provided by DR/CR for the lessee's use of the exclusive parking. After a trial, DR/CR was awarded past rent on its unjust enrichment claim and 20% of future rent payable by the lessee to the lot owners for the use of the exclusive parking. The lot owners appealed, arguing that the trial court erred in awarding past rent on the unjust enrichment claim. The appellate court vacated the judgment and remanded to the trial court with directions to dismiss with prejudice. It held that in this case, the agreement between the lot owners and the lessee was a servitude burdening the entire parcel acquired by DR/CR and existed for the benefit of the lessee (not the lot owners) for the duration of its lease. The appellate court considered that DR/CR was aware of the servitude at the time it acquired the parcel. It noted that the ownership in Lot 4 was separate from the rest of the shopping center and the servitude (the exclusive parking) is appurtenant to the lessee's leasehold interest in Lot 4, not the lot owner's fee ownership of Lot 4. Therefore, even though the lot owners (as the fee owners of Lot 4) benefited from the lessee's entitlement to exclusive parking in 32 spaces, the benefit flows from the leasehold and is only incidental to the fee ownership. The appellate court concluded that the lot owners were not unjustly enriched because under these circumstances, it was not inequitable for them to retain the benefit where the benefit to them was only incidental.

SUBJECT MATTER JURISDICTION

A federal district court does not have subject matter jurisdiction to reverse the decision of a state court that a lease was terminated prior to the filing of a bankruptcy petition. In re Willow Corporation, No. 03-182, United States District Court for the Eastern District of Pennsylvania, October 9, 2003.

Willow entered into a commercial lease with Callowhill. The lease prohibited Willow from subleasing the premises without the prior written consent of Callowhill. Thereafter, Willow and SFX Entertainment executed a Stock Purchase Agreement wherein certain assets, including the lease with Callowhill, would be transferred to SFX. Callowhill denied the transfer, and Willow commenced two lawsuits in Pennsylvania state court against Callowhill, seeking, inter alia, a declaration that Callowhill breached the lease by refusing to permit the transfer of the lease to SFX. Callowhill counterclaimed, seeking a declaration that the lease was terminated. The Pennsylvania court concluded that Willow breached the lease and declared the lease terminated.

Thereafter Willow filed a Bank-ruptcy Petition with the U.S. Bank-ruptcy Court, and Callowhill sought to dismiss the Bankruptcy Petition or remove the automatic stay so that Callowhill could proceed against Willow in state court for repossession of the premises. After a hearing, the bankruptcy court issued an order stating that the Bankruptcy Court, pursuant to the Rooker-Feldman Doctrine, was prohibited from reviewing the state court decision declaring the lease terminated. After further proceedings, the bankruptcy court granted Callowhill's motion for relief from the automatic stay and permitted Callowhill to proceed against Willow in state court for repossession. The bankruptcy court noted that it did not have jurisdiction to consider whether the lease was terminated or if the state court had committed error in its evaluation of evidence prior to terminating the lease.

Thereafter, Willow moved for a stay while it appealed the bankruptcy court's orders to the federal district court. The district court denied the stay pending appeal. It held that Willow could not show a likelihood of success on the merits of the appeal. It considered that the Bankruptcy Code specifically provides that a debtor is not entitled to assign a lease if the lease has been terminated pre-petition. The district court also considered that under the Rooker-Feldman Doctrine, lower federal courts do not have subject matter jurisdiction to engage in appellate review of state court determinations. The court stated that if it found that Willow could succeed on the merits, it would effectively reverse the decision made by the Pennsylvania state court, which would contradict the Rooker-Feldman Doctrine.