Thursday, November 17, 2011

Roger E. Herst Revocable Trust, et al. v. Blinds to Go (U.S.) Inc., et al. (Maryland U.S.D.C.)

Filed: October 26, 2011

Opinion by Judge Ellen Lipton Hollander

Held: When a tenant is contractually obligated to pay rent even after acts that could be considered termination of the lease as a matter of real property law, the damage principles of contract law apply and, in the absence of a lease provision with reasonable clearness to the contrary, a defaulting tenant is entitled to the benefit of any excess rent realized from reletting the premises.

Facts: Crest Net Lease, Inc., as landlord, entered into a triple net commercial Lease with Blinds to Go (U.S.) Inc. ("BTG"), as tenant, on September 21, 2011 and entered into a Guaranty with Blinds to Go Inc. ("BTG's Parent"), the parent company of BTG, on the same date for the guaranty of the obligations of BTG under the Lease. On August 21, 2011, Crest Net Lease, Inc. assigned all of its right, title and interest in the Lease and Guaranty with the Blinds to Go entities to the plaintiffs, Roger E. Herst Revocable Trust, Dr. Roger E. Herst, Trustee of the Roger E. Herst Revocable Trust, and Joshua R. Herst (collectively, the "Plaintiffs"). Under the terms of the Lease, all rent was due and payable on the first day of each calendar month during the term and there was a late charge of 3% of the monthly rent each time the rent was late and interest also accrued on all amounts that had not been paid to the landlord at the rate of 5.25%. On or about August 31, 2009, BTG abandoned and vacated the leased premises and sent a letter to the Plaintiffs on the next day informing the Plaintiffs of the decision to vacate the leased premises. In its letter, BTG informed the Plaintiffs that it would cease paying any and all rent and additional rent otherwise payable under the Lease and suggested that it was in the best interests of the parties to terminate the Lease due to the rental rates under the Lease being well below market rates and permit the Plaintiffs to directly recover a higher rent from a new tenant. Following receipt of the BTG's letter, the Plaintiffs sent a letter to BTG informing it the the Plaintiffs "fully rejected the unilateral termination" by BTG of the Lease and would hold BTG responsible for payment of all rent and expenses set forth in the Lease through the expiration date of the Lease. Subsequent to sending the letter to BTG, the Plaintiffs also entered into an Exclusive Leasing/Sales Agreement with StreetSense Retail Advisors, LLC ("StreetSense") to authorize StreetSense to act as the Plaintiffs' agent to obtain a new tenant of the leased premises. In attempting to find a tenant, StreetSense reached out to KLNB to see if any of KLNB's clients would be interested in the premises. BTG also contacted Bialow Real Estate, LLC ("Bialow") in an effort to find a new tenant for the leased premises. On November 30, 2009, Bialow sent KLNB, on behalf of Vitamin Shoppe a letter for intent to express Vitamin Shoppe's interest in the premises. The letter of intent eventually made it to the Plaintiffs and was countersigned by the Plaintiffs on December 7, 2009. On August 3, 2010, the Plaintiffs and Vitamin Shoppe executed a lease agreement (the "Vitamin Lease") for the premises with an initial term of 10 years. The premises were delivered to Vitamin Shoppe on September 1, 2010. Because the Vitamin Lease contained provisions that gave the tenant a build-out period of 90 days in which to make tenant improvements to the premises for purposes of getting the premises ready for Vitamin Shoppe's business and a building improvement allowance of up to $87,500. The Vitamin Lease's term began on December 1, 2010 and , unlike BTG's Lease, was not a triple net lease. For delivering Vitamin Shoppe as a tenant and because there were three brokers involved, StreetSense, KLNB and Bialow, the Plaintiffs' paid commission equal to $81,218.

The Plaintiffs filed suit against in the Fall of 2010 against BTG and BTG's Parent (collectively, the "Defendants") alleging breach of the Lease and the Guaranty and seeking recovery for damages incurred as a result of such breaches, including unpaid rent from the Defendants for a total of 23 1/3 months, representing the amount of time from Defendants' breach in September 2009 until when the Plaintiffs received rent payments from Vitamin Shoppe, late charges for unpaid rent, repayment of real estate taxes and utilities, reimbursement of brokers' commission, reimbursement for costs with entering into the Vitamin Lease, administrative costs, litigation costs, and prejudgment interest. In response to the claims of Plaintiffs, the Defendants challenged the reasonableness of the Plaintiffs' efforts in mitigating their losses, the reasonableness of some of the concessions made in connection with the Vitamin Lease, the necessity of the build-out period and the reasonableness of the tenant improvement allowance, the administrative charge, litigation expenses regarding zoning issues for Vitamin Shoppe's signage and brokers' commission. The Defendants also argued that the Plaintiffs' claimed damages should be prorated to account for the time period that the Vitamin Lease extends beyond the term of the BTG's Lease and that their liability should be offset by the surplus rent that the Plaintiffs are receiving as a result of the rent being charged under the Vitamin Lease being much more than that under BTG's Lease.

Analysis: Because the parties stipulated as to the amount of unpaid rent and the amount of late charges, the Court turned first to addressing the Defendants' arguments that the length of time it took the Plaintiffs' to execute a lease with Vitamin Shoppe was unreasonable. The Court noted that while the Defendants' claim that the Plaintiffs received four originals of the lease for execution from Vitamin Shoppe's attorney on May 15, 2010 but did not sign the lease until August 3, 2010, the Defendants failed to provide any evidence indicating whether the lease that was finally signed was identical to the lease that was delivered in May. Even with such evidence, the Court explained that it would not have mattered because not only did the exact terms of the lease provide that the projected delivery date of the premises would be on September 1, 2010 but that it was clear from the outset that the lease would not be executed until the end of 2010 due to the letter of intent expressing Vitamin Shoppe's desire for the premises to be delivered "on or about January 3, 2011." The Court then quickly dismissed the Defendants' argument that the inclusion of a 90 day build-out period was unreasonable in light of BTG having been granted a 180 day build-out period under its lease with the Plaintiffs. While the Court found the number of hours claimed by Dr. Herst for purposes of performing administrative services as a result of the Defendants' breach, the Court found the hourly charge of Dr. Herst to be commensurate with market rates and awarded the Plaintiffs' recovery of the administrative charges due to them being expressly allowed under the terms of the Lease, less the number of hours the Court found to be excessively high or covered as a result of professionals hired by the Plaintiffs. Similarly, to the other challenges of Defendants' questioning the reasonableness of the brokers' commission, the title fees, the litigation fees expended to unsuccessfully deal with a zoning issue for Vitamin Shoppe's signage, the Court found all such charges to be reasonable, within the ability of the Plaintiffs' to recover as a result of Defendant's breach and within market rates.

The Court next turned its attention to the argument of Defendants' that the damages should be prorated to account for the additional months of tenancy obtained by the Plaintiffs as a result of the term of the Vitamin Lease being longer than the remainder of BTGs' Lease. As support for their argument, the Defendants pointed to Wilson v. Ruhl, 277 Md. 607 (1967), and the Maryland Court of Appeals approval of the proration of a broker's commission that a landlord paid to procure a replacement tenant. The Plaintiffs argued that Wilson was inapplicable because it concerned a residential lease and not a commercial lease and, even if it applicable to commercial leases, it was overruled by Millison v. Clarke, 287 Md. 420 (1976). The Court first noted that Wilson's holding regarding the proration of a brokerage fee to exclude that portion of the brokers' commission that is for a term in excess of the breaching tenant did differ for residential and commercial leases and then explained that Millison only overruled dicta of Wilson that suggested that a landlord's reletting of premises for a term longer than the original term of the lease was the landlord accepting the surrender of the the premises by the original tenant and not the proration holding. The Court also found that while the express language of the Lease obligated BTG to pay the brokers' commission as one of the listed items that can be incurred in reletting the premises if there is a breach by BTG, it did not warrant disregarding the holding of Wilson. Therefore, with respect to the brokers' commission, the Court held that to the extent that amount requested for the brokers' commission would be reduced to allocate to the Plaintiffs that amount of the brokers' commission that was applicable solely to Vitamin Shoppe's tenancy beyond the balance of the remainder of BTG's tenancy under the Lease.

Turning to the Defendant's next argument, the Court addressed Defendants' argument that they were entitled to setoff the damages owed by them by the amount of the surplus rent that has already been received, and that will be received, by the Plaintiffs as a result of Vitamin Shoppe's rent under the Vitamin Lease being higher than BTG's rent under the Lease. The Plaintiffs' argued that the Defendants were not entitled to a deduction for such surplusage. Because neither of the parties cited any cases, the Court reviewed secondary sources and cases from other jurisdictions regarding Defendants' argument. The Court found the New York case Hermitage Co. v. Levine, 162 N.E. 97 (N.Y. 1928), to be particularly instructive. In Hermitage, the court held that "in the absence of a lease provision to the contrary, a defaulting tenant was entitled to the benefit of any excess rent realized from reletting." The court also acknowledged that a contract damages provision could be drafted in such as way to not require the landlord to account for surplus. In referencing the terms of the Lease, the Court noted that Section 17.2.3 of the Lease expressly authorized the Plaintiffs to relet the premises without terminating the Lease and required the Plaintiffs to apply any rent received by the Plaintiffs "to the account of [BTG], not to exceed [BTG's] total indebtedness to [Plaintiffs]". Because the express terms of the Lease required the Plaintiffs to apply any amount received from reletting to the account of the Defendants, the Court held that the Defendants were entitled to set-off as a result of the surplus rent being received, but that the surplus amounts had to be adjusted to account for present value of future surplus and, in light of the fact that BTG's Lease was a triple net lease and the Vitamin Lease is not a triple net lease, the amounts that would have been paid for taxes utilities and maintenance by the Defendants.

Lastly, the Court addressed the issue of prejudgment interest. Referencing Fourth Circuit precedent that applied state law to questions involving prejudgment interest and Maryland precedent setting prejudgment interest at 6% per annum unless another percentage is established by contract or statute, the Court held that the Plaintiffs would be entitled to prejudgment interest in the amount of 5.25% per annum, as set forth in the Lease, for unpaid rent and late charges beginning on the date due, but were only entitled to pre-judgment expenses for all other awards of damages, including the brokers' commission, the attorneys' fees, the administrative costs and any other amounts from the date of the Court's order until the date judgment was entered against the Defendants. The Court explained that pre-judgment interest was allowable for the unpaid rent and late charges from the date due because those amounts had previously become due and were capable of precise calculation from the date that they were due. The other damages could not have been determined precisely as of any date certain prior to the ruling of a trier of fact and therefore could not begin running interest until they became due and certain as a result of the resolution of the case.

The full opinion is available in PDF.

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