Court Hands Down Multimillion Dollar Judgment Against Default Landlord
Written by: Alan Nochumson
In Gamesa Energy USA v. Ten Penn Center, 2016 Phila. Ct. Com. Pl. LEXIS 270 (July 22, 2016), Judge Ramy I. Djerassi found that a landlord committed a material breach of a commercial lease agreement by failing to properly perform its contractual obligations under the assignment provision contained in the commercial lease agreement. In doing so, Djerassi issued a multimillion judgment against the defaulting landlord, and in favor of the damaged tenant.
In Gamesa, a tenant entered into a lease agreement to rent the 26th and 27th floors of the office building known as Ten Penn Center in Philadelphia, the opinion said.
The term of the lease agreement expired on Sept. 1, 2018, the opinion said.
The lease agreement provided for a substantial tenant improvement allowance for the tenant to build out its office space in the building at the landlord’s cost and expense, according to the opinion.
Under the lease agreement, the tenant is prohibited from subleasing any portion of its office space to a third party without the landlord’s approval, which, according to the lease agreement, “approval shall not be unreasonably withheld, conditioned or delayed.” Furthermore, under the lease agreement, if the tenant requests to sublease any portion of its office space to a third party, the landlord is obligated, within 30 days from its receipt of the written request, to either grant or refuse its consent to the proposed sublease arrangement, the opinion said.
A couple of years subsequent to the execution of the lease agreement, the tenant obtained the landlord’s consent to lease a significant portion of its office space to a third party, Viridity Energy, Inc. After the sublease was approved by the landlord, the tenant used a portion of its remaining tenant improvement allowance to accommodate Viridity’s needs. Thereafter, the tenant was left with approximately $391,000 for modifications at the remaining portion of its unfinished office space, the opinion said.
Almost a year later, the tenant advised the landlord that it was moving its offices from the leased premises to a new location in Trevose, as part of a corporate office consolidation. When that happened, the tenant assured the landlord that it would continue to pay rent on the portion of the leased premises it was moving away from and that it would be looking for a proposed subtenant for the remaining portion of the leased premises.
When the landlord discovered that the tenant had planned to move its corporate offices, the landlord did not declare a default of the lease agreement, the opinion said. Instead, the landlord asserted that the tenant could not use any of its remaining tenant improvement allowance for application to any new proposed sublease, the opinion said.
The issue over the applicable tenant improvement allowances was left unresolved when the tenant vacated from the remaining unoccupied portion of the leased premises. According to the opinion, the tenant left the leased premises with the cooperation of the landlord’s building management, which included access to the building’s elevators and loading docks.
A month after the tenant vacated from the leased premises, the tenant sent a request to the landlord to sublease a portion of the unoccupied portion of the leased premises to a newly formed third-party joint venture between established entities, the opinion said. The tenant even retained the services of an architect to design the proposed fit-out of the new office space and a building contractor to fit-out the new office space, the opinion said. The landlord, at that point, then notified the tenant that it was in default of the lease agreement by contending that the tenant had “vacated the [leased] premises otherwise than in the ordinary and usual course of business.” Moreover, the landlord failed to notify the tenant as to whether it consented to the proposed sublease of that portion of the unoccupied leased premises.
At the time that the landlord declared that the tenant to be in default of the lease agreement, Viridity was still subleasing another portion of the leased premises.
The tenant then filed a complaint against the landlord in state court setting forth counts requesting declaratory judgment, as well as claiming breach of the lease agreement, tortious interference with prospective economic advantage, and unjust enrichment.
While the litigation was pending, the tenant paid and the landlord accepted the rental payments due under the lease agreement.
A bench trial took place before Djerassi, which centered on the issue of whether the landlord’s actions under the lease agreement are viewed as a breach of the 30-day notification provision in which it is required to either consent or refuse a proposed sublease or a breach of its duty not to unreasonably withhold, condition or delay said approval of the proposed sublease.
During the trial, the landlord asserted its claim of default of the lease agreement due to the tenant’s abandonment of the leased premises. Moreover, according to the landlord, the tenant could not authorize new subleases until the status of the validity of its lease agreement for the leased premises was resolved.
After the bench trial concluded, Djerassi held in favor of the tenant and against the landlord, finding that the landlord defaulted under its obligations under the lease agreement and, thereby, caused significant financial loss to the tenant.
Djerassi relied upon the plain and unambiguous language of the lease agreement governing subleases that consent shall not be unreasonably withheld, and that within 30 days from receipt of a tenant’s request for consent to any sublease, the “landlord shall … grant or refuse consent.”
Consequently, Djerassi concluded that landlord violated these terms by failing to advise the tenant in writing that it was rejecting or accepting the sublease application of the newly formed third-party joint venture.
Djerassi further held that the tenant did not default on the lease agreement by vacating the premises, as the premises continued to be occupied by the subtenant Viridity and the tenant continued making rental payments in full which were accepted by the landlord.
Another factor in Djerassi’s decision that the tenant did not default on the lease agreement was that the tenant received the cooperation of the landlord’s management when moved its furnishings and equipment from the premises, following communication from the tenant that it would continue to pay rent owed under the lease agreement and would look for subtenants in addition to Viridity. According to the opinion, that demonstrated that the tenant did not have the requisite intent to abandon the premises of the kind that must be proven to justify declaration of default and immediate repossession by the landlord.
Citing Turnway Corporation v. Soffer, 336 A.2d 871 (Pa. 1975), Djerassi pointed out that, in order to establish legal justification to establish a landlord’s right of immediate possession, there must be found as a matter of fact: an intention to abandon, and conduct by which this intention is carried into effect.
Djerassi found that the landlord in Gamesa had proven neither of these elements by a preponderance of evidence, as the tenant did not intend to abandon the leased premises as it informed the landlord that it would continue to pay rent and would be looking for a proposed subtenant. Moreover, Djerassi emphasized that the landlord’s acceptance of all tendered rent from Gamesa precluded any claim it might have had from 2012 to the present for immediate repossession of the leased premises.
On the contrary, Djerassi reasoned that it was the landlord who had committed a material breach of the lease agreement by declaring the alleged default thereof and failing to either accept or reject the tenant’s subtenant application within the requisite 30-day period of time set forth in the lease agreement.
Djerassi also found that the landlord in Gamesa “prevented” the tenant from obtaining any additional subtenants and did so while also collecting rent and, thus, failed to mitigate the tenant’s damages.
Most significantly, Djerassi voided the lease agreement and, thus, terminated the lease term which would have expired in late 2018 because he believed that the landlord’s breach of the lease agreement was so substantial as to fail to conform to standards of good faith and fair dealing.
According to Djerassi, “whether a breach is so substantial as to justify an injured party’s position that the whole contract is over is weighed by measuring the consequences.”
Djerassi cited to Section 241 of the Restatement (Second) of Contracts as well as the Superior Court of Pennsylvania’s ruling in Widmer Engineering v. Dufalla, 837 A.2d 459 (Pa. Super. Ct. 2003), for the factors utilized by Pennsylvania courts in deciding how substantial a breach is.
In the opinion, Djerassi listed the following factors: “the extent to which the injured party will be deprived of the benefit which it reasonably expected” and “the extent to which the behavior of the party failing to perform or offer to perform comports with standards of good faith and fair dealing.”
Applying these factors, Djerassi concluded that the landlord’s delay of subtenant approval while attempting to renegotiate the remaining tenant allowance due under the lease agreement and then operating under a self-declared lease default without demanding immediate repossession of the leased premises and also continuing to collect the rent under the leased premises constituted conduct that did not conform to standards of good faith and fair dealing.
The judge’s ruling is a cautionary tale for landlords as to their potential monetary exposure if a court of law declares their actions to be lacking in good faith. For breaching the lease agreement, Djerassi assessed damages in the amount of $265,463, plus prejudgment interest of $18,279, which represented three years of lost revenue to the tenant from the landlord’s refusal to approve the additional sublease. To make matters worse, Djerassi assessed a whopping $3,639,202.87 in damages against the landlord for its unjust enrichment for retention of rent paid by the tenant since July 2012, the date that Djerassi held the lease agreement to have legally terminated.
Typically, commercial leases are drafted by the landlord and their legal counsel. As such, courts will likely take a dim view of a landlord acting contrary to the terms and conditions of those commercial leases. That being said, it would behoove all landlords to be very familiar with the contents of their commercial leases or face the consequences.
Reprinted with permission from the September 13, 2016 edition of The Legal Intelligencer © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.