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By Alan Nochumson*
In the commercial lease context, a landlord in
A tenant who leaves the leased premises usually does so for
financial reasons. As such, a landlord will most likely be unable to successfully
collect rent from such a tenant. Equally important is that no commercial landlord wants
any portion of its property to remain vacant because such a
vacancy may detrimentally affect the fair market rental value of
the property. Such a
landlord will nonetheless attempt to secure a replacement
tenant.
In Trizechahn Gateway, LLC
v. Titus, the Superior Court of Pennsylvania confronted such situation, in which a
landlord did attempt to mitigate its damages by finding a
replacement tenant and the legal ramifications for doing so.
In the mid-1990s, Trizechahn Gateway, the owner of a commercial
office building located in downtown Pittsburgh, and a now-defunct
law firm, Titus & McConomy LLP, entered into a 10-year lease
agreement for occupation of one and one-half floors and basement
storage space in that building.
Several years later, the law firm closed its business operations and
offered to work toward subletting the office space. Shortly thereafter, the law firm vacated the office space,
but left behind files in the basement storage spaces. For a short period of time after leaving the building, the
law firm continued making its monthly rental payments due under the
lease agreement.
After the law firm ceased making the rental payments, the landlord
indicated its intention to recover the portion of the storage space
necessary to correct a building code violation. The landlord then utilized a portion of the recovered storage
space to construct an egress from the basement of the office
building for the benefit of a new tenant.
The landlord eventually re-let the office space to other tenants for
a term that extended beyond the term contained in the agreement with
the law firm. Due to the
weaken condition of the commercial lease market, the landlord was
forced to give rent abatements to the replacement tenants.
The landlord then commenced an action against the law firm and its
general partners seeking the remaining amounts due under the lease
agreement.
At trial, the law firm was found to have breached the lease
agreement, and judgment was entered against the law firm and in
favor of the landlord for the accelerated amount due under the
lease, less the amount the landlord would receive under the new
lease agreements.
On appeal, the law firm asserted that the landlord breached both the
covenant of good faith and fair dealing and the covenant of quiet
enjoyment by retaking the rented storage space to correct a building
code violation and by obstructing the re-letting of the office
space.
The Superior Court first addressed the law firm’s argument that the
landlord breached its duty of good faith and fair dealing to the law
firm, which, in turn, excused its performance under the lease
agreement.
According to the law firm, the landlord first notified the law firm
that the landlord needed to retake the storage space in order to
correct a building code violation. The law firm contended that the landlord, prior to sending
this notice, already had decided to take back the space so that it
could commit the space to a new tenant for purposes of building an
egress. This
misrepresentation, the law firm believed, stripped the law firm of
information that could have been used as leverage in buyout
negotiations.
Although the Superior Court noted that every contract imposes a duty
of good faith and fair dealing on the parties in the performance and
the enforcement of the contract, it summarily dismissed that the
landlord breached this duty.
Under the lease agreement, the landlord was entitled to enter the
storage space and make any alterations to that space without
terminating the lease agreement.
Keeping that lease provision in mind, the Superior Court emphasized
that once the law firm defaulted on the lease agreement, the
landlord was entitled to enter the storage space and make the
alterations the landlord felt necessary to allow that space to be
re-letted. The Superior
Court thus believed that the original notice to the law firm about
curing a building violation was immaterial, because even if the law
firm had known about the landlord’s impending plan to use the
storage space to create an egress for a new tenant, the law firm
would have not had any greater leverage in settlement negotiations
because the landlord was entitled to alter the storage space as a
matter of right.
In a footnote, the Superior Court did point out that this conclusion
would have been different if “a general rule existed whereby anytime
a landlord alters or interferes with a portion of a leasehold the
entire lease is terminated.” The Superior Court noted that such a general rule did not
exist in
The Superior Court also found that the landlord did not obstruct the
law firm from re-letting the leased premises based upon what it
described as its painstaking review of the record below. The Superior Court stated that the earliest mention of the
law firm taking any affirmative action to re-let the leased premises
was over two years after the original default when the law firm
started “the process of concluding discussions with a leasing
agent.” The court found
no evidence that the law firm actually presented a prospective
replacement tenant that was rejected to the landlord.
Since the landlord did not breach its duty of good faith and fair
dealing to the law firm, the Superior Court held the law firm was
not relieved from further performance under the lease agreement.
The Superior Court next addressed whether the landlord’s alteration of the leased premises breached its quiet enjoyment to the leased premises and thus constituted an eviction from and termination of the entire lease agreement that relieved the law firm of further performance under the lease agreement.
The law firm argued that although the landlord was permitted to make
alterations necessary for re-letting the leased premises, “it was
permitted to do so only if the re-letting [wa]s done in a way that [wa]s
not hostile to the first lease and create[d] an estate that [wa]s
subordinate to and consistent with that of the original tenant.”
According to the Superior Court, after the law firm defaulted on the
lease agreement and abandoned the leased premises, the landlord was
entitled to take possession of the leased premises and make the
alterations the landlord deemed necessary to re-let the leased
premises. By abandoning
the leased premises, the Superior Court stated that the tenant had
no possessory interest which could be disturbed.
The Superior Court also did not believe that these
alterations constituted acceptance by the landlord of the law firm’s
surrender of the leased premises. In doing so, the Superior Court embraced the concept
promulgated by the Pennsylvania Supreme Court between “a ‘hostile’
second lease with that of a ‘beneficial’ second lease.”
In
The Superior Court warned that the replacement lease only becomes
“hostile” to the original lease when the landlord accepts the
original tenant’s abandonment of the property. In doing so, the court clarified that the burden of proving a
landlord’s acceptance of tenant’s surrender of the leased premises
is on the tenant to establish, by convincing evidence, that the
landlord committed an “unequivocal act” constituting acceptance of
the surrender.
The law firm argued that, by granting rent abatement to the
replacement tenant and extending the term of the new lease
agreements beyond the term set forth in the original lease
agreement, the landlord unequivocally accepted the law firm’s
surrender of the leased premises.
The Superior Court found that giving rent abatement to the
replacement tenant was a “commercially reasonable inducement”
considering that the local commercial real estate market was in a
state of decline. As a
result, the law firm would be required to reimburse the landlord for
the amount of this rent abatement.
The Superior Court did not believe that the landlord accepted the
law firm’s surrender of the leased premises by entering into lease
arrangements with the replacement tenants for a term which exceeded
the original term. The
court pointed out that the “Supreme Court has given a strong
indication that when a landlord enters into a second lease that
contains a longer term than the first lease that is in default, this
fact is insufficient to establish acceptance of surrender.”
Moreover, the Superior Court stressed that, “although
commercial landlords have no duty to mitigate their damages[,] [i]t
would be logically inconsistent to punish a landlord by stripping
him or her of the benefit of the bargain for re-letting a premises,
to the benefit of the breaching lessee, by concluding acceptance of
surrender has taken place simply because the landlord entered into a
subsequent lease with a longer term--a transaction which is both
economically efficient as a general matter and beneficial to the
landlord as a specific matter.”
LESSONS LEARNED
The Superior Court in Trizechahn Gateway merely confirmed that while a commercial
landlord may mitigate its damages, its tenant is not absolved from
making the landlord whole. If the court had ruled otherwise, landlords in
* Alan Nochumson is the sole shareholder of Nochumson P.C. where he specializes in real estate, litigation, employment and labor, and land use and zoning. Mr. Nochumson regularly speaks at and writes for trade and professional associations, local universities, and adult education programs on issues commonly confronted by businesses, individuals, and professionals. Mr. Nochumson is also President of Bear Abstract Services where he offers comprehensive title insurance, title examination, and closing services for transactions ranging from simple residential agreements of sale to complex commercial projects. He may be reached by telephone at (215) 399-1346 or by e-mail at anochumson@nochumson.com.