Landlord is not Required to Reduce Damages for Anticipatory Breach of a Commercial Lease to Present Value Despite Finding Substitute Replacement Tenants

In the commercial lease and business litigation appellate case of Newman Dev. Co. v. Genuardi’s Family Mkt. PICS Case No. 14-1338 (Pa. Super August 19, 2014) the Honorable Christine L. Donohue writing on behalf of the Pennsylvania Superior Court ruled that the trial court properly refused to reduce damages for anticipatory breach to present value, but erred by awarding interest on landlord’s attorney fees, costs and expenses prior to judgment.

The facts of this case are as follows: the landlord-developer entered into a commercial lease with a supermarket-tenant to occupy space in a planned shopping center. When the landlord could not meet construction deadlines set forth in the lease, the parties executed a long-term lease, which tenant held in ‘escrow’ for six months, pending landlord’s lease or agreement of sale with an anchor tenant located in the shopping center. The agreement incorporated the terms of the original lease as well as timing schedules established by the parties.

Four months later, tenant informed landlord that it was terminating the lease due to landlord’s failure to meet the deadlines set forth in the original lease agreement. Landlord refused to accept termination. Landlord filed a complaint against tenant alleging anticipatory breach of the lease agreement and then sought and found two replacement tenants to occupy the area previously reserved for tenant.

During the nonjury trial, landlord received rent payments from its substitute tenants for December 2005, and, on Dec. 28, 2005, landlord sold the shopping center to a third party.

In September 2006, the court found that tenant had breached the lease agreement and, ruling the contract’s damages clause as one for unenforceable liquidated damages, awarded landlord $131,277, later increased on landlord’s motion to $316,889.92, as per the damages clause. The Superior Court agreed that tenant breached an enforceable promise, but reversed the lower court’s calculation of damages. The damages clause was not, as the trial court found, one for unenforceable liquidated damages.

On remand, the trial court awarded landlord $18,489,221.60 in damages and attorney fees and expenses. The court denied tenant’s request to reduce the damages award to present value.

Despite upholding the damages award, the Superior Court vacated the lower court’s ruling, because the trial court erred in including claimed reletting expenses and in awarding interest on landlord’s attorney fees, costs and expenses prior to the court’s verdict.

First, the trial court properly refused to reduce landlord’s damages award for tenant’s anticipatory breach to present value. There was nothing in the lease agreement that suggested the parties intended for the reduction to present value of future damages nor does Pennsylvania law mandate such a reduction.

The trial court also properly calculated mitigation damages pursuant to the agreement, which only required a deduction for the rent received by substitute tenants, and did not, as tenant argued, need to account for any future tenant beyond expiration of the substitute tenants’ leases.

Moreover, the award of interest from Feb. 13, 2002 on landlord’s damages was appropriate. Tenant’s Feb. 13, 2002 refusal to proceed as contracted resulted in a total anticipatory breach of the lease, obligating tenant at that time to pay landlord all rent for the 20-year term. Pursuant to the lease, interest at a defined default rate accompanied that obligation.

However, the trial court erred when it awarded interest on attorney fees and costs accruing prior to the entry of judgment. Pursuant to the lease, tenant did not become responsible for paying landlord’s attorney fees, costs and expenses until landlord became the “prevailing party.” By definition in the lease, this did not occur until the trial court rendered its verdict finding in landlord’s favor. Therefore, landlord was entitled to interest on its attorney fees, costs and expenses beginning Aug. 15, 2006, the date of the trial court’s original verdict.

Reference: Digest of Recent Opinions, Pennsylvania Law Weekly, 37/PLW/833 (September 2, 2014)

Filed Under: Business Litigation; Commercial Litigation, Commercial Lease Damages, Anticipatory Breach

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