Opinion ID: 2299034
Heading Depth: 1
Heading Rank: 5

Heading: Termination of Circuit City's Continuing Obligation

Text: Although Circuit City, by filing a motion to modify or vacate the 1999 judgment, invoked an inappropriate procedure to present its claim that demolition of the demised premises terminated its obligation under that judgment, and the court erred in entertaining such a motion, Circuit City is entitled, under both the lease and the 1999 judgment, to credit against its continuing obligation for the net amount of rent received by [Rockville], after deduction for all actual and reasonable expenses incurred in re-letting the Demised Premises... and in collecting the rent in connection therewith. To the extent there is a dispute as to the amount of such credit, as clearly there is, Circuit City is entitled to a judicial resolution of that dispute, and, to that end, and in the interest of judicial economy, we shall direct that the case be remanded to the Circuit Court for appropriate further proceedings. The key issue presented by Circuit City is whether, by allowing Food Lion to demolish the demised premises, Rockville somehow forfeited or waived its right to continued rent damages from Circuit City. The Court of Special Appeals addressed and ruled upon that issue, and, for the guidance of the Circuit Court, we shall do likewise. See Md. Rule 8-604(d). At common law, a landlord had three options when a tenant abandoned a commercial lease prior to its expiration. One was to accept a surrender of the lease and thereby terminate the tenancy. The RESTATEMENT (SECOND) OF PROPERTY § 12.1 notes that an abandonment of the premises may be treated as an offer by the tenant to surrender the lease, which the landlord may accept by reentering the premises for the landlord's own benefit. If the landlord, expressly or by its conduct, accepts the implied offer and effects a surrender, the tenancy is terminated and the tenant's obligation to pay further rent is also terminated. The landlord may, as a second option, reenter the premises for the account of the tenant, attempt to re-let the property for the tenant's benefit, and hold the tenant liable for any rent that had accrued at the time of the reentry as well as any future deficiency if the premises were unable to be re-let or were re-let at a lower rent than was reserved under the lease. Finally, under the traditional common law rule, the landlord could do nothing and hold the tenant liable for the entire amount of rent payable during the remaining term of the lease. See Wilson v. Ruhl, 277 Md. 607, 610, 356 A.2d 544, 546 (1976); see also 3 HERBERT THORNDIKE TIFFANY THE LAW OF REAL PROPERTY § 902 (3d ed.1939 and 2002 Supp.). In 1974, the Legislature, by statute, effectively abrogated that third option with respect to residential leases by requiring residential landlords to mitigate damages that result from a tenant's termination of occupancy before the end of the term. See Maryland Code, § 8-207 of the Real Property Article. More contemporary common law has sought to achieve the same result with respect to commercial leases. Friedman notes that: under the modern rule landlord may not remain idle when the tenant abandons the premises without legal excuse for so doing. He must make an effort to mitigate his damages as a condition of recovery against the tenant, in this case by endeavoring to relet. 2 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES § 16.3, at 1084 (4th ed.1997) and cases cited there. Compare RESTATEMENT (SECOND) OF PROPERTY § 12.1 cmt. i, at 391-92 (1977), reciting the more traditional rule: A tenant who abandons leased property is not entitled to insist on action by the landlord to mitigate the damages, absent an agreement otherwise. It is not necessary for us to resolve that issue in this case because it is clear that, in response to Circuit City's abandonment, Rockville did, indeed, accept a surrender of the lease. On March 31, 1998, it informed Circuit City that it was terminating the Lease effective immediately, that Rockville had re-entered and repossessed the Demised Premises effective this date, and that Circuit City had no right or authority to enter upon or attempt to convey any interest in the Demised Premises. That action, supplemented in August, 1998, by its successful quest for a partial summary judgment confirming that the lease had been terminated and that Circuit City had no possessory interest in the premises, clearly effected a surrender of the lease and a termination of the tenancy. It therefore chose the first of the three options and not the third. When there is a surrender of the lease, the landlord becomes free of the tenancy and may again deal with the property unfettered by it. On the other hand, because a surrender terminates the tenancy, the tenant's obligation to pay rent ceases. To gain the advantage of a surrender but avoid that consequence, landlords began to insert in leases provisions similar to that contained in paragraph 24 of the lease here, making the tenant liable for the amounts of rent reserved in the lease, notwithstanding any entry or termination by the landlord upon the tenant's default, and to rely on contract law, rather than property law, for the enforcement of that obligation. That, in turn, rests on the proposition, that we have embraced, that a lease is both a contract and a conveyance of a leasehold estate in land, that, as such, it creates between the parties both privity of contract and privity of estate, and that, as a result, the obligations which the parties bear to each other may arise out of contract or from the real covenants of the leasehold estate, or sometimes from both. Arthur Treacher's v. Chillum Ter., 272 Md. 720, 727, 327 A.2d 282, 286 (1974). The inclusion of such a provision often shifts the focus away from whether a completed surrender occurred, because, even if it did, the tenant may remain liable for the amount of rent reserved in the lease as a matter of contract law. The difference is that the claim is not for the post-surrender rent itself which, under property law, is no longer owed, but for damages arising from breach of the contract. See Zazanis v. Gold Coast Mall, 63 Md.App. 364, 370, 492 A.2d 953, 956 (1985) and cases cited there; see also Hermitage Co. v. Levine, 248 N.Y. 333, 162 N.E. 97 (1928) ([once] the lease was at an end ... [w]hat survived was a liability, not for rent, but for damages); Hart v. Vermont Inv. Ltd. Partnership, 667 A.2d 578 (D.C.1995); N.J. Ind. Properties v. Y.C. & V.L., Inc., 100 N.J. 432, 495 A.2d 1320 (1985); P.S.G. Ltd. v. August Income/Growth Fund, 115 N.M. 579, 855 P.2d 1043 (1993); Winshall v. Ampco Auto Parks, Inc., 417 F.Supp. 334 (E.D.Mich.1976). In either case, whether seeking to recover rent under property covenants on the theory that a surrender has not occurred or to recover contract damages under contract law, the landlord has its own obligation to mitigate damages. We have recognized generally that, when one party breaches a contract, the other party is required by the avoidable consequences rule of damages to make all reasonable efforts to minimize the loss sustained from the breach and can charge the defaulting party only with such damages as, with reasonable endeavors and expense and without risk of additional substantial loss or injury, he could not prevent. Sergeant Co. v. Pickett, 285 Md. 186, 203, 401 A.2d 651, 660 (1979). That principle applies as well to damages resulting from a tenant's abandonment of leased premises. See FRIEDMAN, supra § 16.303, at 1115-16: It has already been noted that when a tenant walks out during the term the landlord generally need not relet under the traditional common law rule. This is a rule of property law. If the lease has been terminated and the claim is for damages, the law of contracts becomes applicable. From now on the landlord must endeavor to relet and minimize his damages, that is, as a condition precedent to recovery against the original tenant. Circuit City avers that, when a landlord, following a surrender, takes action inconsistent with the notion of a reletting at the expense of the former tenant, but instead entirely demolishes the former premises... the protection of a survival clause is waived. On that premise, it argues that the issue is no longer one of credits but of an ipso facto extinguishment of any liability under paragraph 24 of the lease. That is not correct, and the cases cited by Circuit City do not support its position. [4] In Wilson v. Ruhl, supra, 277 Md. at 610-11, 356 A.2d at 546-47, we concluded that the duty of a landlord to mitigate its damages upon a default by the tenant requires only that the landlord exercise reasonable diligence in an effort to obtain a new tenant, and that, when there is a dispute over the matter, [i]t is normally left to the trier of facts to determine whether the landlord's efforts to relet satisfied his duty to mitigate. On remand, the court will need, first, to examine the efforts made by Rockville to find a new tenant, in light of Circuit City's conduct, and determine whether the arrangement with Food Lion was reasonable. If the court determines that Rockville's efforts and the arrangement with Food Lion were not reasonable, it may, on that basis, conclude that Rockville breached its contractual obligation to mitigate damages and that, from and after the time of that breach, it was entitled to no further payments from Circuit City. If the court concludes that Rockville did exercise reasonable diligence and that, in the circumstances, the arrangement with Food Lion was reasonable, it will then have to determine, from that arrangement, the net amount of rent received by Landlord, after deduction for all actual and reasonable expenses incurred in re-letting the Demised Premises.... Circuit City makes an additional argument in its brief that, by substantially altering the demised premises, Rockville has made it impossible to calculate its damages, thereby relieving Circuit City from any continuing liability. It relies, for that proposition, on Marco Kona Warehouse v. Sharmilo, Inc., 7 Haw.App. 383, 768 P.2d 247 (1989). That case is inapposite. In Marco, the defendant leased three bays in a 12-bay warehouse. When it abandoned those bays, the landlord re-let them to another tenant in the same warehouse. The bays vacated by that tenant were then re-let to a third tenant from the warehouse. In its action for damages against the defendant, the landlord sought recovery for lost rent on the bays vacated by the second tenant in order to fill the vacancy left by the defendant. The Hawaii court held that the defendant was not liable for those other vacanc[ies] of space which it neither leased nor consented to be liable for. Id. at 252. Marco is neither binding nor applicable here. Rockville has not sought damages for vacancies that Food Lion may have left in moving to the Circuit City location. In calculating the amount of credit to which Circuit City may be entitled, the court will need to examine a number of things, among which are: (1) the amount of rent received from Food Lion; (2) whether, and to what extent, that amount should be modified by the fact that the area of the leased premises is greater than that rented by Circuit Citywhether, in other words, there should be some apportionment; (3) what, if any, net benefit accrued to Rockville from the improvements made by Food Lion or from other provisions in the Food Lion lease; and (4) what effect, if any, should be given to the termination of the other three leases. These determinations may require some expert accounting or economic evidence, but they do not strike us as being impossible to make. See Dodson v. Anne Arundel County, 294 Md. 490, 494-95, 451 A.2d 317, 320 (1982) (The jury may properly consider various elements that influence market value at the time of the taking in its determination of damages ... [including] improvements on the land.); J.L. Matthews, Inc. v. Maryland-Nat'l Capital Park & Planning Comm'n, 368 Md. 71, 107-09, 792 A.2d 288, 309-10 (2002) (holding that, in determining a compensation award for a governmental taking, the petitioner was entitled to present evidence of the fair market value of his property, including the value of improvements that he would have made had he not been prohibited from doing so by an injunction). JUDGMENT OF COURT OF SPECIAL APPEALS REVERSED; CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO REVERSE JUDGMENT OF CIRCUIT COURT FOR MONTGOMERY COUNTY AND REMAND THE CASE TO THAT COURT FOR FURTHER PROCEEDINGS IN CONFORMANCE WITH THIS OPINION. COSTS IN THIS COURT AND COURT OF SPECIAL APPEALS TO BE PAID BY PETITIONER, CIRCUIT CITY.