Opinion ID: 173965
Heading Depth: 2
Heading Rank: 2

Heading: The Holdover Statute

Text: Since 1827, Illinois has had on its books a statute that permits landlords to recover double the fair market rental value of their properties from tenants who willfully hold over on leases. See 735 Ill. Comp. Stat. 5/9-202. The statute is intended to protect and compensate landlords. See Granger v. Bd. of Trs. of Ill. & Mich. Canal, 18 Ill. 443 (1857). Because of its penal nature, it is only applied when tenants know their retention of possession is wrongful; that is, when they lack a colorable justification for remaining in possession. J.M. Beals Enters., Inc. v. Indus. Hard Chrome, Ltd., 271 Ill.App.3d 257, 207 Ill.Dec. 793, 648 N.E.2d 249, 252 (1995). Here, the district court determined that Rexam's entire post-lease stay of seventeen months was both willful and wrongful and awarded Bolger over $1 million pursuant to the Holdover Statute. We review de novo the district court's determination of the legal standard for recovery under Illinois law, but because the determination of whether a holding over was willful is a question of fact we review it only for clear error. Findings of fact are clearly erroneous only when the reviewing court is left with the definite and firm conviction that a mistake has been committed. Econ. Folding Box Corp., 515 F.3d at 720 (quotation omitted). Rexam first asserts that the Holdover Statute should not apply because Bolger failed to conform with its requirements. Though Rexam is correct that landlords must strictly comply with the Holdover Statute's terms to recover, Stride v. 120 W. Madison Bldg. Corp., 132 Ill.App.3d 601, 87 Ill.Dec. 790, 477 N.E.2d 1318, 1321 (1985), that argument lacks traction here. The Holdover Statute by its terms asks very little of landlords who seek to invoke it; it requires only that they demand possession of the property in writing. 735 Ill. Comp. Stat. 5/9-202. Rexam acknowledges in its opening brief that Bolger did just that: By letter dated February 27, 2006, Bolger . . . rejected Rexam's renewal notice. Bolger instructed Rexam to surrender the Rockford Warehouse by the end of the term, March 31, 2006. Appellant's Br. 6. Bolger also took the additional step of notifying Rexam in writing of his intent to pursue damages under the Holdover Statute on May 5, 2006, just over a month into Rexam's holdover tenancy. Illinois courts have long denied the benefits of the Holdover Statute to landlords who terminate their tenants' leases, see Stuart v. Hamilton, 66 Ill. 253 (1872), but Rexam does not allege (and the record does not support the conclusion) that Bolger affirmatively terminated the lease here. Rexam also makes much of the fact that Bolger demanded that it make some repairs to the property. On February 16, 2006, and again on February 27, 2006, Bolger indicated in writing that he expected Rexam to address a few exterior problems with the warehouse, specifically some broken windows, a concrete block wall, and debris and overgrowth on the warehouse's railroad spur. Rexam asserts that Bolger, via these communications, forced it into a Hobson's choice by demanding repairs to the property while simultaneously requiring Rexam to vacate in a timely fashion. See J.M. Beals, 207 Ill. Dec. 793, 648 N.E.2d at 253. We fail to see the bind here. Rexam could have chosen to vacate on time, leaving some repairs undone, or it could have sought Bolger's permission to stay on and complete the requested repairs. It did neither. Rexam was not forced into a Hobson's choice; Rexam simply made no choice. Bolger, on the other hand, chose to give Rexam advance warning of the repairs he wanted done before the end of the lease (six weeks' advance notice, double the three weeks' notice provided in J.M. Beals ) and then chose, again with ample notice to Rexam, to pursue damages under the Holdover Statute. In trying to avoid the writing on the wall, Rexam painted itself into the corner in which it now stands. Its Hobson's choice argument thus lacks merit. Rexam's final argument against the application of the Holdover Statute is that the district court applied the incorrect standard when it concluded that Rexam's behavior was willful. The Holdover Statute does not define willful, see 735 Ill. Comp. Stat. 5/9-202, and Rexam asserts that the term is best interpreted as requiring bad faith on the part of the tenant, see Stride, 87 Ill.Dec. 790, 477 N.E.2d at 1321 (Consistent with its finding that Stride's hold over was not in bad faith, the trial court properly denied double rent. . . .). But the Illinois Appellate Court more recentlyand explicitly reached a different conclusion, one to which the district court properly deferred. In J.M. Beals, 207 Ill.Dec. 793, 648 N.E.2d at 252, the Illinois Appellate Court expressly declined to make such a broad pronouncement that bad faith is required for all claims brought under the statute. It determined that the better rule, the one the district court faithfully looked to here, was that tenants who remain in possession for colorably justifiable reasons. . . should not be charged under the statute. Id. The J.M Beals court further clarified that the tenant, to be liable under the statute, must know that his retention of possession is `wrongful.' Id. (quoting Stuart, 66 Ill. at 255). The district court cogently explicated the evidence and reasoning underlying its conclusion that Rexam made a conscious decision to overstay the lease because it thought the penalty would not be severe. Rexam, 2008 WL 4087441, at . It pointed to Rexam's testimony that it was staying to possibly to try to get new lease terms in the building, and its admission in its briefs that its decision to overstay the lease was the result of a calculus. Id. In light of this evidence, we are not persuaded that the district court erred in determining that Rexam acted willfully in staying on the premises. We are similarly unconvinced that Rexam's attempt to eke out a new lease is the sort of colorably justifiable reason for barring application of the Holdover Statute that the appellate court contemplated in J.M. Beals. And because Rexam was notified in writing that its lease had expired, and was continually reminded of that fact by Bolger's sedulous refusal of its rent payments, we find no clear error in the district court's conclusion that Rexam knew its retention of possession was wrongful.
The Holdover Statute, which the district court correctly deemed applicable here, provides that a tenant must pay a penalty of double the yearly value of the lands to a landlord kept out of possession due to the tenant's willful holdover. 735 Ill. Comp. Stat. 5/9-202. To calculate Rexam's penalty, the district court first had to determine the fair market rental value of the lands at issue here. Both parties offered testimony for the court's consideration. Brian Clancy, Rexam's real estate consultant, testified that Rexam investigated five nearby properties when it was looking for replacement space. Clancy stated that the gross rents for those facilities ranged in price from $1.75 to $3.00 per square foot, while the triple net rental rates ranged from $1.75 to $2.25 a square foot. He testified that the warehouse on the property Rexam selected was a better building than the Loves Park warehouse and came at a gross rental rate of only $2.60 per square foot. Clancy estimated that if the lease had been triple net, the rent would have been about $1.25 lower per square foot. He did not directly testify as to the value of the Loves Park property; instead, Rexam contends that the triple net rental rate should have been about $1.35 per square footcalculated by subtracting the $1.25 gross rate differential from the $2.60 per square foot rate it secured on its new facility. The district court rejected Clancy's lay testimony and relied instead on that of Bolger's expert, Christopher Hall, the president of the appraisal division of an international real estate company. Hall conducted a formal appraisal of the Loves Park property, which involved an in-person inspection of the property, an evaluation of the Loves Park-Rockford commercial real estate market, and an assessment of four comparable properties in the area. To arrive at his estimates of the fair market rental value of the Loves Park property, Hall analyzed the features of the comparable properties and figured out the contribution each made to the properties' value. For instance, he examined the ceiling heights in all the comparable buildings, determined the impact that attribute had on their values, and used that information to adjust his computation of the Loves Park rental rate accordingly. Hall testified that the fair market rental value of the Loves Park property was $2.43 per square foot net, a number that took into account its deteriorated condition. He further testified that he used that figure and historical expense information to compute a gross rental rate of $4.38 per square foot. The district court used Hall's valuation of the gross rental rate to conclude that the annualized gross rental value of the roughly 101,000-square-foot warehouse was $443,895.47. Dividing that figure by twelve yields a monthly gross rental rate of $36,991.29. The district court multiplied the monthly rate by seventeen, the number of months it already found that Rexam had willfully held over, and doubled the result to arrive at the Holdover Statute penalty, $1,257,703.83. The district court subtracted from this amount the $101,471.59 that Rexam paid in utilities during the holdover period because it used a gross rental rate (which includes taxes, utilities, and insurance), and assessed Rexam a penalty of $1,156,232.24. Rexam takes issue with the district court's calculation. It first asserts that the district court erroneously concluded that expert testimony was required for it to determine the fair market value of the warehouse. It rests this contention on a single sentence of the district court's opinion: The issue of comparabilityof the facilities, of locations, of time, and of lease termsis one that requires the type of expert testimony that Rexam declined to provide in this case. Rexam, 2008 WL 4087441, at . This argument fails for two reasons. The first is that Rexam reads too much into the single sentence to which it points. The overall tenor of the district court's discussion of market value indicates that what it was really doing was making a credibility determination: it found Bolger's expert more credible than Clancy, Rexam's lay witness. It noted that Rexam's valuation lacks a convincing foundation in fact, and found its numbers unpersuasive. Id. Contrary to Rexam's assertions that its non-expert testimony was inappropriately deemed inadmissible, the trial transcripts reveal that the district court allowed Clancy to testify as a lay witness (Rexam never sought to have him classified as an expert even though it now touts his qualifications), and the district court's opinion indicates that it thoroughly considered his testimony in making its determination of the property's value. It is well established that we will set aside credibility determinations only if they are clearly erroneous, which occurs only if the district court has chosen to credit exceedingly improbable testimony. United States v. Smith, 576 F.3d 681, 687 (7th Cir.2009) (quotations and citations omitted). Here, the district court credited Hall's testimony over Clancy's, and because Hall's testimony about his comparability analysis and the value of the Loves Park warehouse was not exceedingly improbable, see id. ([T]estimony will be found exceedingly improbable only if it is internally inconsistent or implausible on its face. (quotations and citation omitted)), we uphold the district court's determination. Rexam's argument falls flat even if we read the district court's statement about expert testimony as it does. Whether the juryor, in this case, the court in its role as factfinderneeds expert testimony for a particular claim is a question within the district court's discretion. Talmage v. Harris, 486 F.3d 968, 977 (7th Cir.2007); cf. United States v. Jones, 455 F.3d 800, 805 (7th Cir.2006) (Mr. Jones also contends that expert testimony would have aided the jury. . . . Nevertheless, the district court was entitled to conclude that such testimony would have been of limited value in the overall presentation of his case.). Under the Federal Rules of Evidence, expert testimony is appropriate if specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue. United States v. Myers, 569 F.3d 794, 798 (7th Cir.2009) (internal quotations omitted). Even under Rexam's reading of the opinion, the district court merely concluded that expert testimony would help it determine the appropriate rental value for a commercial property that had not been on the market in forty years. Cf. Ceres Terminals, 200 Ill.Dec. 146, 635 N.E.2d at 496 ([A] general estimation of the property's valuation considers numerous intangible factors which could be weighed and combined in a wide variety of ways. . . .). We do not view this as an abuse of the district court's discretion or a contravention of the Federal Rules of Evidence. Rexam next argues that the district court erred in using a gross rental value rather than a net one as the basis for its penalty calculation. A gross rental rate has utilities, taxes, and insurance payments built in; a net rental rate does not. Consequently, the difference between the two can be significant even at the square foot level and is magnified when the rent is doubled under the Holdover Statute. We review the district court's interpretation of the Illinois statute de novo. Salve Regina, 499 U.S. at 239, 111 S.Ct. 1217; Estate of Moreland, 576 F.3d at 695. The proper way to calculate damages under the Holdover Statute has not been determined by the Illinois courts, as far as we can tell. The parties did not provide any authority on the matter, nor were we able to locate any. Fortunately, the Illinois Supreme Court has been very clear about how statutory interpretation should be undertaken, and, as we must apply the law as we believe that court would, we employ its rules of interpretation as we conduct our de novo interpretation of the Holdover Statute. In Illinois, [t]he primary objective in statutory interpretation is to give effect to the intent of the legislature. Gardner v. Mullins, 234 Ill.2d 503, 334 Ill.Dec. 617, 917 N.E.2d 443, 448 (2009). Because the most reliable indicator of the legislature's intent is the language of the statute, the Illinois Supreme Court looks there first, applying the plain, ordinary, and popularly understood meaning[s] of the statute's terms. Id. The Court looks to the dictionary when necessary to discern the ordinary and popular meanings of words. Exelon Corp. v. Dep't of Revenue, 234 Ill.2d 266, 334 Ill.Dec. 824, 917 N.E.2d 899, 906 (2009); People v. Cardamone, 232 Ill.2d 504, 328 Ill.Dec. 917, 905 N.E.2d 806, 811-12 (2009). In addition to the language of the statute, the Court also considers the purpose behind the law and the evils sought to be remedied, as well as the consequences that would result from construing the law one way or the other. County of DuPage v. Ill. Labor Relations Bd., 231 Ill.2d 593, 326 Ill.Dec. 848, 900 N.E.2d 1095, 1101 (2008). It assumes that the legislature did not intend absurdity, inconvenience or injustice, People v. Glisson, 202 Ill.2d 499, 270 Ill.Dec. 57, 782 N.E.2d 251, 255 (2002), and looks to legislative history if the need arises, see County of DuPage, 326 Ill.Dec. 848, 900 N.E.2d at 1101. The critical portion of the Holdover Statute provides: [T]he person so holding over, shall, for the time the landlord or rightful owner is so kept out of possession, pay to the person so kept out of possession, . . . at the rate of double the yearly value of the lands . . . . 735 Ill. Comp. Stat. 5/9-202 (emphasis added). On its face, the italicized language seems to refer to the lands and the lands alone; the Holdover Statute by its terms awards landlords double the yearly value of the lands, not the value of the lands plus utilities, insurance, and taxes. Indeed, from an economic standpoint, taxes and other expenses are perceived as detractions from the value of a parcel of land. This interpretation is consonant with the dictionary definition of annual value: [t]he net yearly income derivable from a given piece of property, or [o]ne year's rental value of property, less the costs and expenses of maintaining the property. Black's Law Dictionary 1690-91 (9th ed. 2009). In a gross rent situation, a landlord needs to use some of the rent payments (or other funds under his control) to cover utilities, insurance, taxes, and other costs and expenses of maintaining the property. Thus, the net yearly income he actually receives from the property is more akin, if not equivalent, to the net rental value of the property rather than the gross rental value. Our plain reading of the language is also in accordance with the definition of land, which includes with the property itself only everything growing on or permanently affixed to it, id. at 955, and does not reach expenses associated with it. We also look to the purposes and aims underlying the Holdover Statute. See County of DuPage, 326 Ill.Dec. 848, 900 N.E.2d at 1101. In 1857, the Illinois Supreme Court noted that it was enacted for protection of, and compensation to, landlords who are kept out of their possession. Granger, 18 Ill. 443. Those are not its only purposes, however; it has also been consistently recognized as penal, see Chapman v. Wright, 20 Ill. 120 (1858) (This action is, in its nature, highly penal. . ..); J.M. Beals, 207 Ill.Dec. 793, 648 N.E.2d at 253 (An action to recover double rent under the statute is highly penal. . . .), which of course means that it is intended to punish or penalize, see Black's Law Dictionary 1246 (9th ed. 2009). At first blush, all three purposeslandlord protection and compensation and tenant punishmentwould seem best served by a determination that double the yearly value of the lands may be calculated using gross rent. After all, the landlord would be more highly compensated and the tenant would be more severely punished (and more deterred from overstaying its welcome). Yet reading the language this way adds an element of injustice, see Glisson, 270 Ill.Dec. 57, 782 N.E.2d at 255, and unduly minimizes the consequences that could result, see County of DuPage, 326 Ill.Dec. 848, 900 N.E.2d at 1101. A landlord could receive windfalls above and beyond her due compensation, particularly where, as here, the lease that has been held over is by its terms a net lease, and a tenant could be overly deterred from holding over even in situations in which doing so is bona fide or colorably justifiable. J.M. Beals, 207 Ill.Dec. 793, 648 N.E.2d at 252. When the damages are calculated using net rent, the Holdover Statute's purposes are served in a more efficient manner. In light of the plain language of the Holdover Statute and our examination of the purposes underlying it, we conclude that the intent of the legislature would be better effected if damages were calculated using net rather than gross rent. Simply reversing the district court on this issue would leave us at an impasse, however. The district court heard conflicting testimony as to the fair market net rental value of the Loves Park warehouse, but the only finding it made was that the gross rental value was $4.38 per square foot. Bolger conceded at oral argument that doubling the amount of Rexam's setoff for utilities paid during its holdoverto roughly $203,000 would be appropriate if we upheld the district court's usage of the gross rental rate. But because we have determined that the net rental rate is the proper one to use, this remedy is inadequate: if the district court were to credit Hall's testimony regarding the net value of the property, Rexam's penalty would drop by nearly $400,000, and it might drop further (or less) if the district court were to credit Clancy's testimony or some other estimation of value. We therefore vacate Bolger's award of $1,257,703.83 and Rexam's setoff of $101,471.59 and remand this issue to the district court so that the fair net rental value of the property can be determined and the correct penalty assessed Rexam.