Tuesday, February 5, 2013

Be More Specific With Your Remedies, Please

Vt Small Bus. Development Corp. v. Fifth Son Corp., 2013 VT 7.

Ever wondered what happens when a commercial landlord locks a tenant out of its business without the right to do so?  Today’s case should more than satisfy your curiosity while simultaneously illustrating the importance of specifying remedies for default in your lease.

In January 2009, landlord and tenant signed two separate two-year leases, for a restaurant and condominium.  For a little over a year, tenant operated “Miguel’s at Sugarbush” in the restaurant space, and occasionally stayed in the condo.  Tenant borrowed money from the Vermont Small Business Development Corporation (VSBDC) to fund his business. 

In March 2010, tenant fell behind on rent.  Landlord sent tenant a notice of default on both leases, via certified mail dated March 5, 2010.  For some reason, the notice was neither accepted nor received by tenant; it was returned by the Post Office “unclaimed.”  Tenant later spoke with landlord, and only then learned he was about to be evicted. 

On March 28, 2010, landlord emailed tenant its notice stating that tenant was “in default” on both leases, but did not provide a date for termination or give details on the default landlord alleged.  Landlord then apparently decided he had better move things along: the same day he emailed tenant notice, he changed the locks, effectively evicting tenant from both the restaurant and the condo.

The action that was eventually appealed to the SCOV began when VSBDC filed suit against tenant and landlord for tenant’s default on its loan.  Landlord cross-claimed against tenant for damages under the lease.  Tenant cross-claimed against landlord for, among others, wrongful eviction.  The parties settled VSBDC’s claims.  Landlord and tenant stayed behind to duke it out.

Tenant won on the issue of wrongful eviction in a summary judgment motion.  Landlord’s other claims were tried before a jury.  After evidence was presented at trial, tenant raised the question of whether tenant was liable for post-eviction rent.  The parties submitted briefs on the question.  Landlord conceded tenant did not owe post-eviction rent on the condo, but claimed tenant did owe it under the restaurant lease.  Tenant disagreed. 

Instead of instructing the jury on the issue, the trial court judge told the jury that landlord was asking for “satisfaction of all obligations” under the lease, and that the jury was to calculate landlord’s damages for “total . . . unpaid rent and utilities.”  The jury awarded landlord past rent and costs for both the restaurant and condo, but did not award post-eviction rent or costs for either.  Neither did the jury award tenant damages for wrongful eviction or anything else tenant requested.

The trial court invited a post-verdict motion for judgment as a matter of law, and landlord took up the offer, arguing that the court should have told the jury landlord was entitled to post-eviction rent under the restaurant lease.  The court denied landlord’s motion; landlord appealed.

On appeal, landlord manages to get two issues through the SCOV’s “raised below” filter.  First, landlord challenges the trial court’s on the wrongful eviction question because landlord believed the notice of default was not defective.  The SCOV’s case law on this question states that, whether the lease is residential or commercial, a landlord must observe “punctilious compliance” with a lease’s notice and default provisions before exercising its rights.

The restaurant lease stated that termination is “at least” 20 days after landlord gives appropriate notice of default, and that landlord could give notice by mailing it to tenant’s address.  Thus, landlord argues, since it mailed its notice on March 5, it had a right to evict tenant on March 25.

The SCOV finds landlord’s notice defective and, as a result, agrees with the trial court.  The lease required that landlord state what tenant had done to put it in default and provide a specific termination date.  In its notice, landlord failed to do either of these things. 

Landlord attempts to explain away its failure by noting the 20-day period for termination, and arguing that tenant should have “assumed” it had until March 25 to cure the default.  No matter, says the SCOV: the language of the lease, setting termination “at least” 20 days after notice, cannot be read to set termination at exactly 20 days.  Landlord failed to comply, and tenant was wrongfully evicted.

Second, landlord argues that the trial court’s instructions to the jury lacked a statement that landlord was entitled to post-eviction rent because the lease does not relieve tenant from liability even after repossession and allows landlord “liquidated damages” of all unpaid rent in the event of default.  The SCOV’s precedent on this point, drawn from the common law of England and other states, states that a wrongful eviction suspends a landlord’s right to collect rent.

Landlord’s response, which was to wave its contract at the SCOV and argue it was entitled to remedies in a contract that exceed the boundaries of the common law, is unavailing.  The SCOV finds no precedent awarding post-wrongful eviction rent to a landlord, but finds several that reach the opposite conclusion. 

The trial court reasoned that the result landlord requests would be unjust, particularly where a commercial tenant is kicked out and barred from its source of income.  Landlord would essentially have a unilateral right to terminate the lease for any reason, regardless of whether tenant was in default, and collect all future rent after doing so.  The SCOV agrees that this isn’t right.

The SCOV’s parting lesson (in true dicta form) is perhaps the most useful advice for future landlords hoping to change the locks and still collect rent.  The Court says that a provision allowing this remedy would have to be explicit and detailed, and unequivocally state that the parties intend the tenant will pay all rent, even after an eviction takes place, including a wrongful eviction. 

But, alas, landlord not only did not comply with its lease’s notice requirements, and therefore failed to terminate the tenancy properly, its lease was not nearly specific enough to allow it to collect post-wrongful eviction rent.  Tenant wins the day and goes home knowing it doesn’t owe any post-eviction rent, and landlord goes straight to its attorney to draft a new lease.

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