By: Stephen D. Richman, Senior Counsel - Kohrman,
Jackson & Krantz
You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
You never count your money
When you're sittin' at the table
Know when to fold 'em
Know when to walk away
And know when to run
You never count your money
When you're sittin' at the table
There'll be time enough for countin'
When the dealin's done-
When the dealin's done-
Don Schlitz, 1976 (sung by
Kenny Rogers)
The above lyrics could apply as much to a real estate deal, as they do to a
game of poker. However, in terms of a commercial real estate lease (in Ohio,
and presumably other jurisdictions), it is important to realize that even if
you need to walk away, or even run from a lease, rarely will the dealin’ or the deal be done. This tenet
of real estate law is largely based on the fact that leases are interests in
land, as well as contractual agreements. Consequently, it stands to reason that
the abandonment or termination of a possessory interest in land, does not
necessarily extinguish the contract and obligations inherent therein. This
lesson was recently learned the hard way by the tenant in Tecumseh Landing, L.L.C. v. Bonetzky, 2015-Ohio-2741.
Background
of Tecumseh Landing, L.L.C. v.
Bonetzky
In May, 2012,
defendant-appellant Paula Bonetzky (“Tenant”) and Tecumseh Landing, LLC
(“Landlord”) entered into a one year lease agreement for the lease of a portion
of real estate in Huntsville, OH. At lease inception, the Tenant made a
nonrefundable payment of $5,000.00 for the first month’s rent and security
deposit. However, shortly after receiving
the key and possession of the premises, the Tenant returned the key to the Landlord,
indicating that she learned of deficiencies in the premises and did not want to
rent the property any more. The Tenant testified that she told the Landlord, “he could take whatever course he needed to,
but my course was to back out at that point.
And I left the keys with him and left.” The Tenant never returned to the property
after that and made no further payments to the Landlord.
The Landlord testified
that
he never told the Tenant that she was being released from her obligations under
the lease agreement, and in fact indicated the opposite by stating: “I’m not taking these keys, they’re going to
sit here.”
For several months, the
keys did in fact sit there while the Landlord made calls to the Tenant which
went unanswered and sent a demand notice (for payment of past due rent and late
fees) which was returned, unclaimed. Then, in January of 2013, the Landlord
e-mailed the Tenant, declaring that “Although your lease is still active …, We intend on subleasing the property to
protect our interests in the investment.” The Tenant responded, “I thought I made it clear to you that I was
not involved in your operation when I
returned your keys to you last May.”
In August of 2013, Landlord
filed a Complaint for Breach of Contract and Money Damages in the Logan County
Court of Common Pleas alleging that the Tenant breached the lease for failure
to pay rent. Tenant, in her answer, denied
breaking the lease, and filed a counterclaim alleging that the Landlord had
failed to mitigate its damages. Based upon the testimony at trial, the trial
court rendered a judgment in favor of the Landlord on its complaint for damages
against the Tenant. The trial court also
found in favor of the Landlord on the Tenant’s counterclaim.
Tenant then appealed
the judgement to the Logan County Court of Appeals, claiming that the trial
court erred by failing to find that Tenant effectively surrendered the premises
(and her requisite lease obligations), and by finding that Landlord effectively
mitigated its damages.
The
Appellate Court’s Decision/Analysis
The Tecumseh court of appeals basically
affirmed the trial court’s decision with regard to all claimed assignments of
error, except it did reverse the trial court with respect to its calculation of
damages (based upon the court’s failure to properly pro-rate certain expenses
paid by the Landlord).
Regarding mitigation of
damages, the court of appeals concluded that the burden of proof was on the
plaintiff, and the Tenant simply did not provide any affirmative evidence to
prove failure to use reasonable efforts to mitigate on the part of the Landlord.
On the contrary, the evidence showed that Landlord advertised the property in a
newspaper, on Craigslist, eBay, and the company’s website, and that the delay
in finding a new tenant was due to the seasonal nature of the business, and
Tenant’s non-responsiveness to Landlord’s initial attempts to communicate with the
Tenant. The trial court determined that Landlord’s efforts to mitigate were not
unreasonable in a “niche market”, and the Logan County Court of Appeals agreed,
recognizing that the Ohio Supreme Court’s holding in Frenchtown Square Partnership v. Lemstone, Inc.,2003-Ohio-3648 instructs
that “[t]he duty to mitigate requires
only reasonable efforts.”
Regarding surrender,
the Tenant argued that she surrendered the leasehold when she returned the keys
and that this physical surrender put an end to the lease and discharged her
from all further obligations under the term of the lease, including rent.
Using “precedent”
(prior case decisions on point), the Tecumseh
court of appeals basically held that the law does not work that way; that surrender
of premises does not automatically mean the surrender of the lease agreement.
According to the court of appeals in Tecumseh,
“Ohio law recognizes two instances under
which a surrender of a leasehold [and contractual lease obligations] can occur.
The first occurs by an agreement of the parties and must be in writing…
and the second type of surrender occurs by operation of law. This [second] kind of surrender must be a surrender in fact, evidenced by the
conduct of the parties to the lease, which implies a mutual agreement to the
tenant’s surrender of the lease and landlord’s acquiescence thereto…the intent
of the lessor to relieve lessee must be clearly shown.”
Applying the law to the
facts, the court of appeals in Tecumseh
easily concluded neither of the afore-mentioned instances had occurred. First,
the Tenant did not argue and the record did not disclose any written agreement
in which the Landlord expressly accepted Tenant’s surrender of the premises and
lease obligations. Second, according to
the court, “nothing in the evidence
provided in the instant case shows a clear intent on the part of Tecumseh
Landing to relieve Bonetzky from the lease.” The evidence more so indicated
the opposite. For example, the Landlord testified that he did not formally
accept the keys (and told the Tenant their lease was “still active”). Even had the Landlord formally accepted the
keys, the court cited long standing precedent that barring clear intent
otherwise, “[a]n acceptance by the
landlord of the key to the premises, his advertising for a new tenant, and
renting the premises to another upon its vacation by the old tenant,” are
not sufficient to constitute a surrender of a lease.
The Tenant did try to
argue case law, based upon the holding (in favor of a tenant) in Renaissance Mgt., Inc. v. Jay-Lor Corp., (8th
Dist. Cuyahoga), 2011-Ohio-2792 (“A
new lease agreement is a surrender of the old lease, the effect of which is to
terminate the former landlord-tenant relationship and to put an end to the old
lease”). The court of appeals in Tecumseh,
however dismissed the Renaissance
case as non-controlling. While the court’s decision did not elaborate upon the
case, the facts in the Renaissance
case can be easily distinguished from the facts in Tecumseh. In the Renaissance
case, the tenant did not relinquish the keys and abandon the premises, and the
landlord did not indicate its intent to hold the tenant to its lease. In Renaissance, the landlord approached the
tenant, wanting the tenant to change its use. When the tenant found a
prospective assignee who would lease the premises in accord with the desired
use, the landlord refused to approve the assignment and thereafter, entered
into a new lease with tenant’s assignee prospect on widely different terms. That
tenant then defaulted, and without notifying the original tenant, the landlord
in Renaissance entered into a new
lease with a new, subsequent tenant.
The Renaissance case presents one of the few
instances where the landlord’s intent indicated acceptance of surrender of the
lease, as well as the premises. In fact, it seems that the landlord in Renaissance encouraged, and then
acquiesced in the surrender.
The
Moral of the Story
What is the moral of
this story? For most tenants, neither the dealin’
nor the deal (in the form of contractual lease obligations) will be done by
walking away or running from leased premises. Even when there is a forfeiture
clause in a lease (declaring the lease to cease or terminate upon the tenant’s
failure to pay rent), Ohio courts have interpreted same to indicate Landlord’s
intent to render the lease voidable, at landlord’s election vs. automatically
void or terminated (See, e.g., Morris
Investments v. Sawyer Indian Hill, 63 Ohio Misc. 2d 202 (1993) and cases cited
therein).
Consequently, a
tenant’s attempts to work out a termination deal with its landlord will most
always result in a better deal than walking away and claiming the landlord has
accepted the tenant’s surrender of the lease. Negotiating for favorable (to the
tenant) assignment and sublease language “couldn’t hoit” either.
For landlords, even
though the odds (and the law) are in your favor, why not minimize any doubt by:
1) insisting upon language in the lease to the effect that upon default of the
tenant, “no taking or recovering of
possession of the Premises shall deprive Landlord of any of its remedies or
actions against Tenant, and Tenant shall remain liable for all past or future
rent, including all Fixed Rent, Additional Rent, taxes, insurance premiums, and
other charges and rent payable by Tenant under this Lease, during the term
hereof”, and by 2) reminding tenant of that fact, in writing, prior to, and
after landlord’s repossession of the premises.
