Monday, December 17, 2012

CR-RSC Tower I, LLC v. RSC Tower I, LLC (Ct. of Appeals)

Filed: November 27, 2012
Opinion by Judge Sally D. Adkins

Held: Where two parties enter into a contract for the lease and development of real estate and one party subsequently breaches that contract, evidence of post-breach market conditions is not admissible to prove lost profits if the parties did not contemplate the market conditions when they contracted.

Facts: Landlord entered into two 90-year ground leases with Tenant, a "successful real estate company," related to a tract of land in Maryland, consisting of two adjoining properties. Under the ground leases, Tenant agreed to construct two apartment buildings that it would sell after construction and initial rental. After temporary modifications, the parties reverted to their original plan to build two apartments and arranged financing for the first building. However, as construction began, Landlord failed to provide estoppel certificates and, as a result, financing fell through. In November 2006, Tenant sued for breach of contract, seeking recovery of lost profits. 

Tenant based its claim on market projections as of December 2006, the time of the initial breach. Landlord contended that, because in 2006 the apartments weren't projected to be fully leased until 2010 and 2012, the actual market conditions in 2010 and 2012 were relevant. Landlord sought to show that under the conditions of the current market, Tenant would not have profited regardless of whether there was a breach. Landlord offered expert testimony about the real estate market crisis in 2008–2010, a time when “the world . . . changed” and “the cataclysmic events of 2008 in the economy” took place. 

The trial court ruled against Landlord on several motions, including, among other things, that Landlord could not introduce evidence of the 2008 crash in the real estate market to show that Tenant would not have made profits.

The jury found for Tenant, awarding it over 36 million dollars in collateral damages. Landlord appealed, alleging that the trial court erred in not admitting evidence of “post-breach market conditions.” It argued that such evidence is a necessary part of any lost profits claim and that, without it, a plaintiff cannot meet the requirement that lost profits be proved with “reasonable certainty.” 

The Court of Special Appeals affirmed the trial court’s decision, citing the “general principle” that contract damages are measured at the time of breach.

Analysis: The Court engaged in a lengthy discussion of measuring lost profits and reliance  damages. The Court determined that “consequential lost profits are calculated with reference to what the parties can reasonably be said to have anticipated when they entered into the contract.” The Court explained that, for this reason, “circumstances that cannot be said to have been ‘known to the parties’ when they contracted—such as a post-breach boom or bust in the market—should not affect the measure of consequential damages that would ‘ordinarily arise’ according to the ‘intrinsic nature of the contract.’” 

The Court explained, although many contracts are made with the possibility of future market downturns and, accordingly, allocate such risk between the parties, the contract in this case did not. Under this contract, the success of both parties depended on a relatively stable market and it could not be said that a subsequent, unforeseen, “cataclysmic”  market crash was within the parties’ contemplation.  Thus, the Court held that the trial court did not err in excluding evidence of post-breach market conditions.

The Court went on to discuss separate issues raised by Landlord regarding waiver of the attorney client privilege and joint and several liability.

The full opinion is available in PDF.

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