Smith v. Wakefield, LP (Ct. of Appeals)

Filed:  February 27, 2019

Opinion by:  Judge Robert N. McDonald

Holding:  Action for back rent under a residential lease is subject to a three-year statute of limitations irrespective of whether the parties purport to convert the lease into a contract under seal.  The three-year statute of limitations governing residential leases is not subject to waiver.

Facts:  

Petitioner (“Tenant”) in 2007 entered into a month-to-month lease for an apartment in Baltimore City owned by respondent (“Landlord”).  The lease consisted of a one-page cover page and seven pages comprising 90 numbered terms and conditions.  Among those provisions was the following sentence: 

STATUTE OF LIMITATIONS: This lease is under seal and is subject to the twelve-year limitation period of Section 5-102 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland.

Tenant vacated after a few months and ceased to pay rent though the parties dispute whether Tenant vacated voluntarily after giving notice or had been evicted.

Nearly eight years later, Landlord sued Tenant to recover unpaid rent, arguing that CJ §5-101’s three-year period of limitations did not apply to a “contract under seal.”  The District Court of Baltimore City agreed and found in Landlord’s favor.  On appeal, the Circuit Court for Baltimore City affirmed.  Tenant thereafter petitioned for and was granted certiorari.

Analysis:

First, the Court set out the two relevant statutes prescribing statutes of limitation for civil actions: CJ § 5-101 providing the three-year limit for the majority of civil actions and CJ § 5-102 outlining the twelve-year limit for “specialities” such as instruments under seal, bonds, or judgments.

In Tipton v. Partner’s Management Co., the Maryland Court of Appeals had evaluated the merits of a similar action; there, a landlord had sued to collect back rent after failing to take legal action for seven years.  The Tipton Court exhaustively researched the legislative history of CJ § 5-101 and CJ § 5-102, determining that Maryland had applied the three-year period of limitations since colonial times, even though leases and conveyances of real property had customarily been executed “under seal.”  Maryland’s legislature had seen fit not to place residential leases among the “specialties” carved out from the general three-year limit when it revised the code and created CJ § 5-101.   Tipton held that a mere seal affixed to a lease would not waive the three-year period of limitations.  The Tipton Court, however, did not reach the threshold questions of the instant case: would a clear and explicit waiver of the three-year statutory period of limitations conflict with Maryland landlord-tenant law?

Landlord argued that Tipton’s holding left room for parties to agree to modify the limitation period.  The Court responded shrewdly: had anything changed so markedly in the five decades since the last code revision that supported quadrupling the period of limitations on an action for back rent to 12 years?  The 1970s legislature not only revised the Courts and Judicial Proceedings articles, but also the Real Property articles (e.g. attempting to eliminate the custom of executing leases under seal) and Landlord-Tenant law (e.g. attempting to neutralize the superior bargaining power of landlords).   Landlord’s last bastion was an attempt to point to more recent developments.

So looking, the Court turned its focus to Ceccone v. Carroll Home Services, LLC, decided in 2017.  The Ceccone Court held that parties could modify a statute of limitations that might otherwise apply to a cause of action provided that (1) there existed no controlling statute to the contrary, (2) the modification was reasonable, and (3) the modification was not subject to other defenses such as fraud, duress, or misrepresentation.  Finding some ambiguity in the application of the first element to RP § 8-208(d)(2)’s requirement that a lease be proscribed from waiving or foregoing any right or remedy provided by applicable law, the Court found more clarity in element two.  Ceccone’s framework for evaluating the reasonableness of a modification included the following factors: the length of the modified period of limitations, its relation to the statutory period, the relative bargaining power of the parties, the subject-matter of the contract, and whether the modification was one-sided in its effect.  

Applying this framework, the Court found the factors to lean in Tenant’s favor.  Government agencies would not have retained records for so long as twelve years, the lease terms and format argued against an arms-length bargaining process, and the Court could find no potential action that a tenant might reasonably bring under a lease a decade or more after its termination making the waiver one-sided in its application.  In the Court’s view, a nine-year extension of the time to bring an action for back rent did not constitute a reasonable modification of the statute of limitations.

The Court therefore found the three-year period of limitations (1) to apply to actions for back rent under residential leases regardless of language purporting to convert the lease to a contract under seal, and (2) not subject to waiver.

Two judges wrote in dissent, noting that the Maryland legislature in 2014 excepted from the twelve-year period of limitations certain instruments such as deeds of trust, mortgage, and promissory notes signed under seal, but did not include residential leases in that legislation.  Bills in 2016 and 2017 to craft such an exception failed, indicating legislative intent to militate precisely against the court’s majority reasoning.

The dissent further noted that statutes of limitation operate as procedural mechanisms rather than rights or remedies, meaning RP § 8-208(d)(2) should not limit a lease’s modification of the three-year general statute of limitations.

The full opinion is available in PDF.

Roger E. Herst Revocable Trust, et al. v. Blinds to Go (U.S.) Inc., et al. (Maryland U.S.D.C.)

Filed: October 26, 2011

Opinion by Judge Ellen Lipton Hollander

Held: When a tenant is contractually obligated to pay rent even after acts that could be considered termination of the lease as a matter of real property law, the damage principles of contract law apply and, in the absence of a lease provision with reasonable clearness to the contrary, a defaulting tenant is entitled to the benefit of any excess rent realized from reletting the premises.

Facts: Crest Net Lease, Inc., as landlord, entered into a triple net commercial Lease with Blinds to Go (U.S.) Inc. ("BTG"), as tenant, on September 21, 2011 and entered into a Guaranty with Blinds to Go Inc. ("BTG's Parent"), the parent company of BTG, on the same date for the guaranty of the obligations of BTG under the Lease. On August 21, 2011, Crest Net Lease, Inc. assigned all of its right, title and interest in the Lease and Guaranty with the Blinds to Go entities to the plaintiffs, Roger E. Herst Revocable Trust, Dr. Roger E. Herst, Trustee of the Roger E. Herst Revocable Trust, and Joshua R. Herst (collectively, the "Plaintiffs"). Under the terms of the Lease, all rent was due and payable on the first day of each calendar month during the term and there was a late charge of 3% of the monthly rent each time the rent was late and interest also accrued on all amounts that had not been paid to the landlord at the rate of 5.25%. On or about August 31, 2009, BTG abandoned and vacated the leased premises and sent a letter to the Plaintiffs on the next day informing the Plaintiffs of the decision to vacate the leased premises. In its letter, BTG informed the Plaintiffs that it would cease paying any and all rent and additional rent otherwise payable under the Lease and suggested that it was in the best interests of the parties to terminate the Lease due to the rental rates under the Lease being well below market rates and permit the Plaintiffs to directly recover a higher rent from a new tenant. Following receipt of the BTG's letter, the Plaintiffs sent a letter to BTG informing it the the Plaintiffs "fully rejected the unilateral termination" by BTG of the Lease and would hold BTG responsible for payment of all rent and expenses set forth in the Lease through the expiration date of the Lease. Subsequent to sending the letter to BTG, the Plaintiffs also entered into an Exclusive Leasing/Sales Agreement with StreetSense Retail Advisors, LLC ("StreetSense") to authorize StreetSense to act as the Plaintiffs' agent to obtain a new tenant of the leased premises. In attempting to find a tenant, StreetSense reached out to KLNB to see if any of KLNB's clients would be interested in the premises. BTG also contacted Bialow Real Estate, LLC ("Bialow") in an effort to find a new tenant for the leased premises. On November 30, 2009, Bialow sent KLNB, on behalf of Vitamin Shoppe a letter for intent to express Vitamin Shoppe's interest in the premises. The letter of intent eventually made it to the Plaintiffs and was countersigned by the Plaintiffs on December 7, 2009. On August 3, 2010, the Plaintiffs and Vitamin Shoppe executed a lease agreement (the "Vitamin Lease") for the premises with an initial term of 10 years. The premises were delivered to Vitamin Shoppe on September 1, 2010. Because the Vitamin Lease contained provisions that gave the tenant a build-out period of 90 days in which to make tenant improvements to the premises for purposes of getting the premises ready for Vitamin Shoppe's business and a building improvement allowance of up to $87,500. The Vitamin Lease's term began on December 1, 2010 and , unlike BTG's Lease, was not a triple net lease. For delivering Vitamin Shoppe as a tenant and because there were three brokers involved, StreetSense, KLNB and Bialow, the Plaintiffs' paid commission equal to $81,218.

The Plaintiffs filed suit against in the Fall of 2010 against BTG and BTG's Parent (collectively, the "Defendants") alleging breach of the Lease and the Guaranty and seeking recovery for damages incurred as a result of such breaches, including unpaid rent from the Defendants for a total of 23 1/3 months, representing the amount of time from Defendants' breach in September 2009 until when the Plaintiffs received rent payments from Vitamin Shoppe, late charges for unpaid rent, repayment of real estate taxes and utilities, reimbursement of brokers' commission, reimbursement for costs with entering into the Vitamin Lease, administrative costs, litigation costs, and prejudgment interest. In response to the claims of Plaintiffs, the Defendants challenged the reasonableness of the Plaintiffs' efforts in mitigating their losses, the reasonableness of some of the concessions made in connection with the Vitamin Lease, the necessity of the build-out period and the reasonableness of the tenant improvement allowance, the administrative charge, litigation expenses regarding zoning issues for Vitamin Shoppe's signage and brokers' commission. The Defendants also argued that the Plaintiffs' claimed damages should be prorated to account for the time period that the Vitamin Lease extends beyond the term of the BTG's Lease and that their liability should be offset by the surplus rent that the Plaintiffs are receiving as a result of the rent being charged under the Vitamin Lease being much more than that under BTG's Lease.

Analysis: Because the parties stipulated as to the amount of unpaid rent and the amount of late charges, the Court turned first to addressing the Defendants' arguments that the length of time it took the Plaintiffs' to execute a lease with Vitamin Shoppe was unreasonable. The Court noted that while the Defendants' claim that the Plaintiffs received four originals of the lease for execution from Vitamin Shoppe's attorney on May 15, 2010 but did not sign the lease until August 3, 2010, the Defendants failed to provide any evidence indicating whether the lease that was finally signed was identical to the lease that was delivered in May. Even with such evidence, the Court explained that it would not have mattered because not only did the exact terms of the lease provide that the projected delivery date of the premises would be on September 1, 2010 but that it was clear from the outset that the lease would not be executed until the end of 2010 due to the letter of intent expressing Vitamin Shoppe's desire for the premises to be delivered "on or about January 3, 2011." The Court then quickly dismissed the Defendants' argument that the inclusion of a 90 day build-out period was unreasonable in light of BTG having been granted a 180 day build-out period under its lease with the Plaintiffs. While the Court found the number of hours claimed by Dr. Herst for purposes of performing administrative services as a result of the Defendants' breach, the Court found the hourly charge of Dr. Herst to be commensurate with market rates and awarded the Plaintiffs' recovery of the administrative charges due to them being expressly allowed under the terms of the Lease, less the number of hours the Court found to be excessively high or covered as a result of professionals hired by the Plaintiffs. Similarly, to the other challenges of Defendants' questioning the reasonableness of the brokers' commission, the title fees, the litigation fees expended to unsuccessfully deal with a zoning issue for Vitamin Shoppe's signage, the Court found all such charges to be reasonable, within the ability of the Plaintiffs' to recover as a result of Defendant's breach and within market rates.

The Court next turned its attention to the argument of Defendants' that the damages should be prorated to account for the additional months of tenancy obtained by the Plaintiffs as a result of the term of the Vitamin Lease being longer than the remainder of BTGs' Lease. As support for their argument, the Defendants pointed to Wilson v. Ruhl, 277 Md. 607 (1967), and the Maryland Court of Appeals approval of the proration of a broker's commission that a landlord paid to procure a replacement tenant. The Plaintiffs argued that Wilson was inapplicable because it concerned a residential lease and not a commercial lease and, even if it applicable to commercial leases, it was overruled by Millison v. Clarke, 287 Md. 420 (1976). The Court first noted that Wilson's holding regarding the proration of a brokerage fee to exclude that portion of the brokers' commission that is for a term in excess of the breaching tenant did differ for residential and commercial leases and then explained that Millison only overruled dicta of Wilson that suggested that a landlord's reletting of premises for a term longer than the original term of the lease was the landlord accepting the surrender of the the premises by the original tenant and not the proration holding. The Court also found that while the express language of the Lease obligated BTG to pay the brokers' commission as one of the listed items that can be incurred in reletting the premises if there is a breach by BTG, it did not warrant disregarding the holding of Wilson. Therefore, with respect to the brokers' commission, the Court held that to the extent that amount requested for the brokers' commission would be reduced to allocate to the Plaintiffs that amount of the brokers' commission that was applicable solely to Vitamin Shoppe's tenancy beyond the balance of the remainder of BTG's tenancy under the Lease.

Turning to the Defendant's next argument, the Court addressed Defendants' argument that they were entitled to setoff the damages owed by them by the amount of the surplus rent that has already been received, and that will be received, by the Plaintiffs as a result of Vitamin Shoppe's rent under the Vitamin Lease being higher than BTG's rent under the Lease. The Plaintiffs' argued that the Defendants were not entitled to a deduction for such surplusage. Because neither of the parties cited any cases, the Court reviewed secondary sources and cases from other jurisdictions regarding Defendants' argument. The Court found the New York case Hermitage Co. v. Levine, 162 N.E. 97 (N.Y. 1928), to be particularly instructive. In Hermitage, the court held that "in the absence of a lease provision to the contrary, a defaulting tenant was entitled to the benefit of any excess rent realized from reletting." The court also acknowledged that a contract damages provision could be drafted in such as way to not require the landlord to account for surplus. In referencing the terms of the Lease, the Court noted that Section 17.2.3 of the Lease expressly authorized the Plaintiffs to relet the premises without terminating the Lease and required the Plaintiffs to apply any rent received by the Plaintiffs "to the account of [BTG], not to exceed [BTG's] total indebtedness to [Plaintiffs]". Because the express terms of the Lease required the Plaintiffs to apply any amount received from reletting to the account of the Defendants, the Court held that the Defendants were entitled to set-off as a result of the surplus rent being received, but that the surplus amounts had to be adjusted to account for present value of future surplus and, in light of the fact that BTG's Lease was a triple net lease and the Vitamin Lease is not a triple net lease, the amounts that would have been paid for taxes utilities and maintenance by the Defendants.

Lastly, the Court addressed the issue of prejudgment interest. Referencing Fourth Circuit precedent that applied state law to questions involving prejudgment interest and Maryland precedent setting prejudgment interest at 6% per annum unless another percentage is established by contract or statute, the Court held that the Plaintiffs would be entitled to prejudgment interest in the amount of 5.25% per annum, as set forth in the Lease, for unpaid rent and late charges beginning on the date due, but were only entitled to pre-judgment expenses for all other awards of damages, including the brokers' commission, the attorneys' fees, the administrative costs and any other amounts from the date of the Court's order until the date judgment was entered against the Defendants. The Court explained that pre-judgment interest was allowable for the unpaid rent and late charges from the date due because those amounts had previously become due and were capable of precise calculation from the date that they were due. The other damages could not have been determined precisely as of any date certain prior to the ruling of a trier of fact and therefore could not begin running interest until they became due and certain as a result of the resolution of the case.

The full opinion is available in PDF.

Ocean Petroleum, Co., Inc. v. Yanek (Ct. of Appeals)

Filed: October 4, 2010
Opinion by Judge Mary Ellen Barbera.

Held: A lease term granting a tenant the option to purchase the land at "fair market value" must be interpreted within the context of the lease and the circumstances under which it was executed. Accordingly, the phrase “fair market value of the land” refers to the fair market value of the land to a buyer, unencumbered by the tenant's existing lease.

Facts: Appellant's lease agreement, for property on which its convenience store is located, provided that Appellant shall have the right and option to purchase the premises after twenty years. The lease directed the parties to negotiate a price and, if a negotiated price could not be reached, the price would be the fair market value, determined by appraisers. The parties could not agree on a purchase price or on the meaning of the phrase “fair market value,” with the dispute being whether “fair market value” meant the value as encumbered by the existing 99-year lease (the reversionary interest of the landlord) or the value as unencumbered. Appellant filed a complaint seeking a declaratory judgment construing that phrase. The lower court determined that “fair market value” should be determined as if the land were unencumbered.

Analysis: Employing an objective approach to contract construction, the Court “consider[ed] the plain language of the disputed provisions in context, which includes not only the text of the entire contract but also the contract’s character, purpose, and ‘the facts and circumstances of the parties at the time of execution.’” The Court reasoned that “[b]ecause the relevant provisions of the lease agreement contemplate a transaction between a landlord and a tenant rather than an ordinary property owner and potential buyer, these provisions indicate that the parties contemplated a transaction in which the property is sold free of the tenant’s encumbrance thereon.”

The full opinion is available in pdf.

Appiah v. Hall (Ct. of Appeals)

Filed: October 27, 2010

Opinion by Judge Mary Ellen Barbera

Held: To hold an employer liable for the torts of an independent contractor the employer must exercise control over the work that leads to the injury.

Facts: Seagirt is a shipping terminal owned by the Maryland Port Administration. The MPA contracted with P&O Ports of Baltimore, Inc. to conduct stevedoring at the terminal. Amongst other contractors that leased space at the terminal, Marine Repair Services delivered power to and monitored the temperature of refrigerated containers stored at the terminal. An employee of Marine Repair Services was severely injured in an accident involving a trucking company's attempt to pick up a refrigerated container. Plaintiff, as personal representative of the deceased, brought a wrongful death claim against the truck driver, the trucking company, P&O and the MPA.

The Circuit Court granted summary judgment in favor of P&O and the MPA. The Court of Special Appeals affirmed the Circuit Court.

Analysis: An employer will not be liable for the torts of an independent contractor unless the employer retained control over the operative details and manner of the work of the independent contractor such that the independent contractor is not free to do the work in his own way and the employer has retained control over the very thing that caused the injury in question. Here, the MPA and P&O's alleged accident investigation is not relevant to determining the issue of their control of the work performed by Marine Repair Services. Also, while the lease agreement required the MPA's permission before Marine Repair Services could install additional safety signs, permission was not required to impose safety protocol. In sum, Plaintiff failed to show how the MPA and P&O controlled Marine Repair Service's specific work of connecting containers to trucks.

Judge Murphy provided a dissenting opinion, joined by Judge Harrell, which contended the Court of Special Appeals and the Court interpreted too narrowly the "very thing that caused the injury."

The full opinion is available in pdf.

RRC Northeast, LLC v. BAA Maryland, Inc. (Ct. of Appeals)

Filed: May 10, 2010

Opinion by Judge Glenn T. Harrell.

Held: A commercial lease may contain an implied covenant against destructive competition by the lessor, inferred from the duty of good faith and fair dealing, but the lease and the circumstances surrounding formation of the lease must demonstrate the parties intended to limit competition.

Facts: The defendant, party to a Master Lease with the Maryland Aviation Administration, leased, developed and managed the food, service and merchandise concessions at BWI. The plaintiff operated several stores at BWI under subleases with the defendant.

After additional competing gift stores were opened at BWI, the plaintiff alleged the defendant caused it economic damage due to, among other theories, (1) breach of express and implied covenants of good faith and fair dealing and (2) breach of sublease. The Circuit Court granted the defendant's motion to dismiss on grounds that the complaint failed to identify contract terms that the defendant breached. The plaintiff filed an amended complaint, which "essentially reasserted the facts as alleged in the" first complaint. The Circuit Court granted the defendant's motion to dismiss, with prejudice.

The Circuit Court then denied plaintiff's motion to alter or amend the judgment of dismissal. The plaintiff alleged in the motion, for the first time, that the sublease incorporated the Master Lease. The plaintiff also had attached to the motion, for the first time, copies of several documents, including the Master Lease and subleases. The Court of Special Appeals affirmed the Circuit Court's denial.

Analysis: A breach of contract complaint must "allege with certainty and definiteness facts showing a contractual obligation owed by the defendant to the plaintiff and a breach of that obligation by defendant." In considering the sufficiency of a complaint alleging breach of contract, "any ambiguity or uncertainty in the allegations is to be construed against the pleader." The Court of Appeals affirmed the dismissal of the breach of contract claim because the complaint failed to allege the defendant promised the plaintiff it would restrict competing gift stores to four stores.

Analyzing the claim for breach of express and implied covenants, the Court of Appeals stated "an implied covenant to refrain from destructive competition may be inferred from a percentage lease, based on the duty of good faith and fair dealing, where the intentions of the parties, as indicated by the terms of the lease and the circumstances surrounding the formation of the lease, suggest that such an inference is appropriate, namely, by limiting competition to a particular level with, or granting exclusivity to, the plaintiff, either in the contract or an incorporated pre-lease document." As the second complaint failed to alleged that the plaintiff and defendant contracted to limit competition, the Court of Appeals affirmed the dismissal.

The full opinion is available in PDF.

Saul Holdings Limited Partnership, et al. v. Raquel Sales, Inc. and Barefeet Enterprises, Inc. (Cir. Ct. for Mont. County)

Filed August 27, 2009
Opinion by Judge Durke G. Thompson

Held: When accelerated rent clauses provide for the payment to the landlord of a lump sum over a lengthy term and also allows the landlord the present possession of the leased premises with no incentive to mitigate its damages, the accelerated rent clause will be found to speculative and unenforceable as a penalty.

Facts: On or about January 23, 2006, Raquel Sales, Inc. (“RSI”) entered into a 10-year shopping center retail lease with Saul Holdings Limited Partnership for space in the South Dekalb Plaza Shopping Center in Decatur, Georgia and a 10-year shopping center retail lease with Briggs Chaney Plaza, LLC for space in the Briggs Chaney Shopping Center in Silver Spring, Maryland. Barefeet Enterprises, Inc. (“BFI”) executed a guaranty for each of the 10-year shopping center retail leases, whereby BFI guaranteed RSI’s performance under the terms of each of the leases, including payment of all obligations and liabilities under the terms of the leases.

On or about August 1, 2007, RSI abandoned the leased space in the shopping center in Georgia and failed to pay the rent and other fees due under the lease since October of 2007. RSI also abandoned the leased space located in Maryland in October of 2008 and ceased paying the rent and other fees due under the lease beginning in November of 2008. Saul and Briggs Chaney filed suit in the Circuit Court for Montgomery County for breach of lease against RSI and breach of guaranty against BFI seeking damages for unpaid rent and accelerated rent due under Section 29(c) of each lease.

The Court ruled that the accelerated rent due under Section 29(c) of the Georgia lease upon the breach of the lease was not permitted under Georgia law as liquidated damages, but was considered a penalty because the damages were too speculative and uncertain. The Court also found that Saul was entitled to any deficiency resulting from its re-letting of the leased space under its new 5-year lease with a replacement tenant.

With regard to Briggs Chaney, the Court similarly ruled that the accelerated rent due under Section 29(c) of the Maryland lease upon breach of the lease was not permitted under Maryland law as liquidated damages but was considered a penalty because it would disincentivize Briggs Chaney from mitigating its damages. Moreover, the Court determined that the length of the remaining lease term was far too long to fairly calculate Briggs Chaney’s damages resulting from RSI’s default. Thus it concluded that RSI was liable only for those damages resulting from Briggs Chaney’s inability to re-let the premises despite it using commercially reasonable efforts.

The Court also found BFI liable to each of Saul and Briggs Chaney for RSI’s default in accordance with the terms of the damage provisions set forth in each respective guaranty.

Analysis: In determining whether the accelerated rent due under Section 29(c) of the Georgia lease was liquidated damages or a penalty under Georgia law, the Court reviewed previous opinions of the Georgia Court of Appeals. Specifically, the Court applied the precedent set by the Georgia Court of Appeals in Peterson v. P.C. Towers, L.P., 206 Ga. App. 591 (1992), where the Georgia Court of Appeals held that accelerated rent provisions were enforceable liquidated damage clauses if the injury caused by the breach was difficult or impossible to accurately estimate, the parties to the lease intended to provide for damages rather than a penalty, and the sum stipulated in the accelerated rent provision was a reasonable pre-estimate of probable loss. This lead the Court to conclude that the damages provided for in Section 29(c) of the Georgia lease were too uncertain and speculative and, therefore, a penalty. Moreover, because Section 29(c) of the Georgia lease did not either require Saul to mitigate its damages by re-letting the premises or account for the possibility that Saul would re-let the premises, the Court found that awarding Saul the accelerated rent would provide Saul with present possession of the premises and a lump sum award for the lengthy 7 years remaining in the term, even though the awarded damages bore no relation to the actual damages suffered by Saul.

Although Maryland case law allows parties to a lease agreement to impose liability for rent, damages or any deficiency arising after re-letting premises, the question of whether accelerated rent provisions were permitted as liquidated damages had not been addressed by Maryland Courts. Because Maryland courts have generally enforced liquidated damages provisions that provide for a fair estimate of potential damages at the time that the parties entered into the contract and if the damages were incapable of being estimated at the time the parties entered into the contract, for Section 29(c) of the Maryland lease to be enforceable as a liquidated damages clause it would have to meet that standard. Briggs Chaney argued that Section 29(c) was enforceable as liquidated damages because it provided a reasonable estimate of potential damages by calculating the monthly rent at the amount due at the time of default and not at the increased amounts due in future months. Moreover, it contended that lease alleviated any concerns regarding awarding a lump sum payment of future rent for the remainder of the lease term because Maryland law required Briggs Chaney to mitigate its damages.

The Court ultimately held that Section 29(c) of the Maryland lease was a penalty and not enforceable as liquidated damages because it did not provide a fair estimate of the potential damages that would arise out of RSI’s breach of the lease. Rather, the lease provided for damages that were disproportionate to the damages that might be reasonably expected to result from RSI’s breach. As with Saul, the Court found that by awarding the lump sum provided for under Section 29(c), the Court would be providing Briggs Chaney a lump sum award for payment of rent for the remainder of the lengthy term and, at the same time, would allow the landlord present possession of the premises. As a result, Briggs Chaney would have no incentive to re-let the premises during the remainder of the term.

The Court also awarded the plaintiffs attorneys' fees and there is a brief discussion of the procedure and standards to be followed in awarding such fees.

The full opinion is available in PDF.

On November 2, 2009, the Court entered a judgment against RSI in the amount of $704,365.45 and against BFI in the amount of $402,970.53.

Gebhardt & Smith, LLP v. Md. Port Adm'n (Ct. of Special Appeals)

Filed: October 29, 2009
Opinion by Judge Kathryn Grill Graeff

Held: Language in a Lease Agreement stating that the operating expenses payable by the tenants "shall be determined by Lessor's certified public accountant," is not a condition precedent to tenant's obligation to pay these expenses. Further, when a contract provides that a determination rendered by a designated person is "final," that determination is binding on the parties and cannot be contested in court in the absence of fraud or bad faith.

Facts: Gebhardt & Smith, a law firm, leased office space in Baltimore, Maryland, from 1977 until 2006 in the World Trade Center, an office building operated by Maryland Port Administration. The parties executed the lease at issue in 1992 and the tenant agreed to pay per month base rent, plus its proportional share of real estate taxes and operating expenses. The tenant challenged the operating expenses invoiced by the Landlord and did not pay any bills for operating expenses from 2003 to 2006 based upon a provision in the lease that provided that these expenses shall be determined by the landlord's certified public accountant.

Relying on this passage, the tenant argued that it was a condition precedent to its obligation to pay for operating expenses for the landlord to have an independent certified public accountant determine the actual operating expenses at year's end. The tenant also argued it was not precluded from contesting the certified public accountant's calculations as to the accuracy of the operating expenses.

The Circuit Court rejected the tenant's position. It held that the lease does not require an "independent" certified public accountant to determine the operating expenses and that the landlord complied with the lease provisions by employing its internal certified public accountant to determine the operating expenses. Further, the lower court noted that pursuant to the terms of the lease, which stated that the certified public accountant's calculations were "final," the tenant was precluded from challenging whether the operating expenses were calculated correctly.

On appeal, the Court of Special Appeals held the the lease provision at issue does not contain clear language providing that the determination of the operating expenses by the "Lessor's certified public accountant" is a condition precedent to the tenant's obligation to pay these expenses. The lease at issue does not contain language typically used to create a condition precedent, such as a statement that the tenant is obligated to pay operating expenses "if," "when," "after," or "provided that," "Lessor's certified public accountant" determines the operating expenses.

The Court further noted that even if lease contained a condition precedent, that condition had been fulfilled by the audit performed by the landlord's internal certified public accountant (the MDOT Office of Audits). The Court rejected the tenant's argument that the certified public accountant be "independent" should be reasonably implied since the lease referred to "Lessor's certified public accountant" and did not contain the word "independent." In that regard, the Court stated "if the parties to a contract intend that a certified public accountant specified in the contract be 'independent,' the contract would specifically state that requirement." The Court further noted that even if the term "independent" is considered an implied term in this matter, that the Landlord and MDOT Office of Audits satisfied that condition since "Certified public accountants are held to professional, ethical and work standards by the very nature of their training and certification."

Finally the Court held that, where a contract provides that a determination rendered by a designated person is "final," that determination is binding on the parties and cannot be contested in the absence of bad faith or fraud. The Court noted that generally parties to a contract are entitled to turn to the courts to resolve disputes arising from a contract, but that the parties to a contract can waive that right and provide that a designated person has authority to render a final and binding decision.

In order for the contract to foreclose or waive the right of a party to challenge or litigate the conclusions of a third party, the contract must use unequivocal language that unmistakably evidences the parties' intent that the third party's determination is final, binding, and conclusive. The language in the lease in question, that the statement of operating expenses be "determined by Lessor's certified public accountant," was deemed to be sufficient to show that parties' intent that the determination constitutes a "final determination" between the parties that can be challenged only on the narrow grounds of bad faith or fraud.

The full opinion is available in PDF.