How Do You Enforce Your Lease Or Other Contract? (Remedies – Part 2)

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Two weeks ago (August 5), we began a four part “schmooze” about the kinds of remedies a non-breaching party might have against a breaching party. If you missed it, click HERE. The reason we did so is implicit in the very next paragraph, lifted right out of how we started on August 5.

Having contract rights is “pretty neat,” but without any remedy if those rights aren’t fulfilled, they are just empty promises. So, when the other party breaches your agreement and doesn’t deliver what you bargained for and you can’t “work it out” between the two of you, you’ve got to “ask the judge (or an arbitrator, if that’s what you’ve agreed to do)” to step in and give you a remedy for this breach. In such a case, what can you expect?

Given that we referred to them several times in the first installment, it’s time to ask: How about “Consequential” damages? What are they? After all, aren’t all of the damages being claimed the “consequence” of the alleged breach? Wish that life was that easy. In fact, Consequential damages are not the kind that flow directly from the “bad act” or breach; they are ones that flow indirectly, either in time or distance. Basically, they are some shade of “remote.” Give me an example, you say? Lost profits are a prime example. Here is another example. Suppose you planned to use your store for a national employee’s meeting and couldn’t because the landlord didn’t plow the two feet of snow from the parking lot when it could have and your lease says it should have. So, you hire out the local hotel meeting room and have replacement meeting material hand delivered from 500 miles away, all at an extra cost of $15,000. Those are Consequential damages. If you removed the snow yourself, your cost would be Special damages and you could bring the bills to court to prove them. The Uniform Commercial Code (UCC) isn’t directly applicable to real estate agreements, but can be useful to explain Consequential damages better than we can.

Here is what the UCC says:

(2) Consequential damages resulting from the seller’s breach include:

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty.

The “reason to know” test is something like the “foreseeability” test, but the UCC has a more modern approach than does the “common law.” It doesn’t require that the breaching party specifically realized and actually assumed the risk of the loss. Under the UCC, the only test for the breaching party would be whether it could have reasonably contemplated the other party’s “less than direct” loss. In our example, absent a waiver in the lease or other contract, an allowable Consequential damage would be the lost profit because the store was closed, but not the extra meeting costs because no landlord would reasonably have contemplated that its tenant would be holding a national employee’s meeting at this particular store? The result would be different if the lease was pretty direct about holding meetings in the snow season, but that’s not our hypothetical. Don’t jump up and down about other issues of “lost profits,” such as how we can tell how big they were. That’s a matter of proof, not a matter of what to call the lost profits that can be proven.

By the way, the general law is that where the only breach is one of non-payment, the one who didn’t get paid won’t get Consequential damages. It doesn’t matter that a landlord couldn’t pay its mortgage or had to borrow money. This isn’t a case of “for want of a nail … the kingdom was lost” (possibly deriving from the Battle of Bosworth Field).

Now, for “Restitutionary Damages.” For this, we’ll work by way of another example. Suppose a lease is terminated by a tenant based upon a provision that says the tenant can terminate its lease if a particular large space is unoccupied for a year. You’ll recognize that as a co-tenancy clause. Now, further assume that the termination is effective on June 15. Lastly assume that, for one reason or another, the landlord won’t return the balance of June’s rent and won’t return the tenant’s security deposit. When the tenant asks a judge to “make it whole,” the judge will do so by awarding “Restitutionary Damages.” Restitutionary damages are aimed at disgorging the wrongful party of possible unjust enrichment. A non-real estate example might be when an embezzler steals $50,000 and buys $50,000 of a hot stock that goes up in value to $100,000. That stock can be treated as being owned by the victim and a court will disgorge the entire $100,000 as Restitutionary damages for the victim. It isn’t going to let the embezzler “use” the stolen funds for its own advantage. As between the thief and the victim, the money is going to the victim.

Ruminations has avoided analyzing direct damages such as what a tenant might get from its landlord if the tenant is directly harmed by something its landlord did, such as not providing HVAC and thus forcing the tenant to get emergency service from a portable HVAC provider. We’re even going to skip over “attorneys’ fees,” even though they are commonly categorized as a “remedy” because they help make someone “whole.” And, we haven’t discussed the ever common post-eviction / lease termination damages owed to a landlord. That’s because we hope to do that in an upcoming installment, using examples and making practical suggestions with respect to lease drafting. There’s a comment at the very end of  the next installment about that. In the radio business, we call this a “cliffhanger.”

Way near the beginning of this multi-part series, we promised readers some mumbo jumbo. The prime meaning of “mumbo jumbo” may be a “confusing or meaningless subject,” but it also means speaking in a language the listener may not understand. No insult intended. Now, Ruminations is attempting to fulfill its promise.

Here’s a legal concept. The element of “foreseeability” is always a limit on the availability of damages. If the breaching party doesn’t know that a particular type of damage would be realized by the non-breaching party and, objectively speaking, wouldn’t have expected it, the non-breaching party won’t be able to collect. We touched on that above when we addressed Consequential damages, but it might need to be made clearer: just because something is remotely related to the breach of contract doesn’t mean it is a recoverable Consequential damage; it still needs to be foreseeable.

We haven’t spoken about “Punitive” damages, sometimes called “Exemplary” damages because they are meant to teach an “example.” That’s because they are rarely, rarely awarded in contract cases. The predicate for such an award is extreme and outrageous misconduct or a truly malicious intent or a palpable display of gross negligence or reckless disregard. These aren’t things one sees very often in lease or other contract disputes. In fact, in the rare cases where these things show up, it is because there was a parallel tort committed along with, or related to, a breach of contract. The “covenant of good faith and fair dealing” is a contract concept, not a tort (civil wrong) concept. So, don’t expect that a breach of this covenant, implied in every contract, will support a claim for Punitive damages in other than employment contracts.

In two weeks, if all goes as planned, we’ll delve into non-monetary remedies. Y’all have to wait until then, because as the lyrics conclude in Be kind to your web-footed friends, “You may think that this is the end, Well it is” (Citation available on request).

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Comments

  1. I continue to enjoy your editorial on Real Estate Law and more often then not walk away better for having read its content. Here is a question for you concerning this column and that of August 5th: What if the Landlord does not recognize your first rights to expand and provides to another third-party tenant; further that the lease does not allow for non-direct or consequential damages. I assume the wronged tenant would have to prove actual damages occurred in order to seek any restitution… correct? Although would such damages be consequential? Any ideas?

  2. I believe that the central question, as far as shopping centers are concerned, is not about enforcing but “mutual conduct”- that is, being able to follow up the KPIs and mood of the tenant as HE should follow himself. For short, HIS business is actually my business; daily follow-up of mutual interests and the ontime-realtime and building a rapport on mutual interests, is the strongest ENFORCEMENT when time comes for a DIVORCE.

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