My Tenant Ruined Its Premises, How Much Does It Owe Me?

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So, the tenant, without the required permission, made significant changes to its space and failed to properly maintain the property as it was required to do. Further, as readers might expect, at the end of the lease’s term, it didn’t return the space to its landlord it the same condition as it was when the lease started. What damages might be available to the landlord?

For one, it can’t recover more than it lost. The underlying principle is that the landlord is entitled to the amount of money that would put it in the same position it would have been had its tenant not “misbehaved.” But, it isn’t open season on the tenant. The losses claimed must be shown to flow from the tenant’s breaches. And, in making that determination, courts look through the eyes of a “reasonable person” viewing proven facts.

There are two approaches to quantifying what a tenant should pay to put its landlord in the same financial position it would have been. They are either the amount by which the fair market value of the damaged property falls below the value of the same property without the damage caused by the tenant. The other is the amount it would take to repair or otherwise restore the property to the condition in which it should have been.

There are nuances affecting these principles. Here are some the U.S. District Court for Massachusetts wrote in the February 2018 decision we have been studying:

If the injury to real property is permanent, the measure of damages is the difference in the fair market value of the injured premises before and after the injury. If the injury is reasonably curable by repairs, the expense of repairs, if less than the diminished market value, is the measure of recovery.

However, Massachusetts courts have not expressly defined the concept of permanent injury to realty. As a result, most courts applying the diminution in fair market value test use repair costs as either the measure of damages or as evidence of the extent of the diminution.

Although cost of repairs may be used as evidence of the extent of diminution in value, “[w]here the facts indicate that cost of repairs is unrelated to lessors’ actual damage, the rule is not applied.”

The cost of restoration of the property to its former condition does not necessarily furnish a true criterion for determining damages.

Where diminution in value is the measure of damages, real estate experts may establish fair market value by a variety of methods.

Even though in some circumstances a court may permit an owner to testify as to his or her property’s value, the scope of that proof is far more limited than that which would come from a qualified expert such as an appraiser. Even when an owner testifies about value of the owner’s property, the testimony must be based on more than surmise, speculation and general impressions; the testimony must come from an owner particularly familiar with the property to testify as to its value with helpful factual specificity.

The reason we selected this U.S. District Court decision is that, as readers will see, it illustrates the difficulty of reaching the “right” number, if any number at all.

Here, when the landlord concluded that its tenant would be leaving, it used a broker to search for a replacement tenant. Based on what prospective tenants told that broker, the broker concluded no one would lease the property in its current condition. A buyer was located and the sales contract actually included the following language, language the landlord admitted in court had been inserted as a way to “prove” its damages:

Acknowledgment of Purchase Price Adjustment. Buyer and Seller agree that the purchase price of the premises has been adjusted to reflect an estimated repair or replacement cost of the parking lot in the amount of $200,000.00 and demolition of existing leasehold improvements in the amount of $200,000.00. $3,700,000.00 is the agreed upon sale price.

After closing, the buyer spent $140,000 to resurface the parking lot. It also spent $25,000 for demolition, but at the time of trial anticipated that more would be needed to clear out the 1/3 of the property that it had not yet leased.

The tenant argued that its landlord had suffered no damages. After all, the landlord had sold the property for $3.7 million and incurred no repair costs. The tenant offered expert appraisals that valued the property, at time of sale, at $3.4 million. Given that the tenant did not proffer an expert opinion as to what the property would have been worth absent its failure to abide by the lease, one would assume that its argument was that the $300,000 “premium” exceeded what the buyer later spent to restore the property.

The seller-landlord offered a repair estimate from a property management company hired after the tenant vacated the space, but before the lease term had ended. The testimony was that interior restoration would cost about $370,000 and the parking lot would need $202,000 for repaving. In contrast, the tenant’s property management company testified that it would only cost $117,000 for interior work and $175,000 to restore the parking lot. [Note: the tenant’s estimates totaled less than the “$300,000” premium received by the landlord-seller.]

But, here’s what the court described as the landlord’s evidentiary problem:

[Landlord] has introduced no evidence, however, illustrating the relationship between the cost of repairs and the Property’s value. As other courts have noted, “[t]his relationship (if any) is shaky indeed. Restoring property to its pre-injury condition may eliminate the depreciation in its fair market value which results from the injury. It by no means follows, however, that the cost of repairing the property will coincide with the amount of depreciation caused by the injury.”

Not only must the cost of replacement or reconstruction be reasonable, the replacement or reconstruction itself must be reasonably necessary in light of the damage inflicted by a particular defendant.

We’ll decipher that. You need to show what portion of the damage came from what the tenant did and what part of the damage came from normal wear and tear and normal depreciation.

Courts are suspicious about injured parties bringing the kitchen sink to court. They are willing to compensate landlords for losses attributable to a tenant’s breach, but they look askance at anything that smacks of a windfall.

So, what was the outcome of this case? The landlord didn’t even get a chance to go to trial. In dismissing the landlord’s suit at the earliest stage, here is what this federal court wrote:

At bottom, [landlord] has not shown that the Property would have been more valuable absent the alterations merely because they would have cost money to remove. The record is undeveloped as to what about the Property’s “as-is” condition deterred prospective tenants, and as to what actual damage [landlord] thereby incurred. [Landlord] points to no otherwise comparable properties commanding a higher sale price for want of such alterations and has submitted no expert report to refute defendant’s appraisal.

Ruminations thinks this mundane landlord-tenant dispute can teach all of us something. Here’s what we haven’t told readers yet. Before the suit was filed, the tenant appeared amenable to resolving what was then just a disagreement. It even offered to do a “walk-through” with the landlord. There was some indication that the tenant wanted to get started right away on repairs. Then, the tenant disavowed any responsibility. Frankly, we don’t know what happened or if the tenant was being disingenuous. But, we’ve seen this picture before. Without facts, we can only paint a picture and admit that it may have no basis in fact. What likely happened is that the landlord got greedy. It hadn’t looked at what damages would be provable in court. It didn’t do its homework.

Moreover, it did something akin to the following. Someone’s car is struck on the front passenger door. The car is old and its paint is faded. So, you can’t repaint the passenger door to match the faded paint. Consequently, the car’s owner makes a claim for repainting the entire car (including cleaning the rust spots that can’t be painted over).

We aren’t just dumping on landlords. Tenants do the same thing, though they don’t have as many opportunities.

Now, we’ll generalize. Pigs get fat, and hogs get slaughtered. Bulls make money, bears make money, and pigs get slaughtered. [OK, we wish we had coined those pithy sayings instead of just dragging them out of our lexicon.]

One more thought: Going for all may get you nothing. When it comes to issues of money, save that approach for July 26 – National All or Nothing Day. [Who knew?]

And, these lessons apply to all negotiations. Something is usually better than nothing. My way or the highway can lead to a traffic jam.

[Readers who want to read the court’s decision can click: HERE to see it.]

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