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
There’ll be time enough for countin’
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.