Daily Development for Tuesday, February 1, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; QUIET ENJOYMENT; CONSTRUCTIVE EVICTION: A law suit by a landlord that threatens a tenantís possessory interest in a leasehold, brought in bad faith, maliciously, or otherwise without probable cause and primarily for a purpose unrelated to seeking legal redress, constitutes a breach of the landlordís covenant of quiet enjoyment.

Kohl v. PNC Bank National Association, 2004 WL 2404112 (Pa. Super.)(10/28/2004).

Bank held a leasehold mortgage on certain property on which Kohl was the landlord.  Tenant defaulted on the mortgage and Bank took possession, apparently as a mortgagee in possession, in October, 1992.  Bank foreclosed and acquired the tenantís interest on January 15, 1993.  (Apparently through becoming the high bidder at a foreclosure sale, unless some bizarre Pennsylvania procedure not described by the court gave the bank ownership of the lease without a foreclosure auction.)

Kohl, meanwhile, brought suit against the original tenants for damages and eviction, due to their failure to pay real estate taxes as required by the lease, and won a default judgment against them on January 8, 1993.  At that time, note, Bank was in possession and apparently protected from Kohlís eviction by a non-disturbance and attornment agreement that Kohl had signed at the time of the Bank loan.  Kohl, nevertheless, brought a second suit to determine that Bankís possession was wrongful because, under the terms of the lease, the tenantís interest automatically terminated as of the time that the tenant failed to pay the taxes.  If this were true, the lease would have terminated prior to Bankís taking possession. A court ruled in favor of Bank on that claim.

Kohl then brought a second action to terminate the lease and for damages for Bankís failure to pay the taxes.  In connection with this lawsuit, Kohl filed a lis pendens against Bankís interest.  Bank counterclaimed in this action, alleging a breach of the covenant of quiet enjoyment, commencing on the date of the first action to terminate Bankís lease.  Bank argued that Kohlís consistent and ill-founded litigation had interfered with Bankís intended use of the property - to resell it - and that therefore Bank was effectively barred from any beneficial use of the property, justifying it in terminating the lease and recovering damages from Kohl.  Since Kohl had constructively evicted Bank, Bank argued, Bank had no obligation under the lease to pay the taxes or occupy the property.

The trial court found for Bank on most relevant claims, but did not award Bank damages against Kohl.  It did find that Kohlís first lawsuit was brought in bad faith and had virtually no merit.  It further concluded that Kohlís lawsuit indeed had deprived Bank effectively of the use and enjoyment of the property by rendering the property unmarketable (notwithstanding that there had been no lis pendens filed in connection with this first lawsuit.  Anomalously, the court, although excusing Bank from paying the taxes and terminating the lease, did not award Bank any damages for Kohlís alleged breach.

On appeal, held: affirmed in part and reversed in part.  But on the merits of the real relief in the case - permitting Bank to avoid any obligation to pay taxes under the lease, the appeals court held for Kohl.

As virtually a matter of first impression (the court cited two tangentially related precedents), the court held that Pennsylvania would recognize a suit brought in bad faith, with no apparent purpose, and with little or no merit, could constitute a constructive interference with the tenantís use and enjoyment of the subject property and give rise to a claim for constructive eviction.  The court stated that its ruling would strike a proper balance between a policy allowing substantially unfettered access to the court system with a tenantís rights to undisturbed possession.  It noted that a few courts elsewhere have made analogous findings, not necessarily in the context of the argument that ďuse and enjoymentĒ constituted an effort to sell the property.

[L]imiting a finding of breach only with respect to litigation brought in bad faith, maliciously, or without probable cause also reflects a concern that a litigant's genuine attempt to seek legal redress not be hampered. Generally, it is the policy of this Commonwealth that litigants have free access to the courts. . . . ("All courts shall be open; and every man for an injury done him in his lands, goods, person or reputation shall have remedy by due course of law, and right and justice administered without sale, denial or delay.") Under only very limited circumstances are litigants subject to sanction or liability for bringing claims, even where they do not ultimately prevail. Such  strict hurdles reflect concern for the "chilling effect" the sanctions or liability may have on the bringing of legitimate claims for redress. Cf. Thunberg v. Strause, 545 Pa. 607, 615-616, 682 A.2d 295, 300 (1996) ("[T]he [counsel fees] statute serves not to punish all those who initiate legal !

s which are not ultimately successful or which may seek to develop novel theories in the law. Such a rule would have an unnecessarily chilling effect on the right to bring suit for real legal harms suffered. Rather ... [t]he Judicial Code permits the award of attorneys' fees in an attempt to curb the filing of frivolous and otherwise improperly brought lawsuits." (citations omitted)).

The court specifically rejected the Restatement of Property, which finds that the filing of a lawsuit can never be a constructive eviction.

The drama of this finding, however, was diminished when the court held that there was insufficient evidence in this case to show that Kohlís first lawsuit was malicious, and that therefore there was no constructive eviction.  Consequently, Kohl was entitled to possession of the property (as the lower court had held) but the bank had no defense to a damages claim for nonpayment of taxes and wrongfully abandoning the property.

The Chief Judge dissented from this part of the courtís ruling, holding that it should not be necessary to show malice.  The mere fact that the landlordís first lawsuit had little or no merit, he argued, should be sufficient to show that the landlordís acts were wrongful and amounted to constructive eviction.

Comment:   Do we really want to go here?  Arguing that selling the leasehold estate is a ďuseĒ of the property seems to open up the constructive eviction claim considerably wider than previously.  Further, particularly if the Chief Judgeís position is correct, landlords will be deterred from bringing claims they deem to be legitimate for fear that a subsequent court will not only deny relief on the claim, but also award substantial damages to tenant for the impact of the lawsuit on its plans for the property.  And why not stop at a lawsuit?  Wouldnít a little sabre rattling by the landlord also deter the tenant from carrying out an economic plan for the property until the dispute was resolved?  Any old threat would do.

In the editorís view, quiet enjoyment deals with the physical use of the property.  For a constructive eviction to occur, the landlordís wrongful actions ought to have such a direct impact on the tenantís physical use of the property that the tenant is forced to leave.  Here, it is unclear whether in fact Bank terminated its possession of the property in response to Kohlís first   lawsuit.  It appears that, at least for a time, Bank continued to try to sell the property, which suggests that it deemed itself in control of the property.  The editor would need to see a much clearer delineation of the relationship between the lawsuit and the Bankís actions to find a constructive eviction.  (Note that because of its finding of ďno malice,Ē the court didnít give us all the detail of this relationship here.

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