Daily Development for Tuesday, March 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
dirt@umkc.edu

LANDLORD/TENANT; ASSIGNMENT AND SUBLETS; UNAUTHORIZED ASSIGNMENTS:  Lessor's eviction of an unpermitted assignee and reacquisition of the property does not necessarily terminate tenant's obligation to pay rent under the lease.

RAL Automotive Group, Inc. v. Edwards, 861 A.2d 795 ( NH. 2004).

In July 1999, Landlord Edwards and Tenant RAL entered into a lease for the operation of a car dealership.  RAL defaulted under the Lease and Edwards brought legal action resulting in a settlement agreement, which provided that so long as there was no change in the Toyota Dealership or principal of RAL, Edwards would be entitled to invest $132,090, then held in escrow, into a certificate of deposit ("CD") as security under the Lease, but, if Toyota approved a new dealer, RAL would be required to purchase an irrevocable letter of credit in an amount equal to the CD.  In September 2001, RAL sold the dealership to Minato Auto, LLC ("Minato").  Edwards, however, refused to consent to the assignment of Lease to Minato and held RAL in default under the Lease.

In November, RAL brought an equitable action to determine the parties rights and obligations under the Lease.  The Superior Court held that Edwards acted reasonably in refusing to consent to the assignment of Lease, that RAL remained the tenant under the Lease and that Minota was a tenant at will.  Further the Superior Court held that because the Toyota dealer changed from RAL to Minota, Edwards was no longer entitled to invest the escrow funds in a CD, however, RAL was required to purchase an irrevocable letter of credit under the terms of the settlement statement.  Subsequently, Edwards filed a motion to compel RAL to post the irrevocable letter of credit.  The Superior Court denied Edwards motion, holding that the requirement of the letter of credit was to protect Edwards in the event that he suffered a loss of future rent and, because he had elected to evict the current tenant [Minota], he was the cause of any loss of rent he would suffer.  The Superior Court reasoned th!

 at no
rent loss or damage could be caused by a tenant who was no longer in possession of the property.

Edwards appealed the denial of his motion to compel to the Supreme Court of New Hampshire.  The court held that the Superior Court's order was based upon "reasons clearly untenable" because it failed to make any factual finding that Edwards intended to terminate RAL's liability under the Lease.  The court reasoned that only if a landlord intends to accept a tenant's surrender under a lease, is the tenant no longer liable for rent under such lease.  The court held that without such intent, Edward's reacquisition of the property would not terminate RAL's obligation to pay rent.  The court thus vacated the Superior Court's order and remanded the case for a determination of whether the Lease was ongoing, in which case equitable relief would be available, or whether the Lease had been breached or terminated, in which case an action for damages would be appropriate.

Next, RAL argued that the Superior Court's order was supported by the doctrines of mitigation of damages and avoidable consequences.  The court, however, dismissed this argument, holding that for the doctrine of mitigation of damages to apply, Edwards must be seeking damages.  Because Edwards was only seeking equitable relief, the doctrine did not apply.  Accordingly, the court held that the doctrine of avoidable consequences, a specific type of mitigation, did not apply in a case of equitable relief..

Comment: There is something of a conundrum here, not identified by the court.  The purported assignee was occupying under a license from the tenant.  If the landlord terminates that licensee’s possession, is it not terminating the possessory rights it has granted to the tenant?  And, if so, isn’t the landlord’s action thereafter in damages, rather than for the rent?

The court didn’t necessarily find otherwise here.  It remanded to the trial court as follows:

“While representations were made at oral argument about the status of the property after the eviction of Minato, there is no evidence in the record regarding these representations. No factual findings have been made as to whether the lease is ongoing, is in breach, or has been terminated. Because such findings are crucial to a determination of whether enforcement of the obligation to post a letter of credit would be both available and equitable, we vacate [the trial court’s orders.]

But it is clear that the appeals court entertained the possibility that the landlord could have evicted the tenant’s licensee yet still claimed the lease remained in effect.  A few jurisdictions might permit this if such a remedy is clearly set forth in the lease, but most would not, and there is no evidence of such language in the lease here.  Normally, if the landlord terminates the tenant’s possessory rights, the lease is at an end and the landlord’s claim is in damages.

One way to resolve the conundrum is to treat the tenant has having abandoned, and the landlord retaking possession in order to relet to mitigate damages.  That’s possible, but the court really doesn’t discuss that, and in any event the evidence of abandonment on these facts is pretty sketchy.

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