When a tenant prematurely vacates leased premises, a landlord sometimes delays suing for damages for any number of reasons, including the potential of “throwing good money after bad,” but the Court of Appeals recently gave landlords additional incentive to seek damages quickly. If the landlord obtains a judgment against the tenant and guarantor and later enters a new lease for the premises, the rents that the landlord obtains under the later lease need not reduce the amount of the judgment. Thus, the landlord is in essence permitted to obtain a double-recovery. In some cases, timing is everything.
The court’s decision also reminds a tenant of the importance of discovery into the landlord’s efforts to re-lease the premises, notwithstanding that discovery is expensive and not always fruitful. Had the tenant undertaken some discovery, it may have learned of the re-leasing efforts and used those to alter the judgment.
The Court of Appeals Decision
The court of appeals recently affirmed a landlord’s right to obtain a judgment against a former tenant and a guarantor for damages for all future rents due after a premature vacation of the premises, despite the fact that the landlord re-leased the premises for a portion of that term. Lariat Cos., Inc. v. Baja Sol Cantina EP, LLC, No. A12-2202, 2013 Minn. App. Unpub. LEXIS 756 (Minn. App. 2013). In Lariat Cos., the parties entered a ten-year lease in 2008. The tenant failed to pay rent and was evicted in July 2010. In October 2010, the landlord sued the tenant and the personal guarantor for the rents that were due for the remaining term and for attorneys’ fees and costs. The lease provided that the landlord was entitled to receive as damages “the present value . . . of the balance of the rent for the remainder of the term less the present value . . . of the amount Tenant reasonably demonstrates that Landlord would in all likelihood receive from leasing the leased premises to another tenant for said period . . . .” The litigation thus focused on this clause.
The tenant elected not to complete any discovery in the litigation. In March 2011, the landlord moved for summary judgment, which the district court granted in June 2011, awarding the landlord over $2.2 million in damages against the tenant and the guarantor, jointly and severally. The judgment was docketed in August 2011 and the landlord began collection efforts.
The tenant, however, learned that the landlord re-leased the premises on July 14, 2011 and was entitled to rents in excess of $1.1 million under that lease. The tenant accordingly asked the district court in April 2012—eight months after judgment-entry--to vacate the judgment. The court rejected the tenant’s request because the tenant had not undertaken any discovery before the summary judgment motion; the court said that the tenant did not use “reasonable investigative efforts to find and produce evidence” and did not have a reasonable excuse for failing to do so. For these reasons the court allowed the full amount of the judgment to stand.
The tenant appealed the district court’s decisions to the Minnesota Court of Appeals in December 2012. There, the tenant argued against the monetary judgment on the merits, including whether the lease was terminated when the landlord accepted the tenant’s surrender of the premises. The Court of Appeals summarily rejected that argument on the basis of the lease language and long-standing Minnesota case law, both of which permitted the landlord to recover damages even if the lease was terminated. The tenant also argued that its franchisor had assumed the lease and relieved the tenant of liability, based on the franchisor’s temporary possession after the tenant vacated. The Court of Appeals also rejected that argument, again on the basis of the lease language and case law which provided that an assignment did not impact the tenant’s continuing liability.
Finally, the tenant argued that the amount of the judgment should be reduced because of the new lease. It claimed that the district court impermissibly allowed a double recovery. But the Court of Appeals cited an earlier decision stating that “double recoveries are not absolutely prohibited” and limited its review to the documents that were before the district court at the time of the summary judgment motion. The Court of Appeals, therefore, determined that there was no evidence of a double-recovery and affirmed the district court’s decision in all respects.
Landlords, while generally desiring to act quickly to re-lease premises after a tenant vacates prematurely, should be mindful of the potential for a double-recovery. If a landlord promptly moves forward with the litigation against the former tenant and guarantor and obtains an award of the full amount of rent due through the end of the lease, and then enters a new lease, the landlord may be permitted to retain the benefit of both.
On the other hand, tenants should remember the importance of completing at least some discovery concerning the landlord’s attempts to lease the premises to a new tenant. Discovery can reveal the landlord’s negotiations with a new tenant to occupy the space and disclose information concerning rent the landlord will be receiving into the future. Additionally, even if discovery does not reveal any such information before judgment, but the landlord’s rights to rent later comes to light, the tenant will be better positioned to argue that the award of damages was improper as a double-recovery.