Hto7, LLC v. Elevate, LLC ( 2024 )

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DISTRICT OF COLUMBIA COURT OF APPEALS
No. 22-CV-636 & No. 22-CV-645
HTO7, LLC, APPELLANT/CROSS-APPELLEE,
V.
ELEVATE, LLC, APPELLEE/CROSS-APPELLANT.
Appeal from the Superior Court
of the District of Columbia
(2020-CA-003769-B)
(Hon. Jason Park, Trial Judge)
(Argued November 16, 2023 Decided August 1, 2024)
Brett A. Berman, with whom Kristen Ward Broz was on the brief, for
appellant/cross-appellee.
Matthew J. MacLean, with whom Katherine T. Danial was on the brief, for
appellee/cross-appellant.
Before BLACKBURNE-RIGSBY, ∗ Chief Judge, and BECKWITH and DEAHL,
Associate Judges.
∗
Associate Judge AliKhan was originally assigned to this case. Following
Judge AliKhan’s appointment to the U.S. District Court for the District of Columbia,
effective December 12, 2023, Chief Judge Blackburne-Rigsby was assigned to take
her place on the panel.
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DEAHL, Associate Judge: This is a commercial lease dispute between a
landlord, Hto7, LLC, and its former tenant, Elevate, LLC. It is undisputed that
Elevate terminated their lease agreement two years and three months into an
eleven-year term. This dispute centers around whether Elevate was justified in doing
so because Hto7 had previously materially breached the lease agreement when it
failed to return, after several months of demands, a $38,000 security deposit that it
was required to refund to Elevate after year two of the lease.
The case went to trial, and the trial court did not address whether Hto7’s
failure to return the $38,000 security deposit constituted a material breach of the
lease agreement. It instead reasoned that it did not matter, because a “No Rental
Offset” provision in the lease agreement—precluding Elevate from offsetting its rent
obligations from amounts it felt were due—had nullified Elevate’s common law
right to terminate the contract even in the event of a material breach. Elevate now
challenges that ruling on appeal.
We reverse. The No Rental Offset provision does not purport to (or implicitly)
extinguish Elevate’s common law right to terminate the lease in the event of a
material breach. What remains to be resolved is whether Hto7’s failure to return the
$38,000 security deposit after several months of demands constituted a material
breach in the context of a multi-million dollar lease agreement. We remand that
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question for the trial court’s resolution because it is a quintessential question of fact
that is not conducive to resolution on appeal in the first instance. See 3511 13th St.
Tenants’ Ass’n v. 3511 13th St., N.W. Residences, 922 A.2d 439, 445 (D.C. 2007)
(“Whether a particular breach of a contract is ‘material’ is a classic issue of fact.”).
Hto7 raises its own claims in this appeal related to how the trial court
calculated its damages, though they are all premised on the now-questionable
proposition that Elevate breached the contract without legal justification. For the
sake of judicial efficiency, we address two of these arguments now in case they arise
again after remand. Hto7 argues that the trial court (1) erred in finding that Hto7
failed to take reasonable steps to mitigate its damages after Elevate terminated the
lease, and (2) otherwise erred in calculating damages because it misunderstood when
any replacement tenant would actually start paying rent (given the time it would take
a new tenant to move in and some customary period of “free rent” at the start of
commercial leases). We disagree with Hto7 on the first point; the trial court’s
mitigation analysis was generally sound and well-supported by the evidence. We
agree with Hto7 on the second point, however, because the trial court clearly
misinterpreted the testimony regarding when Hto7 could have reasonably expected
to receive rent payments from a new tenant had it taken all reasonable steps to
mitigate its damages. If, on remand, the trial court determines that Hto7 did not
materially breach the lease agreement in the first instance, we generally uphold the
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trial court’s mitigation ruling, but instruct it to reconsider its damages calculation in
light of the considerations below.
I. Factual and Procedural Background
The Lease
Elevate agreed to an eleven-year lease with Hto7 for two floors of office space
at 806 7th Street, NW, in the heart of the District’s Chinatown neighborhood. The
lease was executed following extensive negotiations and the lease term began on
May 1, 2018. The lease set a payment schedule under which the base rent owed by
Elevate increased over time, starting at about $19,000 per month during the first two
years of the lease, doubling to about $40,000 in year three of the lease, and ticking
up to roughly $48,000 per month by the eleventh and final year of the lease. Elevate
was slated to pay more than $5 million over the entire eleven-year lease term, barring
early termination (which Elevate was allowed to do at its option after seven years).
A few provisions of the lease agreement are important to our consideration of
this appeal. Section 5.1 required Elevate to provide Hto7 a security deposit of about
$115,000, or roughly six months’ worth of the initial base rent. At the end of the
second lease year (on April 30, 2020), Hto7 was obligated to refund one-third of this
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amount, or about $38,000, within thirty days of receiving a written request for that
refund from Elevate.
Section 16.4 of the agreement was a “No Rental Offset” provision, which
stated:
Except to the extent expressly provided in this Lease, in
the event that at any time during the Lease Term Tenant
shall have a claim against Landlord, Tenant shall not have
the right to deduct the amount allegedly owed to Tenant
from any rent or other sums payable to Landlord
hereunder, it being understood that Tenant’s sole method
for recovering upon such claim shall be to institute an
independent action against Landlord. . . . The obligation
to pay rent under this Lease of Tenant is an express
independent covenant of Tenant.
The lease also expressly permitted Elevate to unilaterally terminate the lease
in two instances: (1) if there were a “fire or other casualty” on the premises that
required more than twelve months of restoration work, or (2) if Elevate reached the
end of the seventh lease year and wanted to terminate the remainder of the lease, was
not in default, and had not assigned the lease to a third party. Two separate
provisions of the lease specified that, “[e]xcept as expressly otherwise herein
provided, time is of the essence in this Lease.” The lease also included a catch-all
provision which stated that remedies were cumulative:
No right or remedy herein conferred upon or reserved to Landlord or Tenant
is intended to be exclusive of any other right or remedy, and each and every right
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and remedy shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing by agreement, applicable law or in equity. In
addition to other remedies provided in this Lease, Landlord and Tenant shall be
entitled, to the extent permitted by Law, to injunctive relief, or to a decree
compelling performance of any of the covenants, agreements, conditions, or
provisions of this Lease, or to any other remedy allowed to Landlord or Tenant at
law or in equity. Finally, the lease provided in § 20.1 that Elevate would be in default
if, among other things, it failed to pay rent or make any other required payment when
due. Any such monetary default expressly permitted Hto7 to terminate the lease if
Elevate, after receiving notice of its default, failed to cure it within ten business days.
Elevate’s Termination of the Lease
On April 23, 2020, amidst the early stages of the COVID-19 pandemic,
Elevate sent a letter requesting that Hto7 refund one-third of its security deposit,
which it was entitled to per § 5.1 of the lease. Hto7 acknowledged receipt of the
request later that day, but did not provide the refund within thirty days as required
by the lease agreement. More than sixty days after that initial demand, on June 23,
2020, Elevate emailed Hto7 a notice of default with a demand to cure, noting that
Hto7 was “in default” because it had not provided the required refund within the
thirty days mandated by the lease and demanding that Hto7 “cure its default within
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thirty days.” After those additional thirty days passed with no response from Hto7,
Elevate mailed a July 25, 2020, notice of termination to Hto7, stating that it was
terminating the lease “for cause” because Hto7 failed to provide the security deposit
refund. Elevate asserted that Hto7’s failure was a material breach and demanded the
return of its entire security deposit.
Three days later, Hto7, via counsel, responded with a letter contesting
Elevate’s right to terminate the lease in response to Hto7’s “minor breach,” citing
the No Rental Offset provision as foreclosing Elevate’s right to terminate the lease.
It was at this point that Hto7 first stated that it was prepared to refund the required
$38,000 of Elevate’s security deposit, but that it would do so only if Elevate
withdrew its notice of termination. If Elevate did not do so, Hto7 posited that it
would be an “unlawful[]” attempt to get out of the lease. On July 31, 2020, Elevate
responded by reiterating that it was terminating the lease for cause because Hto7 still
had not returned the $38,000 security deposit refund despite receiving more than
thirty days’ notice and despite being given more than an additional thirty days to
cure the default. Elevate vacated the space that same day, as it had previewed it
would do in its July 25 notice of termination.
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Hto7’s Efforts to Re-Let the Premises
Following Elevate’s termination of the lease, Hto7, through its property
manager, attempted to secure a new tenant. Hto7 eventually hired Newmark Group,
Inc., to serve as its leasing broker in October 2020. Hto7 also hired a company to
create a three-dimensional scan of the premises so that interested tenants could tour
the space virtually. Newmark worked with Hto7 to create marketing materials and
listed the premises on CoStar, a commercial real estate site.
On January 6, 2021, Newmark informed Hto7 of an unnamed prospective
tenant with a “need to be in Chinatown” who wanted to “occupy the space by the
end of the year.” Newmark reported that the interested party “asked for floorplans
and rentable square footages.” Hto7 provided no response. One week later,
Newmark followed up, stating that the “tenant who inquired about [the Elevate
space] has also asked if [Hto7 was] interested in selling the building. This is the
same tenant who has asked for floorplans, ceiling heights and [rentable square
footages] for the space.” A week later, Newmark followed up again, indicating that
the same party “continue[d] to ask about” rentable square footage “and ceiling
heights,” believed the space was a “great option,” and needed “to be in the space”
within the year. In response, Hto7’s representative replied that it “continue[d] to
follow up on measurements,” which they anticipated being available “soon.” Hto7
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ultimately never provided any of the requested floorplans or other information in
response to those repeated inquiries.
The following month, on February 10, 2021, another broker reached out to
Newmark about a floor plan and asking price for the Elevate space. Newmark
informed the broker that while there was “unfortunately” no floor plan, “ownership
is getting the space measured this week.” This second broker followed up with
Newmark again several weeks later, in early March, asking once more if floor plans
were available. In response, Newmark replied “we will have them by the end of this
week or early next.” Again, no measurements were ever provided.
Litigation
Hto7 sued Elevate for breach of contract. It sought the base rent for the
remainder of the eleven-year term, or about $4.5 million, plus some additional costs
for re-letting the premises, interest, and attorneys’ fees. Elevate countersued for
breach of contract, seeking the $38,000 security deposit refund that it had never
received. The trial court granted summary judgment to Elevate on that $38,000
counterclaim, and Elevate then filed an amended counterclaim seeking the return of
its entire $115,000 security deposit.
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The trial court held a bench trial on the outstanding claims during which it
heard testimony from various Elevate, Newmark, and Hto7 executives regarding the
lease negotiations and efforts to re-let the office space. Each party presented their
own expert relevant to Hto7’s efforts to mitigate its damages after Elevate’s
termination—Michael Goldman for Hto7, and Louis Kluger for Elevate—whose
testimony we detail in our mitigation discussion below.
After hearing the evidence, the trial court concluded that Elevate breached the
lease agreement when it stopped paying rent and vacated the premises at the end of
July 2020. The court did not opine on whether Hto7’s failure to refund the $38,000
was a material breach of the lease agreement, reasoning that the question was
immaterial because Elevate had bargained away its right to terminate the lease even
in the event of a material breach by Hto7. In support of that view, the trial court
stressed that the lease agreement’s No Rental Offset provision meant that Elevate’s
sole recourse in the event of any breach by Hto7 was “an action for damages, rather
than early termination of the Lease.” The court drew further support for that
conclusion from the two provisions that expressly permitted Elevate to terminate the
lease early if (1) there was a “fire or other casualty” that could not be remediated
within twelve months, or (2) if Elevate chose to terminate the lease after seven years.
In the trial court’s view, the lease agreement unambiguously provided that those two
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provisions—when combined with the No Rental Offset provision—provided the
exclusive bases upon which Elevate could terminate the lease.
The trial court then turned to damages. At the time of trial, Hto7 still had not
secured a replacement tenant, and the trial court explained that Hto7 was entitled to
recover the amounts it would have received under the lease provided that it had used
commercially reasonable efforts to secure a replacement tenant. The trial court
found that Hto7 made reasonable efforts to re-let the premises and mitigate damages
up until March 3, 2021, which was the date of the last of Hto7’s repeated unfulfilled
assurances—dating back to January 2021—that it would have the measurements
sought by prospective tenants “soon” or “this week.” The trial court reasoned that
“Hto7’s failure to measure the space and provide” the requested details by that date
“frustrated re-letting efforts and was, therefore, unreasonable and in violation of
Hto7’s duty to mitigate damages.” The trial court therefore calculated damages as
if Hto7 had identified a replacement tenant on March 3, 2021, and it reasoned that
this new tenant would have begun paying rent in November 2021 (a finding we
address in Part III.B). While the damages calculation was further complicated by a
host of factors irrelevant to this appeal, at bottom the court awarded Hto7 just north
of $226,000 in damages.
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Hto7 filed a motion to amend the judgment arguing that the trial court erred
in finding that Hto7 did not make reasonable efforts to mitigate its damages. It
argued that it was entitled to unmitigated damages through the end of the lease, or
about $4.5 million in unpaid base rent for the nearly nine years left on the lease term.
Alternatively, it argued that the trial court erred in calculating damages as if Hto7
found a replacement tenant in March 2021 because there was insufficient evidence
to conclude that Hto7 could have found a replacement tenant so quickly. Hto7 also
asserted that even if it had found a replacement tenant in March 2021, the trial court
erred in concluding that a tenant would begin paying rent just eight months later,
given the time it would take for a new tenant to move in and then a customary “free
rent” period that, by itself, would have been no less than eight months even
according to Elevate’s expert. The trial court denied Hto7’s motion on all counts,
though it did not explain why it failed to account for the time it would take for a new
tenant to move into the space when calculating when a replacement tenant could be
expected to start making rental payments. Both parties also filed post-judgment
motions for attorneys’ fees and costs, and the trial court awarded Hto7 roughly
$300,000 in attorneys’ fees and costs.
Elevate and Hto7 now each appeal. We begin with Elevate’s challenge to the
trial court’s threshold finding that it breached the lease agreement before turning to
Hto7’s challenge of the trial court’s damages calculation.
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II. Whether Elevate Breached the Lease Agreement
Elevate argues in its cross-appeal that the trial court erred in concluding that
it breached the lease agreement when it vacated the premises and stopped paying
rent after July 2020. Elevate insists that it had the common law right to terminate
the lease agreement because Hto7 had already materially breached the agreement
when it failed to return the $38,000 portion of its security deposit that was due to be
refunded after year two of the lease. It further argues that the trial court was wrong
to conclude that the No Rental Offset provision foreclosed its common law right to
terminate the agreement after Hto7’s material breach, contrary to the trial court’s
reasoning. We agree with Elevate that the lease agreement did not foreclose its right
to terminate the lease in the event of a material breach by Hto7, though we remand
for the trial court to consider whether Hto7’s failure to return the $38,000 security
deposit was a material breach.
A. Elevate Did Not Waive Its Common Law Right to
Terminate in the Event of Hto7’s Material Breach
It is a central principle of contract law that one party’s material breach of an
agreement allows the other party to stop performing under the agreement, or to put
another it way, to terminate the agreement entirely. See 3511 13th St. Tenants’
Ass’n, 922 A.2d at 445 (one party’s material breach of contract relieves the other “of
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any duty to perform”); Rosenthal v. Sonnenschein Nath & Rosenthal, LLP, 985 A.2d
443, 452 (D.C. 2009) (“A party is excused from performance under a contract if the
other party is in material breach thereof.” (quoting BioLife Solutions, Inc. v.
Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003))); Ashcraft & Gerel v. Coady,
244 F.3d 948, 950 (D.C. Cir. 2001) (“[A] party’s continuing obligations under a
contract are conditioned on there being no ‘uncured material failure by the other
party to render any such performance due at an earlier time.’” (quoting Restatement
(Second) of Contracts § 237)). Elevate argues that Hto7’s failure to return its
$38,000 security deposit was a material breach that justified its termination of the
lease agreement in July 2020.
Hto7 casts no doubt on this common law principle that its own material breach
would ordinarily allow Elevate to terminate the lease. It instead argues that “Elevate
bargained away its ability to unilaterally terminate the Lease,” including for a
material breach, as part of the lease agreement. It echoes the trial court’s reasoning
that the lease agreement’s No Rental Offset provision, plus two other provisions that
expressly gave Elevate the right to terminate in certain circumstances, displaced
Elevate’s common law right to terminate in the event of material breach.
This raises a question of how to interpret the lease agreement. “The proper
interpretation of a contract,” at least when it is free from ambiguity as both the parties
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and the trial court agree the lease agreement is, “is a legal question, which this court
reviews de novo.” Tillery v. D.C. Contract Appeals Bd., 912 A.2d 1169, 1176 (D.C.
2006); Unfoldment, Inc. v. D.C. Contract Appeals Bd., 909 A.2d 204, 209 (D.C.
2006) (“Where the language in question is unambiguous, its interpretation is a
question of law for the court.”). We interpret a lease agreement as a whole, giving
a “reasonable, lawful, and effective meaning to all its terms.” 1010 Potomac Assocs.
v. Grocery Mfrs. Of Am., Inc., 485 A.2d 199, 205 (D.C. 1984).
Contrary to the trial court’s reasoning, the No Rental Offset provision neither
expressly nor implicitly waived Elevate’s common law right to cease performing
under the lease agreement in the event of Hto7’s material breach. The No Rental
Offset provision, by its plain terms, serves an entirely different purpose. It precluded
Elevate from engaging in just one particular type of self-help—withholding rent to
offset any damages. Terminating an agreement because of a material breach is an
entirely different form of self-help that the No Rental Offset provision did not
expressly or implicitly alter. While a tenant offsetting their rent obligations (which
the lease agreement precludes) is an effort to continue performing under the lease,
terminating a lease due to material breach puts an end to the agreement altogether.
A lease agreement foreclosing the first type of self-help does not supplant the right
to stop performing under the agreement entirely when the common law would justify
such nonperformance.
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To draw an analogy, imagine you bought a car for $20,000 and agreed to pay
it off by making $1,000 payments per month for twenty months. Now let’s assume
your financing agreement with the dealership further said that you could not offset
your payment obligations by any amounts spent to make repairs to the car that you
were assured was in good working order; like the No Rental Offset provision here,
your agreement says that the “sole method for recovering upon such claim shall be
to institute an independent action against” the car dealership. So if you drive the car
off the lot and it immediately breaks down, and needs a new $10,000 engine, you
cannot simply withhold your first ten months of payments to offset the cost of that
new engine. If you want to keep the car and recover damages, you would need to
sue the car dealership to recover that amount. But if you had a right under the
relevant lemon laws to return the car entirely, nothing in the “no offset” provision
above would preclude you from availing yourself of that remedy. You are not
seeking to offset any amounts due to you, or seeking to recover upon any claim
against the dealership—you simply want out of the deal. And the no offset provision
does not, either on its face or implicitly, foreclose any rights the law may provide
you to that end.
Returning to this case, the No Rental Offset provision meant that Elevate
could not withhold its June or July rental payments in order to offset the $38,000
that Hto7 was obligated to refund; to recover that amount and continue under the
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lease, Elevate would have to file suit against Hto7. If Elevate had simply withheld
rent, it would have been in breach of the agreement, and Hto7 would have been in a
position to terminate the agreement and sue for damages per § 20.1 of the lease. But,
of course, Elevate never attempted to recoup its security deposit by withholding rent
payments, which is all that the No Rental Offset provision precluded it from doing.
Elevate instead continued making the obligatory rent payments throughout its
tenancy and up until the point that Hto7 refused to even respond to its requests to
cure what Elevate alleged was a material breach of the lease agreement. If Elevate
was correct that Hto7 indeed materially breached the lease agreement by failing to
refund the $38,000 portion of its security deposit, nothing in the No Rental Offset
provision purported to abrogate Elevate’s common law right to walk away from the
lease entirely, and then seek the return of its security deposit in a suit for damages,
as it did.
Hto7, like the trial court, also relies on two other provisions in the lease
agreement that expressly permitted Elevate’s early termination of the lease as
supporting its view. But those provisions do not purport to, or even seem to, displace
the common law right to terminate in the event of a material breach. “For a contract
remedy to be exclusive of other remedies, it must be apparent from the face of the
contract that the parties intended to make it so.” Pernice v. Bovim, 183 F.Supp.3d
84, 90 (D.D.C. 2016) (citing Phenix-Georgetown, Inc. v. Charles H. Tompkins Co.,
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477 A.2d 215, 225-26 & n.34 (D.C. 1984), and other cases). “If a contractual
provision providing for termination for breach is not exclusive, it does not bar the
remedy of termination for a breach that is material or that goes to the essence of the
contract.” Tricat Indus., Inc. v. Harper, 748 A.2d 48, 60 (Md. Ct. Spec. App. 2000).
The first such provision is just an early opt-out provision, permitting Elevate
to walk away from the lease after seven years. That has no conceivable bearing on
Elevate’s common law right to terminate. And the second provision simply codifies
what amounts to a material breach in one particular context—in the event of a fire
or other casualty—providing that Hto7 would have twelve months to remediate the
premises before it could be deemed in material breach. But illustrating what
constitutes a material breach in one context does not suggest that no other material
breaches are possible, or that no other material breaches would justify termination.
What’s more, these provisions are caveated by § 20.5 of the lease agreement, which
specifically notes that the lease agreement preserves remedies available in
“applicable law or in equity,” such as the right to terminate in the event of a material
breach.
It would also be bizarre to read the “fire or other casualty” provision as being
the sole basis upon which Elevate could terminate the contract (outside of its
seventh-year option). Just imagine if Hto7, contrary to its obligations under the
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contract, had simply never furnished the keys to the premises to Elevate, and had
instead leased the premises out to an alternate tenant and then proactively blocked
Elevate from accessing the property. That would undoubtedly have been a material
breach of Hto7’s core obligations under the lease agreement, and it would be an
untenable reading of the contract to say that the No Rental Offset and “fire or other
casualty” provisions mean that Elevate simply had to continue paying rent over the
course of the eleven-year lease term while seeking damages on the back end. But
that is the natural extension of the trial court’s reading of the lease agreement. While
parties are free to contract for harsh and even bizarre results like that, we should not
lightly read such absurdities into a contract when it is just as easy to read it more
sensibly. See United States v. Winstar Corp., 518 U.S. 839, 907 (1996) (plurality
op.) (avoiding interpretation of contract that “would be absurd”); Am. First Inv.
Corp. v. Goland, 925 F.2d 1518, 1521 (D.C. Cir. 1991) (avoiding interpretation of
contract that would “produce an absurd result”). If Elevate had ceded the entirety of
its common law right to terminate in the event of Hto7’s material breach, we would
expect a much clearer statement to that effect in the contract than the No Rental
Offset provision, but there is none.
Finally, Hto7 stresses that the parties to this lease were both sophisticated and
“represented by competent counsel” during lease negotiations. It suggests that is a
point in favor of its interpretation of the lease agreement because the parties “did not
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negotiate a provision that would provide Elevate a unilateral termination right” in
the event the security deposit refund was not timely. But the point cuts the other
way: Elevate had that unilateral right to terminate in the event of Hto7’s material
breach as a matter of common law, yet the parties (sophisticated as they were) never
expressly abrogated it, as they might have done. In other words, (1) the common
law rule is that one party to a contract has a right to terminate in in the event of the
other’s material breach, so that (2) if these parties meant to extinguish that right—
via the No Rental offset provision or otherwise—that intent had to be “apparent from
the face of the contract,” and it simply is not. Pernice, 183 F.Supp.3d at 90 (citing
Phenix-Georgetown, 477 A.2d at 225-26 & n.34). Hto7’s argument is thus circular:
it treats the parties’ sophistication as a point in its favor only because it
misunderstands how sophisticated parties should have understood this lease
agreement on its face, given the legal backdrop they were negotiating against. Once
that legal backdrop is clarified, the sophistication of the parties becomes a point in
Elevate’s favor.
Contrary to the trial court’s reasoning, we conclude that the agreement did not
eliminate Elevate’s common law right to terminate the contract in the event of Hto7’s
material breach.
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B. Whether Hto7 Materially Breached the Contract Is a Question of
Fact That We Remand for the Trial Court’s Consideration.
That leaves the question of whether Hto7’s failure to return the $38,000 due
as a security deposit refund constituted a material breach of the agreement. Both
parties urge us to rule on that matter in the first instance. In a nutshell, Elevate argues
that it was a material breach because the agreement included “time is of the essence”
clauses which it interprets to mean that Hto7’s failure to promptly refund the security
deposit constituted a material breach. Hto7 counters that in the context of a lease
agreement contemplating more than $5 million in base rent over eleven years, the
failure to refund a mere $38,000 was not a material breach.
We remand this question for the trial court to rule upon in the first instance.
“Whether a particular breach of a contract is ‘material’ is a classic issue of fact” and
is generally not conducive for us to determine in the first instance. 3511 13th St.
Tenants’ Ass’n, 922 A.2d at 445. Whether Hto7’s failure to return the $38,000
security deposit was a material breach “involv[es] an inquiry into such matters as
whether the breach worked to defeat the bargained-for objective of the parties.” Id.
(quoting Sahadi v. Continental Illinois Nat’l Bank & Trust Co., 706 F.2d 193, 196
(7th Cir. 1983)). One potentially relevant fact that would seem to favor a finding of
materiality is that, were the roles reversed and Elevate failed to make even one
month’s rental payment, the contract would have allowed Hto7 to terminate the lease
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if that default were not cured within ten days of Elevate receiving notice of its
default. Here, Hto7 failed for more than thirty days to so much as respond to
Elevate’s June 23, 2021, notice of default, seeking the $38,000 refund it was due
(the rough equivalent of one month’s rent in that third year of the lease).
This court faced a somewhat analogous scenario in 3511 13th St. Tenants’
Ass’n, where a would-be purchaser failed to make a $25,000 earnest money deposit
as a precursor to the $1.3 million purchase of a multi-unit apartment building. Id. at
441. Whether that failure to pay the $25,000 in earnest money was a material breach,
we reasoned, could not “fairly be resolved” as a matter of law, but instead was a
question for the “trier of fact,” so we remanded the case for a factfinder’s
determination. Id. at 444-46. We adopt the same approach here. There is no
question that Hto7 breached the lease agreement when it failed, after repeated
demands, to refund Elevate the $38,000 it was due at the end of the second year of
the lease. Whether that breach was a material one is a question for the trial court, as
factfinder, in the first instance.
III. Hto7’s Challenges to the Damages Calculation
Hto7 raises a series of challenges to how the trial court calculated damages.
Each of those challenges is premised on the proposition that Hto7 is due any
damages at all, which is now unsettled. If Hto7 materially breached the lease
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agreement before Elevate terminated the lease, then Elevate was within its rights to
stop performing under the lease and Hto7 has not been damaged. We nonetheless
exercise our discretion to address two of Hto7’s arguments that “might well arise on
remand” in the event the trial court concludes that Hto7’s breach was not material,
for the sake of judicial efficiency. See In re G.D.L., 223 A.3d 100, 107 (D.C. 2020)
(where an “issue could possibly become academic on remand,” this court retains
discretion to address it when “it might well arise on remand”).
Hto7 challenges the trial court’s calculation of damages in two respects that
could reasonably arise on remand. First, it argues that no reasonable factfinder could
have concluded that Hto7’s efforts to mitigate damages ceased being reasonable as
of March 3, 2021, contrary to the trial court’s conclusion. Second, it argues that the
trial court erred in concluding that a replacement tenant could be expected to begin
rent payments in November 2021 had Hto7 acted to reasonably mitigate its damages.
We disagree with Hto7 on the first point, but agree with it on the second. 1
1
Hto7 raises a third issue regarding how the trial court calculated attorneys’
fees—which were recoverable under the terms of the lease agreement—but we opt
not to address that issue now. The proper calculation of attorneys’ fees is best left
until after the trial court has addressed the materiality of Hto7’s breach.
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A. Hto7’s Failure to Mitigate
Hto7 first argues that the trial court erred in concluding that its efforts to
mitigate damages ceased being reasonable as of March 3, 2021. The duty to mitigate
damages “bars recovery for losses suffered by a non-breaching party that could have
been avoided by reasonable effort and without risk of substantial loss or injury.”
Bolton v. Crowley, Hoge & Fein, P.C., 110 A.3d 575, 586 (D.C. 2015) (internal
quotation marks omitted). A lease provision giving the lessor a right to recover lost
rent is subject to a requirement that the lessor use “reasonable efforts” to re-let the
space. Lennon v. U.S. Theatre Corp., 920 F.2d 996, 1000 (D.C. Cir. 1990). “[T]he
failure to mitigate damages is an affirmative defense,” and the burden of
demonstrating an absence of reasonable efforts to mitigate lies with the tenant. Sizer
v. Lopez Velasquez, 270 A.3d 299, 303 (D.C. 2022) (citing Norris v. Green, 656
A.2d 282, 287 (D.C. 1995). “Generally, [w]hat is a reasonable effort to [mitigate
damages] is a question of fact, and thus for [the factfinder] to decide.” Havilah Real
Prop. Servs. v. VLK, 108 A.3d 334, 343 n.8 (D.C. 2015) (internal citation omitted).
We review questions of fact under a clearly erroneous standard, and will not set aside
the trial court’s factual findings unless they are clearly wrong and without evidence
to support them. Mingle v. Oak St. Apartments Ltd., 249 A.3d 413, 415 (D.C. 2021).
25
From January through early March of 2021, Hto7 repeatedly fouled off
requests from prospective tenants who asked for floor plans and measurements of
the premises. Emails entered into evidence showed that Hto7 was on notice that at
least one prospective tenant—a seemingly eager one—sought floor plans, ceiling
heights, and rentable square footages for the property as early as January 2021, but
that Hto7 made no reasonable efforts to accommodate its requests. By its own
representative’s estimate, Hto7 expected as of mid-January 2021 that it would have
the relevant measurements “soon.” Then in early February it offered its assurances
that it was “getting the space measured this week,” then again in early March it said
it would have them “this week or early next.” Yet the requested measurements never
materialized at any point, and Hto7 never offered any contemporaneous explanation
for its delays. That record alone, before we even consider the testimony of the
competing experts, provides adequate support for the trial court’s finding that Hto7
did not act with reasonable diligence to mitigate its damages. “A factfinder can put
two and two together without the help of an expert mathematician explaining how
to do so.” See KS Condo v. Fairfax Village Condo. VII, 302 A.3d 503, 511 (D.C.
2023).
Beyond the emails and Hto7’s lack of any contemporaneous explanation for
its months-long delays in responding to the requests of potential tenants, Elevate
submitted an expert report from Louis Kluger that noted how as of the June 2021
26
date of his report, Hto7 (1) had still “not furnished floorplans or an accurate square
footage” to tenants that expressed interest in the space, and (2) had not shown the
space to any tenant. Kluger also testified at trial that Hto7’s failure to provide the
relevant “marketing materials for a ten-month period is well beyond the norm.”
Hto7 counters that its own expert, Michael Goldman, offered contrary
testimony that the trial court ignored. Goldman opined that it was not unreasonable
for Hto7 not to have procured floor plans by March 3, 2021, because they were
difficult to quickly procure during that stage of the COVID-19 pandemic, and in any
event, the floor plans should not have mattered to interested tenants because a virtual
tour of the premises was available to them and better than mere floor plans. In
support of its position, Hto7 points to Norris v. Green. In Norris, after tenants
vacated a property, the landlord attempted to mitigate damages only by placing “For
Sale” and “For Rent” signs in the window. 656 A.2d at 284. This court found that,
despite those apparently meager efforts to mitigate, the tenants simply failed to offer
any evidence that the landlord’s efforts to re-let the space were unreasonable. Id. at
287-88. Hto7 argues that this case presents an “indistinguishable” scenario given
that Goldman testified that Hto7’s efforts were “comprehensive” and “explained in
detail why having two-dimensional floor plans available on March 3, 2021 was not
only unnecessary but also complicated.” Hto7 also asserts that “Elevate presented
no evidence to the contrary.”
27
But Hto7 is just wrong to assert that Elevate did not provide any evidence to
the contrary. As already discussed, the January 2021 emails showed that an
interested party considered the space a “great option,” needed to be in the
neighborhood by early the following year, and liked the property enough to follow
up twice in pursuit of measurements. And while Hto7’s own representatives
contemporaneously and repeatedly indicated they could provide the requested
measurements “soon” and “this week,” they failed to ever do so, without
explanation. Those false assurances without any explanatory follow-up were
facially unreasonable, no matter how difficult it was to procure floorplans or
measurements at that time. And unlike in Norris, Elevate’s expert supported the
already fairly obvious conclusion that a party seeking to mitigate millions of dollars
in damages cannot give the silent treatment to prospective tenants who are seeking
fairly routine measurements and floorplans. The trial court’s finding, that “Hto7’s
failure to measure the space and provide details of the Premises . . . before March 3,
2021, frustrated re-letting efforts and was, therefore, unreasonable and in violation
of Hto7’s duty to mitigate damages,” had strong support in the evidence.
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B. The Court Misunderstood the “Free Rent” Testimony
Finally, Hto7 argues that the trial court misinterpreted the expert testimony
about when Hto7 could have expected to receive rent payments from a replacement
tenant. We agree.
After concluding that Hto7 failed to take reasonable mitigation efforts as of
March 3, 2021, the trial court was left to address a counterfactual scenario in order
to calculate Hto7’s damages: Had Hto7 acted reasonably at that time, when could a
replacement tenant expect to begin making rent payments? In answering that
question, the trial court should have accounted for two distinct periods after March
2021 but before Hto7 could expect to receive any rent payments.
The first period where Hto7 would expect to receive no rental proceeds is what
we will call the “move in” period. Hto7’s expert (Goldman) explained that was the
“period of time in between when the tenant signs the Lease and then actually moves
into the space,” during which the parties finalize the lease and build out the space to
tailor it to the tenant’s needs. Goldman opined that this move-in period could be
expected to last six to twelve months before a replacement tenant actually moved
29
into the space, and Elevate’s expert (Kluger) did not appear to offer any clear opinion
on the matter.
The second period where Hto7 would expect to receive no rental proceeds is
what we call the “free rent” period, which both Goldman and Kluger agreed is a
customary part of commercial leases where tenants do not pay rent for some initial
period after they move in. Kluger estimated that a tenant could negotiate one month
of free rent per lease year, which here translated to an eight-month free rent period
based on the eight years remaining on Elevate’s lease. Goldman, by contrast, opined
that a replacement tenant could have negotiated one-and-a-half to two months of free
rent per lease year, so that a new tenant would have expected twelve to sixteen
months of free rent.
The trial court ultimately credited Kluger’s estimate that a new tenant could
expect just eight months of free rent, which the trial court originally (but incorrectly)
posited was “within Goldman’s estimate of six to twelve months” of free rent. But
the trial court did not account for any move-in period, as if a tenant could have been
expected to move into the space immediately once it had been identified in March
2021. So the court projected that Hto7 would begin receiving rent from a
replacement tenant in November 2021, eight months after Hto7 might have
identified a replacement tenant had it reasonably mitigated its damages.
30
In its motion to amend the judgment Hto7 correctly alerted the trial court to
two distinct errors. First, it pointed out that Goldman had estimated a twelve-to-
sixteen month free rent period, not six to twelve months as the trial court posited, so
that Kluger’s eight-month estimate was not, in fact, “within Goldman’s estimate.”
Second, that free rent period was in addition to the six-to-twelve month move-in
period that it would actually take for any lease term to commence—a period the trial
court did not account for. The trial court denied the motion to amend, reasoning that
it had “evaluated and weighed competing expert opinion” and found Kluger’s
estimate that Hto7 would receive rent eight months after identifying a replacement
tenant “persuasive.”
The problem with that reconciliation of the testimony is that Kluger never
opined that a new tenant could move into the space the moment they had been
identified, which under the trial court’s mitigation analysis would have been no
sooner than March 3, 2021. So while we take no issue with the trial court’s decision
to credit Kluger’s projected eight-month free rent period over Goldman’s twelve-to-
sixteen month free rent projection, the trial court failed to account for any move-in
period, i.e., the amount of time it would take a new tenant, once identified, to actually
move into it.
31
A calculation of damages must rest on “an adequate basis for a reasoned
judgment.” Vector Realty Grp., Inc. v. 711 Fourteenth St., Inc., 659 A.2d 230, 234
(D.C. 1994) (internal quotation marks omitted). We are mindful that “damages need
not be calculated with ‘mathematical precision,’” particularly in the context of
assessing counterfactuals like the one the trial court confronted. Havilah, 108 A.3d
at 352 (quoting NCRIC, Inc. v. Columbia Hosp. for Women Med. Ctr., Inc., 957 A.2d
890, 903 (D.C. 2008)). But the trial court’s failure to account for any move-in period
preceding the commencement of a lease term and any free rent period was
unexplained and seemingly unsupported even by Kluger’s testimony. It also
overlooks a potentially substantial sum, as six to twelve months of rent payments
under an expected lease would amount to hundreds of thousands of dollars. Should
the trial court conclude that Hto7 did not materially breach the lease agreement in
the first instance, it should reassess its calculation of damages and offer some
accounting for the period of time it would take for a replacement tenant to move into
the space after March 2021.
IV. Conclusion
For the foregoing reasons, we reverse the trial court’s determination that
Elevate did not have a right to terminate the lease in the event of Hto7’s material
breach. We remand for the trial court to consider whether Hto7 materially breached
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the agreement and hold that any such breach would have justified Elevate’s early
termination of the lease. And should the issues arise again on remand, we uphold
the core of the trial court’s mitigation analysis, but conclude that it erroneously
failed to account for any move-in period that would precede the receipt of rental
payments from any replacement tenant. It should account for that phase of no
rental payments if it has to recalculate Hto7’s damages.
So ordered.