B & G Properties Ltd. Partnership v. Office Max, Inc. , 2013 Ohio 5255 ( 2013 )

[Cite as B & G Properties Ltd. Partnership v. Office Max, Inc., 2013-Ohio-5255.]
Court of Appeals of Ohio
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION
No. 99741
B & G PROPERTIES LIMITED PARTNERSHIP
PLAINTIFF-APPELLEE
vs.
OFFICEMAX, INC.
DEFENDANT-APPELLANT
JUDGMENT:
AFFIRMED
Civil Appeal from the
Cuyahoga County Court of Common Pleas
Case No. CV-754680
BEFORE: Celebrezze, J., Stewart, A.J., and S. Gallagher, J.
RELEASED AND JOURNALIZED: November 27, 2013
ATTORNEYS FOR APPELLANT
Michael J. Zbiegien, Jr.
Patrick J. Krebs
Taft Stettinius & Hollister, L.L.P.
200 Public Square
Suite 3500
Cleveland, Ohio 44114
Michael M. Dingel, pro hac vice
Officemax, Inc.
1111 West Jefferson Street
Suite 510
Boise, Idaho 83702
ATTORNEYS FOR APPELLEE
Michael N. Ungar
Marvin L. Karp
Lawrence D. Pollack
Matthew T. Wholey
Ulmer & Berne, L.L.P.
Skylight Office Tower
1660 West 2nd Street
Suite 1100
Cleveland, Ohio 44113
FRANK D. CELEBREZZE, JR., J.:
{¶1} Appellant, OfficeMax, Inc. (“OfficeMax”), appeals from the grant of
summary judgment and certain damages in favor of appellee, B & G Properties Limited
Partnership (“B&G”), in B&G’s action for breach of a commercial lease agreement
between it and OfficeMax. OfficeMax claims the trial court erred in finding the lease
was not terminated when an assignee of the lease filed for bankruptcy and that B&G was
not required to mitigate its damages under the lease. OfficeMax also argues the trial
court erred in finding that a 5 percent late payment provision was an enforceable damages
clause rather than an unenforceable penalty. After a thorough review of the record and
law, we affirm.
I. Factual and Procedural History
{¶2} In 1994, the parties negotiated a 20-year lease of commercial property located
in North Olmsted, Ohio, that commenced in 1995. OfficeMax never occupied the
premises, instead assigning its rights in the lease to Planet Music, Inc. (“Planet Music”) in
1996. Planet Music assigned its interest in the lease to Borders, Inc. (“Borders”) in 2005.
In February 2011, Borders filed for Chapter 11 bankruptcy protection. Borders
ultimately went from plans for reorganization to liquidation. The bankruptcy trustee
eventually rejected the lease and sent notice to B&G. In turn, B&G sought rents from
OfficeMax. OfficeMax argued that Section 7.2 of the lease agreement terminated the
lease when Borders filed for bankruptcy and rejected the lease. B&G disagreed, took
possession of the premises, and sued OfficeMax on May 6, 2011, for breach of contract in
the Cuyahoga County Common Pleas Court. The case was transferred to the specialized
commercial docket. Both parties filed motions for summary judgment. On April 19,
2012, the trial court granted B&G’s motion and found that OfficeMax breached the lease
agreement.
{¶3} The court then set about determining damages. B&G filed a motion seeking
to limit the scope of the hearing asserting that the lease agreement included a provision
waiving its common law duty to mitigate its damages. OfficeMax disagreed with that
interpretation. On October 3, 2012, the trial court ruled that the lease agreement did
waive B&G’s obligation to mitigate its damages and found OfficeMax would be liable for
the entire amount of outstanding rent. OfficeMax attempted to appeal this order, but this
court found that it was not final and appealable at that time. The parties, for the most
part, then stipulated to damages, except for a 5 percent late payment provision.
OfficeMax argued this provision was an unenforceable penalty. On March 11, 2013, the
trial court found the provision enforceable and awarded B&G $1,212,821.84 in past due
rent, penalties, interest, and attorney fees. OfficeMax then filed the instant appeal
assigning four errors for review:
I. The trial court erred in failing to enforce the clear and unambiguous
terms of the commercial lease agreement at issue which included a
provision, Section 7.2(a) thereof, that called for the cancellation of the
Lease if Borders, the “Tenant” of the Lease, rejected the Lease in
bankruptcy which rejection in fact occurred March 16, 2011.
II. The trial court erred in ruling that Section 7.1 of the Lease waived
B&G’s common law duty to mitigate damages.
III. The trial court erred in denying OfficeMax’s motion to amend the
October 3, 2012 journal entry.
IV. The trial court erred in ruling that the 5% late charge provided for in
Section 2.1(d) of the Lease is an enforceable late fee and not an
unenforceable penalty.
II. Law and Analysis
A. Summary Judgment
1. Standard of review
{¶4} This court reviews a lower court’s summary judgment decisions de novo.
Grafton v. Ohio Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996).
“Summary judgment is appropriate if (1) no genuine issue of any material
fact remains, (2) the moving party is entitled to judgment as a matter of law,
and (3) it appears from the evidence that reasonable minds can come to but
one conclusion, and construing the evidence most strongly in favor of the
nonmoving party, that conclusion is adverse to the party against whom the
motion for summary judgment is made.” State ex rel. Duncan v. Mentor
City Council, 105 Ohio St.3d 372, 2005-Ohio-2163, 826 N.E.2d 832, ¶ 9.
DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68, 2010-Ohio-6279, 941 N.E.2d 1187, ¶ 15.
{¶5} A decision regarding contract interpretation is a matter of law, reviewed de
novo as well. Saunders v. Mortensen, 101 Ohio St.3d 86, 2004-Ohio-24, 801 N.E.2d
452. “Ohio courts ‘presume that the intent of the parties to a contract is within the
language used in the written instrument. If [courts] are able to determine the intent of the
parties from the plain language of the agreement, then there is no need to interpret the
contract.’” Telecom Acquisition Corp. I v. Lucic Ents., 8th Dist. Cuyahoga No. 95951,
2012-Ohio-472, ¶ 11, quoting Saunders at ¶ 9.
2. Lease Cancellation
{¶6} OfficeMax argues that is it not liable under the lease because it was canceled
pursuant to Section 7.2(a) of the agreement. This provision states,
If a petition is filed by or against Tenant1 under Chapter 7 of the
Bankruptcy Code and the Trustee elects to assume this Lease for the
purposes of assigning it or otherwise, the assumption or assignment, or
both, may be made only if all of the terms and conditions set forth under
Section 7.2(b) below are satisfied. If the Trustee fails to assume this Lease
within sixty (60) days after his appointment, or within such additional time
period as the Bankruptcy Court may allow, this Lease shall be deemed to
have been rejected. * * * In the event this Lease is rejected, Landlord shall
then immediately be entitled to possession of the Premises without further
obligation to Tenant or the Trustee and this Lease shall be canceled.
Landlord’s right to be compensated for damages in the bankruptcy
proceedings, however, shall survive.2
{¶7} B&G argues that the defined term “Tenant” in the lease refers to OfficeMax,
and interpreting the word “Tenant” in the bankruptcy termination provision to mean
Borders is contrary to the contract and rules of contract interpretation. However, after an
assignment, the assignee steps into the shoes of the assignor and assumes the rights and
responsibilities under the lease. Certain provisions clearly must refer to the assignee.
The assignee has the ability to execute an option to extend the lease,3 something it can
1
“Tenant” is a defined term under the lease agreement to mean “OFFICEMAX, INC., an
Ohio corporation.”
Borders filed for bankruptcy reorganization under Chapter 11, which is addressed by
2
Section 7.2(b) of the agreement, and has similar wording about rejection of the lease, except that it
does not contain the cancellation language and does not state how the lease is to be treated after a
rejection in a Chapter 11 proceeding. However, the bankruptcy proceedings turned into a liquidation
similar to those under Chapter 7 following Borders’ failed attempt to reorganize. Therefore, the
language of Section 7.2(a) should be read to apply because the bankruptcy proceedings ended in
liquidation rather than a reorganization.
See Telecom Acquisition Corp. I, 8th Dist. Cuyahoga No. 95951, 2012-Ohio-472.
3
only do if the word “Tenant” in the option provision is read to refer to an assignee.
There are other provisions that clearly always refer to the original tenant, like a clause
holding the original tenant liable for any breach by an assignee. Therefore, this court
must determine whether the bankruptcy termination provision is one that should be
interpreted to refer to the tenant in possession or the original tenant.
{¶8} To understand the intention of the parties, it is necessary to understand the
nature of the clause at issue. This bankruptcy termination clause is common in
commercial leases. These provisions arose to permit a landlord to terminate the lease if
the tenant filed for bankruptcy. These clauses came to be known as “ipso facto” clauses.
Rubin, Not Every Ipso Facto Clause Is Unenforceable in Bankruptcy, 32-7 ABIJ 12
(2013). Their genesis was the result of various bankruptcy code provisions that allowed
the bankruptcy estate to avoid certain lease provisions, including allowing assignment
without landlord consent. These provisions were widely enforceable. Wadyka,
Executory Contracts and Unexpired Leases: Section 365, 3 Bank.Dev.J. 217, 245 (1986).
However,
[t]hese clauses came to be seen by Congress as hampering a debtor’s
rehabilitation efforts, and in 1978, to further the goal of preserving a
debtor’s assets and providing the debtor an opportunity to formulate a plan
of reorganization, Congress enacted various provisions under the
Bankruptcy Reform Act [of 1978] that invalidated contractual ipso facto
clauses against debtors in bankruptcy.
Lynn, Brown, and Mayesh, Enforcing Bankruptcy Termination Lease Clauses Against
Assignees, New York Law Journal (Oct. 9, 2007).
{¶9} The clause at issue in the present case is triggered on the rejection of the lease
in bankruptcy. Its purpose is to return possession of the premises to the lessor as soon as
possible with minimal disturbance to the bankruptcy proceedings. The bankruptcy estate
seeking to reorganize and emerge as a going business can be devastated by the loss of its
lease and its business premises. However, a lease rejected by the bankruptcy trustee no
longer benefits the estate, and possession can be returned to the lessor. This bankruptcy
termination provision therefore benefits the lessor when a tenant in possession rejects the
lease.
{¶10} OfficeMax asserts that the complete assignment of all its interests in the
lease to Planet Records and then to Borders relieved it of any liability under the lease
when the lease was cancelled as a result of the assignee “tenant” under the lease, Borders,
filing for bankruptcy and rejecting the lease.
When a lease is assigned, the assignee takes over all obligations
contained in the initial contract between the landlord and the lessee. The
“lessee is not discharged from his obligations under such lease, [but] the
assignee assumes the position of principal obligor for the performance of
the covenants of the lease, and the lessee becomes his surety for such
performance.”
Lucic Ents., 8th Dist. Cuyahoga No. 95951, 2012-Ohio-472, ¶ 28 (Stewart, J., dissenting),
quoting Gholson v. Savin, 137 Ohio St. 551, 31 N.E.2d 858 (1941), paragraph two of the
syllabus. See also Ogle Leasing Co. v. Submarine Galley, Inc., 2d Dist. Montgomery
No. 11267, 1990 Ohio App. LEXIS 42, *13 (Jan. 11, 1990).
{¶11} This black letter law was codified by the parties in the lease itself. Section
8.2 states, “[a]ny assignment, subletting or other transfer, even with the consent of the
Landlord, shall not relieve Tenant from primary liability for the payment of rent and other
charges or from the primary obligation to keep and be bound by the terms, conditions, and
covenants of this Lease.”
{¶12} The primary disagreement between OfficeMax and B&G is to whom should
the bankruptcy termination provision in Section 7.2 apply, OfficeMax or Borders.
{¶13} OfficeMax relies on New York case law to argue that “Tenant” under the
bankruptcy termination provision should be construed to mean Borders. Staples, Inc. v.
Moses, 806 N.Y.S.2d 448, 9 Misc.3d 1102(A) (2005). In that case, Staples assumed a
commercial lease through assignment by the original lessee. The lease contained a
bankruptcy termination provision similar to the provision in the present case that entitled
the landlord to immediate possession if a petition in bankruptcy was filed by the tenant
under the lease. The landlord attempted to regain possession of the premises after it
discovered that the original lessee filed for bankruptcy several times. The trial court
determined that the provision should apply to the tenant in possession at the time of the
bankruptcy filing, meaning Staples, not the original lessee. However, the Moses court
recognized that it is in conflict with another New York case, Inip Co. v. Bailey, Green &
Elger, Inc., 356 N.Y.S.2d 436, 78 Misc.2d 235 (1974).
{¶14} In Inip Co., the bankruptcy termination clause was more detailed and gave
the landlord the option to terminate the lease upon the tenant filing for bankruptcy. The
tenant under the lease assigned its interest to a third party. The original tenant filed for
bankruptcy, and the landlord cancelled the lease under this provision even though the
tenant in possession remained solvent and remained current in rental payments. The
third-party tenant remained in possession in derogation of the landlord’s notice to vacate.
The court ruled that the bankruptcy termination provision applied to the original tenant
under the lease. It recognized the inequitable results visited on the tenant in possession,
but determined that risk was assumed by the assignee tenant when it assumed the lease.
{¶15} There is a dearth of case law on this area, but the majority of cases hold that
a bankruptcy termination provision in a commercial lease applies to the tenant in
possession after an assignment where the language of the provision does not differentiate
between the original tenant and assignees. Stamm v. Buchanan, 55 N.M. 127, 128, 227
P.2d 633 (1951); A.J. Flagg v. Andrew Williams Stores, Inc., 127 Cal.App.2d 165, 273
P.2d 294 (1954); Waukegan Times Theater Corp. v. Conrad, 324 Ill.App. 622, 59 N.E.
308 (1945).
{¶16} The New Mexico Supreme Court determined that the original lessee’s
declaration of bankruptcy did not entitle the lessor to retake possession when the assignee
tenant in possession had not breached the lease. Stamm at 128. That court addressed
the question
whether, after valid assignment of a lease pursuant to lessor’s consent
contained in the lease, involuntary bankruptcy of original lessee, who as
assignor executed the assignment, gave lessor the right to forfeit the lease as
against an assignee in possession, performing all the covenants of the lease
on lessee’s part to be performed, by reason of an option in the lease
providing that bankruptcy of the “lessee,” voluntary or involuntary, should
give lessor the right forthwith to terminate the lease and retake possession
of the demised premises.
Id. The court reaffirmed that
“[t]o construe the option paragraph so as to permit the termination of the
lease upon the bankruptcy of the assignee would result in a forfeiture which
clearly would be inequitable in this case, and is to be avoided. The law
frowns upon forfeitures. Forfeitures should never be decreed unless the
language of the instrument sought to be construed so states in clear,
unmistakable terms.”
Id. at 132, quoting In re Murray Realty Co., 35 F.Supp. 417, 419 (N.D.N.Y.1940). See
also Model Dairy Co. v. Foltis-Fischer, Inc., 67 F.2d 704 (2d Cir.1933) (holding a
provision terminating the lease on appointment of a receiver for the tenant applied to an
assignee in possession); In re Famous Fain Co., 13 F.2d 529 (2d Cir.1926) (holding that
the bankruptcy termination provision applied to the assignee in possession because the
landlord treated it as the tenant and executed ancillary documents that referred to the
assignee in possession as tenant).
{¶17} The majority of these cases are underpinned by the abhorrence in the law for
forfeiture of the leasehold estate. See, e.g., A. J. Flagg at 176-177. Without abundantly
clear language that the termination provision should apply only to the original lessee,4
this court is loath to effectuate a forfeiture that may be wrought by these common
termination provisions. Therefore, we hold that the provision applies to tenants in
possession when the parties to a lease do not make it clear to whom it should apply after
an assignment. Parties may contract for the provision to apply differently, but “where a
provision so full of financial hazard and danger to a tenant in possession under an
4
See Carson v. Imperial “400” Natl., Inc., 267 N.C. 229, 147 S.E.2d 898 (1966) (where the
termination provision referenced the original lessee by name rather than generically as tenant, the
North Carolina Supreme Court determined the bankruptcy termination provision applied to the
original tenant).
assignment is intended, it must rest on language so plain and unmistakable that the courts
are left no alternative but to enforce it according to the letter.” Stamm at 135. This
holding comports with the basic purposes of these provisions to return possession of the
property to the landlord as quickly as possible when the lease has been rejected in
bankruptcy.
{¶18} The fact that the provision applies to Borders and the lease was terminated
does not resolve the question of OfficeMax’s liability. OfficeMax argues that the
cancellation of the lease absolves it of liability for future rents owed for the duration of
the lease. However, the termination of the lease as a result of its repudiation by the
tenant in possession does not impact the tenant’s or the surety’s liability for rents. This is
because “despite the termination of the lease * * * [l]essees are potentially liable * * * for
the rent up to the point of the lessor’s finding a new tenant, or the expiration of the lease,
whichever is earlier.” Dennis v. Morgan, 89 Ohio St.3d 417, 419, 2000-Ohio-211, 732
N.E.2d 391. See also Pinnacle Mgt. v. Bell, 12th Dist. Butler No. CA2011-08-145,
2012-Ohio-1595, ¶ 8. Further, “an assignee and the original lessee may be held jointly
and severally liable where there has been a valid assignment.” Colony by the Mall v.
Duckro, 2d Dist. Montgomery No. CA 6169, 1979 Ohio App. LEXIS 8802, *9 (June 29,
1979).
{¶19} Under Section 7.1(iv), B&G preserves OfficeMax’s responsibility for all
rents for the entire period of the lease after the lease is terminated. This provision
provides, “[i]n case of re-entry, or of the termination of this Lease, whether by summary
proceedings or otherwise, Tenant shall remain liable for the Fixed Rent, Additional Rent
and other obligations of Tenant herein provided for the balance of said term, whether
Premises be relet or not * * *.” “Cancel” and “terminate” have the same meaning in this
case. Thomas v. Am. Elec. Power Co., 10th Dist. Franklin No. 03AP-1192,
2005-Ohio-1958, ¶ 35, citing Grant v. Aerodraulics Co., 91 Cal.App.2d 68, 73, 204 P.2d
683 (1949) (“[t]he words ‘terminate,’ ‘revoke’ and ‘cancel,’ as used in * * * the written
agreement, all have the same meaning, namely, the abrogation of so much of the contract
as might remain executory at the time notice is given”). OfficeMax argues that the
cancellation of the lease terminates liability for the executory portion of it. However,
Section 7.1(iv) specifically imposes liability on the tenant for the duration of the lease
even in the event the lease is terminated, and Section 8.2 5 imposes that liability on
OfficeMax.6
{¶20} The reservation of rights to rents in Section 7.1 for the duration of the lease
harmonizes with the language of the bankruptcy provision, which preserves B&G’s
claims for rents when it states that its “right to be compensated for damages in the
bankruptcy proceedings, however, shall survive.” Section 7.2(a).
“Any assignment, subletting or other transfer, even with the consent of the Landlord, shall
5
not relieve Tenant from primary liability for the payment of rent and other charges or from the
primary obligation to keep and be bound by the terms, conditions, and covenants of this Lease.”
6
B&G claims its cause of action survives termination of the lease according to R.C. 1310.51.
However, this statute, a part of Ohio’s codification of the Uniform Commercial Code, does not apply
to the lease of real property. See R.C. 1310.01(A)(10) (defining “lease” to mean “a transfer of the
right to possession and use of goods”).
{¶21} B&G argues that the bankruptcy termination provision should apply only to
the original lessee, and a holding contrary to its position creates an incentive for lessees
looking for a way out of a long-term lease to simply assign the lease to an insolvent
entity, which can then file for bankruptcy and terminate the lease. B&G also argues that
a contrary ruling would create a disincentive for landlords to allow assignments.
However, the holding of this court eliminates these possibilities while at the same time
preserving the rights of tenants in possession.
{¶22} We therefore hold that the bankruptcy termination provision applies to
Borders, the tenant in possession at the time of the bankruptcy, but, based on the language
of the contract, OfficeMax, the assignor, remains jointly and severally liable as a surety.
3. Duty to Mitigate Damages
{¶23} There is inherent in every contract a duty to act in good faith. As a function
of this duty, plaintiffs must reasonably act to lessen the financial impact of a breach.
This duty to mitigate damages demands that landlords attempt to relet the premises when
the tenancy terminates prematurely as a result of the tenant’s breach. Frenchtown
Square Partnership v. Lemstone, Inc., 99 Ohio St.3d 254, 2003-Ohio-3648, 791 N.E.2d
417, ¶ 21.
Imposing such a duty assures that an award of damages will put the
injured party in as good of a position as if the contract had not been
breached while affording the least amount of cost to the defaulting party. F.
Enterprises, Inc, et al. v. Kentucky Fried Chicken Corp. (1976), 47 Ohio
St.2d 154, 160, 351 N.E.2d 121. This is in conformity with the tenants of
contract law. Id. Requiring a landlord to mitigate damages by attempting to
relet the abandoned premises also promotes the most productive use of the
land while at the same time, discourages injured parties from suffering
avoidable economic losses. [White v. Smith, 8 Ohio App. 368 (7th
Dist.1917)].
New Towne L.P. v. Pier 1 Imports (U.S.), 113 Ohio App.3d 104, 108, 680 N.E.2d 644(6th Dist.1996). However, this common law duty, like many others, may be changed by
negotiation between the parties. Frenchtown Square at ¶ 20.
{¶24} Here, the parties’ agreement includes the following provision in Section 7.1:
In case of re-entry, or of the termination of this Lease, whether by
summary proceedings or otherwise, Tenant shall remain liable for the Fixed
Rent, Additional Rent and other obligations of Tenant herein provided for
the balance of said term, whether Premises be relet or not, and for expenses
to which Landlord may be put in re-entering, including preservation of the
Demised Premises, less however, the avails after deducting brokers’
commissions, remodeling and redecorating expenses and attorney’s fees, if
any, in connection with the reletting, upon demand of Landlord. Any such
reletting may be for a term exceeding or less than the period of this Lease.
Landlord shall not be liable for failure to relet the Premises, and in the event
of reletting, for failure to collect the rent under such reletting.
The trial court found this provision obviated B&G’s duty to mitigate its damages by
attempting to relet the premises.
{¶25} OfficeMax states that the lease language before us is substantially the same
as the language employed in the lease that was the focus of Westfield Franklin Park Mall
L.L.C. v. Vanity Shop of Grand Forks, Inc., 642 F.Supp.2d 756 (N.D.Ohio 2008). That
lease provided that the “[l]andlord shall use its reasonable efforts to mitigate its damages
hereunder; however the failure or refusal of Landlord to relet the Premises shall not affect
Tenant’s liability.” The court in Westfield declined to interpret this provision as waiving
the landlord’s common law duty to mitigate its damages. Id. However, this provision
affirmatively incorporates the common-law duty to mitigate damages. It is not similar
to the provision in the present case that completely abrogates this duty, stating “Tenant
shall remain liable for the Fixed Rent * * * for the balance of said term, whether Premises
be relet or not * * *.” The provisions are not similar, and the case does not aid
OfficeMax.
{¶26} The provision in this case sets forth that OfficeMax will be liable for rent
for the entire duration of the lease irrespective of the reletting of the premises. This is a
sufficiently clear statement of the parties’ intention. “Each party must stand or fall upon
the written contract * * *.” Ins. Co. v. Brecheisen, 50 Ohio St. 542, 548, 35 N.E. 53(1893). Here, the contract expresses a clear intent to waive the landlord’s common law
duty to mitigate its damages by reletting the premises.
{¶27} A danger to be guarded against in this context is a landlord being placed in a
better position than if no breach had occurred. However, the trial court gave OfficeMax
a credit in the amount of $234,000 against the amount of judgment in favor of B&G for
rents received by B&G from a new tenant that leased a portion of the premises.
Therefore, it is not a concern in this case at this point.
4. Liquidated Damages Provisions
{¶28} The trial court also determined that the lease contained an enforceable late
payment provision that made OfficeMax liable for an additional amount of damages equal
to 5 percent of the outstanding rent due under the lease. OfficeMax claims this late
payment provisions is an unenforceable penalty. B&G argues it is an enforceable
liquidated damages provision for the late payment of rent.
{¶29} Punitive damages are generally not recoverable in a breach of contract
action. Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 381, 613 N.E.2d 183(1993). “A remedy is considered to be punitive if it subjects the breaching party to a
liability ‘disproportionate to the damage which could have been anticipated from breach
of the contract.’” Cintas Corp. v. Joel Lehmkuhl Excavating, 2d Dist. Montgomery No.
19613, 2003-Ohio-2958, ¶ 13, citing Lake Ridge Academy.
Liquidated damages clauses in contracts are enforceable if they meet
various conditions; otherwise, they are unenforceable as penalties for
non-performance. The Ohio Supreme Court’s decision in Samson Sales,
Inc. v. Honeywell, Inc. (1984), 12 Ohio St.3d 27, 12 Ohio B. 23, 465 N.E.2d
392, outlines the enforceability test for liquidated damages provisions. First,
the amount of actual damages must be uncertain and difficult to prove.
Second, the amount of stipulated damages must be reasonable and
proportionate to the contract as a whole. Third, the parties’ intent to
stipulate to damages must be clear and unambiguous. See, also, Lake Ridge
Academy v. Carney (1993), 66 Ohio St.3d 376, 613 N.E.2d 183.
Carter v. CPR Staffing, Inc., 8th Dist. Cuyahoga No. 94671, 2010-Ohio-6026, ¶ 16.
{¶30} Section 2.1(d) of the lease provides,
Each installment of Fixed Rent shall be due and payable in advance
on the first day of each month during the term hereof. Any rent or other
sums payable by Tenant to Landlord under this Lease which is not paid
within ten (10) days after such payment first becomes due, will be subject to
a late charge of five percent (5%) of the amount due. Such late charge will
be due and payable as Additional Rent on or before the next day on which
an installment of Fixed Rent is due.
{¶31} OfficeMax argues that B&G has suffered no damages because it has been
fully compensated for rent, attorney fees, and any other expense associated with the lease.
This argument has been addressed and rejected by at least one court applying New York
law:
Defendant’s argument suggests that in the event that plaintiff
suffered no actual damages, the liquidated-damages provision should not be
enforced. However, even if we agreed with defendant that plaintiff
necessarily suffered no actual damages since no late payments have been
processed, defendant’s argument is contrary to New York law, under which
“the actual damages suffered by the party for whose benefit the
[liquidated-damages] clause is inserted in the contract have little relevance
to the validity of a liquidated damages clause.” Walter E. Heller & Co.,
Inc. v. Am. Flyers Airline Corp., 459 F.2d 896, 898 (2d Cir.1972). Instead,
the propriety of the liquidated-damages clause is to be evaluated as of the
time at which the contract was made. Bradford v. New York Times Co., 501
F.2d 51, 57 (2d Cir.1974). A liquidated-damages clause in a commercial
lease imposing a one-time payment of three percent of past-due rent and
related expenses is not unreasonable. See K.I.D.E. Assocs., Ltd. v. Garage
Estates Co., 280 A.D.2d 251, 254, 720 N.Y.S.2d 114, 117 (1st Dept. 200)
(late charge of five percent per month not unconscionable in “commercial
lease negotiated by sophisticated business people”).
Sidley Holding Corp. v. Ruderman, S.D.N.Y. No. 08 Civ. 2513, 2009 U.S. Dist. LEXIS
126040, *28 (Dec. 30, 2009). This, in a broad sense, comports with Ohio law where
a court must view the provision “in light of what the parties knew at the
time the contract was formed and in light of an estimate of the actual
damages caused by the breach.” When a provision was reasonable at the
time that it was formulated and bears a reasonable, but not necessarily
exact, relationship to the actual damages, the provision is enforceable.
(Citation omitted.) Harmon v. Haehn, 7th Dist. Mahoning No. 10 MA 177,
2011-Ohio-6449, ¶ 50, quoting Kindle Road Co., L.L.C. v. Trickle, 5th Dist. Licking No.
03CA99, 2004-Ohio-4668, ¶ 21.
{¶32} The damages that would result from the late payment of rent were not easily
ascertainable at the time the lease was drafted and executed. The affidavit submitted by
B&G attached to its motion in support of the enforceability of the late-payment provision
indicated several costs incurred by B&G that would result from late payment. These
include sending notices of default and demand letters, “the cost of time spent preparing
detailed and complicated matter material analyses of charges and amount due under the
lease that change monthly as OfficeMax continues to fail to pay,” and the cost of
“handling demands for information from lenders and other third parties due to decreased
cash flow.”
{¶33} Next, the amount of the late-payment provision, 5 percent, must be
reasonable in relation to the lease as a whole, and may not be “unconscionable,
unreasonable, or disproportionate in amount.” Premium Ents. v. T.S., Inc., 9th Dist.
Medina No. 2751-M, 1999 Ohio App. LEXIS 396, *9 (Feb. 9, 1999). This provision
was freely negotiated by parties of equal bargaining power, and both thought it was a
reasonable expression of the damages resulting from the late payment of rent. The
parties agreed, at the time of formation, that the provision is a reasonable approximation
of those damages, and OfficeMax has failed to show otherwise.
{¶34} Finally, this is a clear statement of the parties’ intention to stipulate damages
for the late payment of rent. All three prongs of the above test are satisfied, and the
late-payment provision is enforceable.
B. Denial of Motion to Amend
{¶35} On October 3, 2012, the trial court issued a journal entry finding:
Section 7.1 of the parties’ contract waives the Plaintiff, B&G
Properties’ common law duty to mitigate. Specifically, Section 7.1 states:
“Tenant [Office Max] shall remain liable for fixed rent, additional
rent and other obligations * * * herein provided for the balance of the [term
of the lease] * * *, whether the premises be relet or not * * * *.”
The court further finds that by agreeing to this provision, Office Max
relieved B&G of any duty to relet the premises in the event of a breach by
Office Max.
{¶36} Both parties moved the trial court to amend its judgment. B&G requested
that the court add “no just reason for delay” language to a prior judgment entry and
require OfficeMax to post a supersedeas bond. OfficeMax wanted the court to clarify
that B&G’s duty to mitigate was waived only as to reletting of the premises. Officemax
claimed that B&G’s failure to file a claim with the bankruptcy court against Borders
constituted a unique failure to mitigate its damages not covered by Section 7.2 of the
lease. The trial court granted B&G’s motion in part by adding “no just reason for delay”
language to the April 19, 2012 journal entry granting summary judgment in favor of
B&G. However, the court denied the request for a supersedeas bond and OfficeMax’s
motion to amend.
1. Standard of Review
{¶37} “Civ.R. 54(B) allows for reconsideration of an interlocutory order, and
provides, in pertinent part, that the order ‘is subject to revision at any time before the
entry of judgment adjudicating all the claims and the rights and liabilities of all the
parties.’” Forman v. Forman, 3d Dist. Marion No. 9-06-63,
2007-Ohio-4938, ¶ 19. OfficeMax’s motion to amend is akin to a motion for
reconsideration of an interlocutory judgment. “A trial court has plenary power in ruling
on a motion for reconsideration, and we will not reverse such rulings absent an abuse of
discretion.” Mindlin v. Zell, 10th Dist. Franklin No. 11AP-983, 2012-Ohio-3543, ¶ 23,
citing Groza-Vance v. Vance, 162 Ohio App.3d 510, 2005-Ohio-3815, 834 N.E.2d 15(10th Dist.), ¶ 53. An abuse of discretion connotes an arbitrary, unreasonable, or
unconscionable decision. Blakemore v. Blakemore, 5 Ohio St.3d 217, 450 N.E.2d 1140(1983).
2. Duty to Mitigate
{¶38} OfficeMax argues that even if the lease did abrogate B&G’s duty to relet the
premises, that did not encompass all B&G should be required to do to mitigate its
damages, and the trial court erred in denying its motion to amend the judgment.
OfficeMax claims B&G should have submitted a claim in bankruptcy against Borders,
and its failure to do so constituted a breach of its duty to mitigate damages. However, as
previously discussed, OfficeMax is jointly and severally liable for rent for the remainder
of the lease term. As such, B&G was not required to pursue a claim against Borders.
{¶39} Further, OfficeMax’s claim is moot. B&G did receive a payment from
Borders as a result of the bankruptcy proceedings, and the trial court offset that amount
against OfficeMax’s liability. In its motion to amend, OfficeMax estimated that B&G
would have received between $22,609.50 and $56,523.74 from the bankruptcy
proceedings had it filed a claim against Borders. In fact, the final order of the trial court
in this case indicates the judgment against OfficeMax was reduced by $51,248.99 for
payments received by B&G from “Borders and/or its bankruptcy estate.” The argument
OfficeMax wished to make regarding B&G’s failure to file a claim against Borders is
moot. Therefore, the trial court did not err in overruling OfficeMax’s motion to amend
the October 3, 2012 journal entry.
III. Conclusion
{¶40} The parties involved are both sophisticated business entities with equal
bargaining power. The provisions included in the lease were negotiated by the parties,
and they must live by them. Here, that means OfficeMax remains liable for rent owed
for the duration of the lease regardless of reletting. Further, the late-payment provision is
enforceable as an approximation of the damages that would result from the late payment
of rent.
{¶41} Judgment affirmed.
It is ordered that appellee recover from appellant costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate be sent to the common pleas court to carry this
judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
FRANK D. CELEBREZZE, JR., JUDGE
MELODY J. STEWART, A.J., CONCURS IN JUDGMENT ONLY;
SEAN C. GALLAGHER, J., CONCURS IN JUDGMENT ONLY IN PART AND
DISSENTS IN PART (WITH SEPARATE OPINION)
SEAN C. GALLAGHER, J., CONCURRING IN JUDGMENT ONLY IN PART AND
DISSENTING IN PART:
{¶42} I respectfully dissent from the lead opinion’s determination of the second
assignment of error and would find that Section 7.1 of the lease does not contain an
express waiver of the landlord’s duty to mitigate damages. I concur in judgment only
with the remaining assignments of error.
{¶43} A commercial landlord has a duty to mitigate damages, as is reasonable
under the circumstances. Frenchtown Square Partnership v. Lemstone, Inc., 99 Ohio
St.3d 254, 2003-Ohio-3648, 791 N.E.2d 417. Section 7.1 of the lease does not contain
an express provision that releases B&G from its obligation to take actions to mitigate its
damages, nor is an implied waiver allowed. The lease merely provides that the tenant
would remain liable for the full amount of the rent for the balance of the lease term,
regardless of whether the premises were relet, and that the landlord would not be liable
for a failure to relet the premises. This provision does not clearly and unambiguously
provide that the landlord is released from its obligation to mitigate damages. Further, the
fact that part of the premises may have been relet does not render the mitigation argument
moot. The required inquiry is whether B&G’s efforts to relet the premises and minimize
its damages were reasonable. I would remand the matter to the trial court for a
determination of this issue.