PR Financing v. Elias, P. ( 2015 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
PR FINANCING LIMITED PARTNERSHIP IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
PAUL ELIAS T/A YUM-YUM TASTY
DONUTS
Appellee No. 1446 WDA 2014
Appeal from the Judgment Entered September 26, 2014
In the Court of Common Pleas of Fayette County
Civil Division at No(s): 3070 of 2007 GD
BEFORE: PANELLA, J., SHOGAN, J., and OTT, J.
MEMORANDUM BY PANELLA, J. FILED: AUGUST 20, 2015
Appellant, PR Financing Limited Partnership (“PR”), appeals from the
judgment entered after the trial court found that Appellee, Paul Elias, trading
as Yum-Yum Tasty Donuts, had breached his lease with PR, but concluded
that the accelerated rent provisions of the lease were unconscionable. We
affirm in part, and reverse and vacate in part.
The factual findings of the trial court are largely undisputed, for
purposes of this appeal, regarding the period of time prior to the morning of
January 1, 2006. In 1984, a predecessor in interest of Elias leased the
subject premises from a predecessor in interest of PR. The lease was for a
term of 25 years, ending on January 31, 2011. In 1990, the lease was
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assigned to Elias, after he had unsuccessfully sought to modify the
provisions of the lease to allow him to terminate the lease after 5 years.
In 1999, Elias desired to invest in improvements to the leased
property, and therefore requested a 10-year extension of the lease term to
justify the investment. Once again, Elias unsuccessfully sought a
modification of the lease to allow him to terminate after 5 years, and
ultimately agreed to the 10-year extension of the term with all other
provisions remaining intact. Elias proceeded to finance extensive
improvements to the property.
On December 21, 2005, Elias requested a copy of the lease from PR.
PR provided a copy of the lease to Elias on December 23, which provided for
an increase in annual rent from $28,000 to $30,000, starting on February 1,
2006. At this time, Elias was several months behind in his rental payments
to PR.
In the morning of January 1, 2006, a fire caused by arson destroyed
the premises of Yum-Yum Tasty Donuts. The building and the equipment
inside were determined to be a total loss, and Elias received a full payout
from his property insurance policy, totaling $445,753.96, by May 4, 2006.
After reviewing several proposals to rebuild and re-outfit the premises, Elias
concluded that he could not pay the rent due while at the same time re-
building the premises. Instead, Elias used the insurance policy proceeds to
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pay off debts, including debts owed to family members, as well as loaning
$105,411.81 to his wife’s business in 2006 and $197,500 in 2009.
Elias stopped making rent payments to PR in September 2006. In
November 2007, PR filed a complaint against Elias, asserting a cause of
action in breach of contract based upon Elias’s failure to pay rent and failure
to rebuild the premises as required by the lease. In particular, PR sought
accelerated damages in an amount equal to the rent due for the remaining
15 years of the lease term. Elias filed an answer asserting defenses of
impossibility, Act of God, and failure to mitigate damages.
After extensive discovery, the parties proceeded to a non-jury trial in
December 2012. The trial court found Elias to be in breach of the lease, but
found that Elias was not required to rebuild the premises. Furthermore, the
trial court found that accelerated rent provisions of the lease constituted an
unconscionable contract of adhesion, and therefore only awarded damages
based upon unpaid rent prior to December 2007. After the denial of PR’s
post-trial motions and the entry of judgment, this timely appeal followed.
On appeal, PR raises four issues for our review. The first two issues
concern the trial court’s limitation of damages, the third attacks the trial
court’s finding that the accelerated rent provision was unconscionable, and
the fourth and final issue challenges the trial court’s treatment of Elias’s
defenses of financial impossibility and vis major. We will address these
issues in sequence.
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We begin with our standard of review.
Our appellate role in cases arising from non-jury trial verdicts is
to determine whether the findings of the trial court are
supported by competent evidence and whether the trial court
committed error in any application of the law. The findings of
fact of the trial judge must be given the same weight and effect
on appeal as the verdict of a jury. We consider the evidence in a
light most favorable to the verdict winner. We will reverse the
trial court only if its findings of fact are not supported by
competent evidence in the record or if its findings are premised
on an error of law. However, where the issue … concerns a
question of law, our scope of review is plenary.
Stephan v. Waldron Elec. Heating and Cooling, LLC, 100 A.3d 660,
664-665 (Pa. Super. 2014) (citation and brackets omitted).
First, PR contends that the trial court erred in concluding that Elias had
no duty to rebuild the premises under the lease. A “lease is in the nature of
a contract and is controlled by principles of contract law.” Willison v.
Consolidation Coal Co., 637 A.2d 979, 982 (Pa. 1994) (citation omitted).
Interpretation of a contract poses a question of law and our review is
plenary. See Charles D. Stein Revocable Trust v. General Felt
Industries, Inc., 749 A.2d 978, 980 (Pa. Super. 2000). “In construing a
contract, the intention of the parties is paramount and the court will adopt
an interpretation which under all circumstances ascribes the most
reasonable, probable, and natural conduct of the parties, bearing in mind the
objects manifestly to be accomplished.” Id. (citation omitted).
To give effect to the intent of the parties, we must start with the
language used by the parties in the written contract. See Szymanski v.
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Brace, 987 A.2d 717, 722 (Pa. Super. 2009). Generally, courts will not
imply a contract that differs from the one to which the parties explicitly
consented. See Kmart of Pennsylvania, L.P. v. M.D. Mall Associates,
LLC, 959 A.2d 939, 944 (Pa. Super. 2008). We are not to assume that the
language of the contract was chosen carelessly or in ignorance of its
meaning. See id.
Where the language of the contract is clear and unambiguous, a court
is required to give effect to that language. See Prudential Property and
Casualty Ins. Co. v. Sartno, 903 A.2d 1170, 1174 (Pa. 2006). Contractual
language is ambiguous “if it is reasonably susceptible of different
constructions and capable of being understood in more than one sense.”
Hutchison v. Sunbeam Coal Co., 519 A.2d 385, 390 (Pa. 1986) (citations
omitted).
At issue in this matter is a specific provision of the lease addressing
fire damage to the leasehold during the term of the lease. The provision
provides as follows.
(a) If the demised premises shall be damaged or destroyed by
fire or other casualty, Tenant shall promptly commence the
repair of the demised premises to the condition which existed
prior to such damage. There will be no abatement of rentals due
hereunder and no cancellation of this Lease Agreement during
the period such repairs are being made by Tenant.
(b) Tenant covenants and agrees that Tenant’s mortgage of
the improvements to be erected upon the demised premises
shall provide that any proceeds of insurance policies paid for the
destruction, in whole or in part, by fire or other cause, of the
improvements shall be made available for repair of the premises.
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(c) Notwithstanding anything contained herein, if a substantial
loss or destruction to the improvements to be erected upon the
demised premises shall occur within the last two years of the
original term, or during any renewal term, Tenant may, at is
option, terminate this Lease as of the date of such occurrence by
written notice mailed to Landlord within ten (10) days after such
occurrence and direct all insurance proceeds to Landlord as
consideration for such termination. At such time, the rights of
the parties under this Lease shall cease, rent shall be
apportioned, and Landlord and Tenant shall be released from
any further liability hereunder.
Lease, § 16.01(a)-(c).
Elias argued, and the trial court agreed, that the term “repair” in
section 16.01(a) was ambiguous as to whether it required Elias to
completely rebuild the premises in the event of a total loss. See Trial Court
Opinion, 12/31/13, at 6. As a result, it construed the term against PR as the
successor in interest to the drafting party, and concluded that section 16.01
did not require Elias to rebuild the premises in the event of a total loss. See
id.
Read in isolation, the trial court’s conclusion is plausible. But when
read in the context of the entirety of the section, as we must, it is clear that
“repair” includes a complete rebuild in the event of a total loss. Section
16.01(a) begins with the statement that in the event the premises are
“damaged or destroyed by fire,” the tenant was required to repair the
premises. Furthermore, section 16.01(b) explicitly requires repair of the
premises using insurance proceeds paid to the tenant pursuant to “the
destruction, in whole or in part, by fire or other cause, of the
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improvements[.]” The inclusion of the explicit terms “destroyed” and
“destruction, in whole” in setting forth the scope of the tenant’s duty to
repair the premises renders the term unambiguous. When read in context,
the term “repair” is not reasonably susceptible of being understood in more
than one sense. Obviously, the parties intended for the tenant to repair the
property—even in the event of a total loss. Thus, we conclude that the trial
court erred in holding that the term was ambiguous and interpreting it to
exclude a duty to rebuild in the event of a total loss.
Apparently in the alternative, the trial court further found that it was
impossible to rebuild the premises pursuant to the lease agreement “when
[Elias’s] monthly payments on the mortgage and rent would have been in
excess of [$7,500] and there was no reasonable possibility that a rebuilt
donut shop … could generate enough income to pay that amount.” Trial
Court Opinion, 12/31/13, at 21-22. The defense of legal impossibility,
however, is premised upon an objective standard. See Luber v. Luber,
614 A.2d 771, 774 (Pa. Super. 1992). Thus, it does not apply if it is merely
beyond the party’s ability to perform; it must be beyond any person’s ability
to perform. See id. “[A] party generally assumes the risk of his own
inability to perform his contractual duties.” Id. (citations omitted).
Elias has not, indeed cannot, establish that it is impossible for anyone
to rebuild the premises. He has not identified any physical feature of the
leased premises or legal impediment that prevents rebuilding. Rather, he
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has established, at best, that he cannot afford to rebuild the premises. This
does not rise to the level of legal impossibility. See id. The trial court erred
in concluding that rebuilding of the leased premises was impossible.
Next, PR argues that the trial court erred in holding that it had a duty
to mitigate the damages it suffered from Elias’s breach. Section 19.05(b) of
the lease provides that in the event of a default by Elias, PR was entitled “to
recover … as liquidated damages for loss of the bargain and not as a
penalty, a sum equal to the Fixed Minimum Rent multiplied by the number of
months and fractional months which would have constituted the balance of
the term, together with costs and attorneys’ fees.” In other words, Section
19.05(b) provided that in the event that Elias breached the lease, PR was
entitled to damages in an amount equal to the rental payments that it would
have received until January 31, 2021, the end of the lease term. PR
calculated the liquidated damages due under the lease to be $472,711.51.
In contrast, the trial court found that PR had intentionally failed to re-
let the property in order to increase its claim against Elias. As a result, the
trial court limited the damages for which Elias was liable to such rent that
was due and unpaid as of December 31, 2007, or $40,000.00.
The Supreme Court of Pennsylvania has ruled that “a non-breaching
landlord whose tenant has abandoned the property in violation of the lease
has no duty to mitigate damages.” Stonehedge Square Ltd. Partnership
v. Movie Merchants, Inc., 715 A.2d 1082, 1084 (Pa. 1998). The Supreme
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Court provided five reasons for this rule. First, that the rule has been firmly
established in Pennsylvania jurisprudence for over 100 years. See id.
Second, that the “rule has the virtue of simplicity.” Id. Third, that the
legislature’s 1951 comprehensive overhaul of landlord/tenant law did not
seek to modify this rule. See id., at 1085. Fourth, that it was
fundamentally unfair for a breaching tenant to require a non-breaching
landlord to expend time, effort, and money to mitigate the damages arising
from the breach. See id. Finally, the Court recognized that in the case
before it the tenant had the right to sublet the property with the landlord’s
approval, which could not be unreasonably withheld. See id.
The trial court attempted to distinguish Stonehedge from the present
case with the following reasoning.
This is a lease with nearly fifteen years remaining on its term,
and sums claimed to be due amounting to nearly $500,000.00 in
rent, plus the illusory claimed residual value of the donut shop
structure. Unlike Stonehedge, the leasehold improvements in
this case were completely demolished as the result of a fire. The
lot was cleared and available for a new tenant to make
improvements for any viable business. It is impossible for the
Tenant in this case to reconstruct a donut shop that [can]
conceivably generate enough income to pay a mortgage and the
rent due under the terms of the pre-existing lease. Adjacent
structures owned by Landlord – that were larger and more
valuable “as-is” than the tiny donut shop that was destroyed by
arson here – were deliberately demolished to make way for one
or more new business (most notably an Olive Garden restaurant)
and parking lots for the new business.
Trial Court Opinion, 12/31/13, at 21.
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The trial court’s attempt to distinguish Stonehedge is simply
untenable. Initially, we observe that the amount in controversy or the
remaining term of the lease is not relevant to the Supreme Court’s explicit
reasoning in adopting the Stonehedge rule. These circumstances therefore
do not support distinguishing the present case from Stonehedge.
The remainder of the trial court’s explicit reasoning centers on the fact
that the leased premises were destroyed by arson. However, as noted
above, the plain language of the lease agreement imposed the duty to
rebuild the premises in the event of a fire upon Elias. Thus, this
circumstance cannot favor Elias in his attempt to escape the Stonehedge
rule.
We therefore conclude that the trial court erred when it held that
Stonehedge was not controlling. As a matter of law, PR had no duty to
mitigate the damages that arose from Elias’s failure to rebuild the property
and his abandonment of the property.
In the alternative, the trial court found that the liquidated damages
clause of the lease agreement was an unconscionable contract of adhesion.
[A] contract or term is unconscionable, and therefore avoidable,
where there was a lack of meaningful choice in the acceptance of
the challenged provision and the provision unreasonably favors
the party asserting it. The aspects entailing lack of meaningful
choice and unreasonableness have been termed procedural and
substantive unconscionability, respectively. The burden of proof
generally concerning both elements has been allocated to the
party challenging the agreement, and the ultimate determination
of unconscionability is for the courts. Nevertheless, where
material facts are disputed, for example, concerning the general
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commercial background underlying a challenged transaction
and/or the commercial needs of a particular trade, fact finding
may be necessary.
Salley v. Option One Mortgage Corp., 925 A.2d 115, 119-120 (Pa. 2007)
(citations omitted). Even if a contract is determined to be procedurally
unconscionable, or a contract of adhesion, a court must still analyze the
terms at issue to determine if they unreasonably favor the opposing party.
See Bayne v. Smith, 965 A.2d 265, 270 (Pa. Super. 2009).
Here, even assuming that the lease agreement was procedurally
unconscionable, we conclude that Elias has not met his burden of
establishing that the liquidated damages provision of the lease was
substantively unconscionable. The liquidated damages provision reflects the
law of Pennsylvania as set forth in Stonehedge. Accordingly, as a matter of
law, it cannot be found to unreasonably favor PR.
We therefore conclude that the trial court erred in finding the
liquidated damages provision to be unconscionable. Furthermore, to the
extent that the trial court’s finding of legal impossibility applies to the
liquidated damages provision, we conclude that such a finding is in error for
the same reasoning we applied above regarding Elias’s duty to rebuild the
premises.
The only remaining issue involves the trial court’s award of attorneys’
fees to PR. The trial court limited the legal fees awarded to PR to the
amount of $5,000 pursuant to its finding that PR had improperly failed to
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mitigate damages in this matter. As we have concluded that PR had no such
duty, we vacate the award of attorneys’ fees and remand for the trial court
to calculate a reasonable award based upon the appropriate law and
circumstances.
In summary, we affirm the trial court’s finding that Elias breached the
lease; we reverse and vacate the remainder of the judgment.
Judgment affirmed in part, reversed and vacated in part. Case
remanded for proceedings consistent with this memorandum. Jurisdiction
relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/20/2015
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