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Underlying information required for diminished value calculations for breach of commercial lease damages.

BLT Burger DC, LLC v. Norvin, 1301 CT, LLC.
--- A.3d --- (March 13, 2014) (not yet published)
by Gregory Emrick, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In February 2010, BLT Burger DC, LLC (“BLT”) entered into a commercial lease agreement with Norvin 1301 CT, LLC (“Norvin”) to rent a three-story townhouse located at 1317 Connecticut Avenue, N.W. in Washington, DC (the “Property”). The lease required that BLT complete a $1.8 Million renovation of the property to convert it into a restaurant, which would have added value to the property, as well as pay rent, taxes and insurance. BLT paid $100,000 for its security deposit and first rent payment on August 3, 2010, but then refused to pay any further amounts, claiming that there were significant structural issues that Norvin had failed to remedy. After Norvin sent a notice of default, it filed suit seeking possession of the land. BLT left the premises and turned over the key on December 3, 2010. Norvin then put the Property up for rent, but also marketed it for sale with an adjoining property. The Property was sold as part of a two property package deal on July 6, 2011 for $27 Million.

BLT then filed suit against Norvin for violation of the warranty of quiet enjoyment, and Norvin counterclaimed for unpaid rent, taxes, insurance and other losses associated with the breach of lease. During a bench trial on February 4, 2013, the Judge granted a motion for judgment as a matter of law against BLT at the conclusion of BLT’s case-in-chief, ruling that BLT had breached the lease. Norvin then proceeded to present its damages claim, which included a claim for unpaid rent, taxes and insurance allocated before the sale of the property, and the diminished value of the property realized at the sale. The damages evidence was provided by Norvin’s principal, Norman Livingston, who testified that the diminished value of the building was $5.7 Million, who testified:

That the sale price of $27 million for the joint sale of the two buildings had been determined by using a 5.25% capitalization rate. He explained, more specifically, that the price had been calculated by dividing the “income, after all of the expenses have been paid on the property,” by that rate. He further testified that because BLT had not paid rent, there was “no net income” from 1317 Connecticut Avenue (the premises previously leased to BLT) to factor into the calculation. As a result, he concluded, the sale price was $5.7 million less than if BLT had been paying the rent due.

BLT Burger DC, 2014 WL 959424 at 3.

The Court entered judgment in the amount of $158,542 for the unpaid rent, taxes and insurance, and $5.7 Million for the “diminished value” of the property. The parties were permitted to submit post-trial briefs on the issue of damages. BLT filed its motion to amend the judgment, arguing judgment should have been entered in its favor, and, alternatively, that the trial court improperly calculated the damages award. The Court denied the motion on the basis that it was untimely filed, but also noting it was meritless. The Court then granted Norvin’s motion for attorney’s fees in the amount of $200,000. BLT timely appealed.

The District of Columbia Court of Appeals began its review of the trial court’s ruling by outlining the available damages for breach of a lease in the District of Columbia.

[There are] three long-established options that a landlord has when the tenant wrongfully abandons the premises and repudiates the lease: (1) accept the abandonment and terminate the lease in full satisfaction; (2) refuse to acquiesce in the abandonment, re-enter and relet the premises, and hold the tenant liable for any deficiency in the rent; or (3) refuse to re-enter, allow the premises to remain vacant, and hold the tenant for the full rent. Landlord exercised the second option, with its obligation to mitigate Tenant’s damages by attempting to relet—a remedy detailed in [the provisions of this] lease.

BLT Burger DC, 2014 WL 959424 at 4.

The Court observed that in this case, Norvin took the second option, but also advertised the property for sale. The Court observed that this variation, and how it affected the rights of the landlord and tenant, had never been addressed by the District of Columbia Court. The Court surveyed other jurisdictions’ holdings on the issue and adopted New York’s position, holding that the contract provision “’lawfully entitled’ Landlord, upon termination of the lease, to recover damages by selling the property and seeking relief based on diminished value of the premises, if reletting was not a realistic option and the facts otherwise justified that remedy.”

The Court then observed that while BLT had failed to preserve the issue of the “diminished value” damages or Livingston’s expertise on that issue, the calculations were so erroneous that permitting them to stand was a “manifest miscarriage of justice.” The Court noted that Livingston’s testimony included four (4) fundamental mistakes:

First, Livingston erroneously justified the sale price for the combined properties ($27 million) by excluding all potential income from 1317, which was vacant at the time of sale. He thereby posited a substantially deflated value of the properties. Given the income potential of 1317, one cannot reasonably say that its temporarily vacant state permitted valuing that property at zero dollars.

Second, Livingston used a 5.25% capitalization rate for the sale of both properties (1301 and 1317), and yet testified that he had imputed “no net income” to 1317 and did “not know what ... 1317 alone would have sold for.” It is not clear, therefore, whether 1317 was actually priced into the deal and, if it was not, whether the capitalization rate should nonetheless have remained the same and the price still $27 million.

Third, in applying the income method of valuation, Livingston valued 1317 incorrectly by relying exclusively on one year’s income under Tenant’s abandoned lease. As explained more fully below, appraisal of the market value under the income method requires consideration of income over several years, commonly including income evidence from comparable properties.

Fourth, in taking what Livingston called the “first year’s net rent” as the basis for calculating the capitalized value of 1317, Livingston included taxes and insurance as well as rent in his “net” rent figure. In doing so, he actually relied on a “gross” rent figure that overly inflated the lost value of the lease, and thus overly increased the diminished value of 1317 by erroneously exaggerating the difference between what the estimated selling price of the two properties (at market value) should have been and the $27 million Landlord received.

BLT Burger DC, 2014 WL 959424 at 8.

The Court noted that the proper way to calculate “diminished value” damages included a “stabilized net income” derived by reference to incomes and expenses over several years, including from other comparable properties, if necessary, which Livingston failed to consider. “In short, from Livingston’s testimony we cannot discern a valid minuend or subtrahend, and thus a new hearing on diminished value is required.” The trial court then vacated the $5.7 Million award.

The Court also vacated the rent, taxes and insurance award, noting that:

Landlord in this case elected two, sequential measures of damages: first, the damages calculated by reference to the rent, taxes, and insurance payable under the lease during the seven-month period between surrender and sale, and second, post-sale damages represented by the diminished value of 1317 derived by comparing (1) the value of the property with the lease in place immediately before sale with (2) the lesser value represented by its allocable portion of the selling price of both properties (1301 and 1317). Although theoretically such two-step damage calculation may be feasible, we do not know from this record whether Livingston purported to arrive at his (miscalculated) diminished value as of the date of sale or, perhaps, had an earlier date—or even no date—in mind, leaving open the possibility of double-counting. We therefore vacate the $158,542 awarded to Landlord, subject to reconsideration on remand in connection with recalculation of diminished value damages.

BLT Burger DC, 2014 WL 959424 at 11.

The Court vacated the damages awards and remanded the case for additional proceedings consistent with its opinion.