| Latham Land I, LLC v TGI Friday's, Inc. |
| 2012 NY Slip Op 05227 [96 AD3d 1327] |
| June 28, 2012 |
| Appellate Division, Third Department |
| Latham Land I, LLC, Appellant-Respondent, v TGIFriday's, Inc., Respondent-Appellant. |
—[*1] Nixon Peabody, L.L.P., Albany (Jena R. Rotheim of counsel), forrespondent-appellant.
Spain, J. Cross appeals from a judgment of the Supreme Court (Platkin, J.), entered February3, 2011 in Albany County, upon a decision of the court in favor of defendant.
Plaintiff commenced this action alleging that defendant breached a May 24, 2007 contractwhereby defendant, as lessee, agreed to, among other things, build and operate a restaurant on aportion of plaintiff's real property in the Town of Colonie, Albany County (hereinafter thecontract). The contract contemplated an initial lease term of 10 years, with five-year renewaloptions and, at the end of the lease, that plaintiff would take ownership of the building.Defendant, however, never commenced construction and instead, in March 2008, notifiedplaintiff that it was terminating the contract. Thereafter, plaintiff commenced this action and,after failing to find another tenant, ultimately sold to a third party both the property designated tobe leased to defendant and an adjacent parcel improved by a lease with Chipotle Mexican Grill ofColorado, LLC.[FN1]During a nonjury trial, plaintiff submitted evidence of [*2]damages based on the difference between the estimated value of theproperty had defendant performed under the contract, and the actual sale price that plaintiffreceived for the land alone. Supreme Court held that defendant had breached the contract but,finding that plaintiff had failed to establish damages, dismissed the action. The parties nowcross-appeal.
We concur with Supreme Court that defendant breached the contract. The contractcontemplated a time line by which the parties would simultaneously make efforts to procure thenecessary approvals to proceed with the project. Specifically, plaintiff agreed to seek site planapproval at the same time that defendant would "diligently pursue" its obligation to obtain thenecessary building permits. Section 2.07 (a) of the contract required defendant to submit itsbuilding plans and specifications to plaintiff for approval "no later than" 90 days after its receiptfrom plaintiff of, among other things, written notice that a meeting between plaintiff and theTown of Colonie's Development Coordination Committee (hereinafter DCC meeting) hadoccurred. After plaintiff approved its building plans, defendant then had 10 days to apply for itsbuilding permits. Although the DCC meeting occurred in July 2007, plaintiff did not then sendwritten notice to defendant. Supreme Court found, however, that defendant had actual notice thatthe DCC meeting had occurred no later than the end of August 2007. Nevertheless, defendant didnot submit building plans to plaintiff. By late 2007, defendant was experiencing financialdifficulties and began negotiations with plaintiff to modify and postpone the contract, but theparties did not reach any new agreement and, on February 28, 2008, plaintiff sent formal writtennotice of the DCC meeting to defendant.
On March 24, 2008, defendant informed plaintiff that it was terminating the contractpursuant to section 2.08 (e), which provides that either party may terminate the contract if,despite the exercise of due diligence, defendant had been unable to satisfy a set of enumeratedconditions—including obtaining necessary building permits—within one year fromthe date the contract was executed. May 24, 2008 represented the end of the one-year period anddefendant terminated the lease in March 2008, two months prior to that date, arguing thatplaintiff's delay in sending written notice of the DCC meeting left defendant with insufficienttime within which to obtain building permits prior to the May 24, 2008 deadline.
The record amply supports Supreme Court's finding that plaintiff substantially complied withits obligation to notify defendant of the DCC meeting in August 2007, triggering defendant'sobligation to submit building plans thereafter. Defendant's director of development, who was theindividual who negotiated for the language regarding the DCC meeting to be included in thecontract, was copied in a series of e-mails between plaintiff and defendant in late August 2007indicating that the DCC meeting had occurred. One of defendant's design project managers in itsarchitectural department was also included in these e-mails. Hence, although plaintiff never sentformal written notice of the DCC meeting as set forth in the contract, the record supports thecourt's conclusion that defendant had actual notice by the end of August 2007. Further, evidenceat trial indicated that, at defendant's urging, the parties had engaged in unsuccessful negotiationsto delay defendant's performance until 2009. In addition, plaintiff submitted uncontradictedtestimony that defendant made little perceivable effort to finalize building plans or apply forbuilding permits. According appropriate deference to the trial court's credibility determinations(see Richmor Aviation, Inc. vSportsflight Air, Inc., 82 AD3d 1423, 1424 [2011]), we hold that plaintiff substantiallycomplied with the requirements of section 2.07 (a) and that defendant thereafter breached thecontract by terminating the contract rather than making diligent efforts to complete buildingplans and acquire permits.[*3]
Defendant contends, nevertheless, that section 2.07(a)—"[t]enant shall submit its plans and specifications to Landlord for approval no laterthan ninety (90) days after (i) Landlord sends written notice"—constituted a conditionprecedent to its obligation to submit building plans and, as such, had to be "literally performed"as opposed to being satisfied by substantial compliance (Oppenheimer & Co. v Oppenheim,Appel, Dixon & Co., 86 NY2d 685, 690 [1995]). Because plaintiff failed to send writtennotice until February 28, 2008, defendant argues that it had until after the May 24, 2008deadline (i.e., May 28, 2008) to tender its plans, hence triggering the option to terminate thecontract pursuant to section 2.08 (e) of the lease. We do not agree. "A condition precedent is 'anact or event, other than a lapse of time, which, unless the condition is excused, must occur beforea duty to perform a promise in the agreement arises' " (Oppenheimer & Co. v Oppenheim,Appel, Dixon & Co., 86 NY2d at 690, quoting Calamari and Perillo, Contracts § 11-2,at 438 [3d ed] [citations omitted]; accord MHR Capital Partners LP v Presstek, Inc., 12 NY3d 640,645 [2009]). Notably, section 2.07 (a) does not employ clearly conditional terms such as "if,""unless" or "until" (MHR Capital Partners LP v Presstek, Inc., 12 NY3d at 645; seeOppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d at 691; Restaurant Creative Concepts Mgt., LLC vNortheast Rest. Dev., LLC, 83 AD3d 1189, 1191 [2011]; Su Mei, Inc. v Kudo,302 AD2d 740, 741 [2003]). Further, read in the context of the parties' contract as a whole, it isclear that the parties contemplated reciprocal good faith efforts to move the project forward, andthis specific notice provision was intended as a means to impose a time limit on defendant'sperformance, rather than a basis for conditioning that performance. Thus, Supreme Courtproperly held that written notice of the DCC meeting was not a condition precedent todefendant's obligation to submit building plans and specifications to plaintiff, but rather that thelanguage created a constructive condition, which could be—and was here—satisfiedby substantial compliance (see Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co.,86 NY2d at 691; Restaurant Creative Concepts Mgt., LLC v Northeast Rest. Dev., LLC,83 AD3d at 1191; Rooney vSlomowitz, 11 AD3d 864, 865-866 [2004]).
We turn next to the issue of damages. On appeal, plaintiff has expressly stated that it is notseeking actual rent due as a result of defendant's failure to create the leasehold estate promised bythe contract. Accordingly, arguments suggesting that rent might not be recoverable because of theabsence of an acceleration clause in the contract or the fact that the property was sold before thelease term began are irrelevant. Indeed, the contract was not a simple lease, but had elements ofpure contract, and inasmuch as the contract was repudiated before the building was constructedor the lease term began, it was appropriate for plaintiff to seek contract damages (see e.g.Kenford Co. v County of Erie, 67 NY2d 257, 260 [1986]; see also Arthur Treacher's Fish& Chips of Fairfax, Inc. v Chillum Terrace LP, 272 Md 720, 726-731, 327 A2d 282,286-288 [1974]). Plaintiff was thus entitled to "recover general damages which are the naturaland probable consequence of the breach" (Kenford Co. v County of Erie, 73 NY2d 312,319 [1989]). Further, we agree with Supreme Court that section 10.01 of the contract, which setsforth certain remedies—retaking possession or terminating the lease—available toplaintiff in the event of defendant's default, does not preclude plaintiff from seeking generalcontract damages. That section clearly contemplated a default after the lease term had begun anddefendant had taken possession. Where, as here, the contract was repudiated prior to that time,the section does not preclude plaintiff from seeking alternate remedies (see Imperial WaterCo. No. 8 v Cameron, 67 Cal App 591, 594-595, 228 P 678, 679-680 [1924]).
Hence, we turn to whether the type and measure of contract damages sought by plaintiff areappropriate. "Damages for breach of contract include general (or direct) damages, whichcompensate for the value of the promised performance, and consequential damages, which are[*4]indirect and compensate for additional losses incurred as aresult of the breach" (Appliance Giant,Inc. v Columbia 90 Assoc., LLC, 8 AD3d 932, 934 [2004] [citations omitted]). Directdamages are typically expectation damages, measured by what it would take to put thenon-breaching party in the same position that it would be in had the breaching party performed aspromised under the contract (see J.R. Loftus, Inc. v White, 85 NY2d 874, 877 [1995];Simon v Electrospace Corp., 28 NY2d 136, 145 [1971]; Restatement [Second] ofContracts § 347). Special, or consequential damages, on the other hand, are "extraordinaryin that they do not so directly flow from the breach [and] are recoverable only upon a showingthat they were foreseeable and within the contemplation of the parties at the time the contract wasmade" (American List Corp. v U.S. News & World Report, 75 NY2d 38, 43 [1989]).Section 10.01 (d) of the parties' contract expressly prohibits the recovery of "any speculative,indirect, consequential, or incidental damages."
Here, plaintiff sought damages for the loss of the value of the leasehold interest promised bythe parties' agreement. Specifically, plaintiff introduced evidence that the value of its propertyfollowing defendant's breach was lower than it would have been had defendant honored the leaseagreement, and argued that the difference in those values is a proper measure of damages in thiscase. Through expert testimony, plaintiff sought to establish that leased properties, such as theone at issue in this case, are often bought and sold as investment vehicles referred to as "triple netlease properties"[FN2]and that an accepted valuation method exists for such properties. Plaintiff's expert calculated thevalue of the subject property with the lease in place as $2,503,846 by dividing the average annualbase rent ($162,750) by a capitalization rate of 6.5%. He then took the actual sale price ofplaintiff's Colonie property ($2,348,037)—which included both the subject property andthe adjacent parcel improved by the Chipotle restaurant—and subtracted the value of theportion of the property he calculated to be attributable to the Chipotle lease ($1,373,077) to arriveat the value of the portion of the demised property without defendant as atenant—$974,960. The expert then opined that plaintiff's damages as a result ofdefendant's breach amounted to the difference between the value of the property with the lease inplace ($2,503,846) and the value that plaintiff actually received for the sale of the property($974,960), or $1,528,886.
Supreme Court rejected this proof, finding that a loss, if any, in the market value of plaintiff'sproperty on the triple net lease market is a consequential damage, specifically barred by theparties' contract. We disagree. Plaintiff seeks to recover for expectation damages flowing fromdefendants' breach, i.e., the loss of the benefit of its bargain. In our view, these are directdamages "which are the natural and probable consequence of the breach" (Bi-Economy Mkt., Inc. v Harleysville Ins.Co. of N.Y., 10 NY3d 187, 192 [2008] [internal quotation marks and citation omitted]).Unlike losses stemming from some anticipated profit linked to, but collateral to, the partiesagreement (see e.g. Kenford Co. v County of Erie, 73 NY2d at 319 [loss of anticipatedappreciation in value of land owned in periphery of proposed stadium site are consequentialdamages]), the loss asserted here is the very essence of the contract between theparties—i.e., the diminution in value of the actual property defendant promised to improveand lease (see e.g. NENR Invs., LLC v Starbucks Corp., 2009 WL 1605603, 2009 USDist LEXIS 47999 [WD [*5]Va 2009]). Further, unlike lostprofits which must both be proven with reasonable certainty and shown to have been "fairlywithin the contemplation of the parties to the contract at the time it was made" (see KenfordCo. v County of Erie, 67 NY2d at 261), here, the value of the lease was calculated basedupon the rental amounts specifically contemplated by the parties' agreement (see AmericanList Corp. v U.S. News & World Report, 75 NY2d at 43). Although the calculation of thesegeneral damages by using values obtained from the triple net lease market may be challenged,with contrary proof, as inaccurate or not a proper measure of the actual value of plaintiff's land,the use of this particular methodology to assess the damage amount does not alter the core natureof the damages sought—the lost value of the lease—as being direct damagesflowing from the breach.
Thus, contrary to defendant's arguments, plaintiff did not need to demonstrate that, at thetime the contract was signed, plaintiff planned to sell the subject property in the triple net leasemarket and that defendant was aware of that plan. In light of defendant's breach, and plaintiff'sfailed efforts to find a new tenant for the property, the sale of the property was an appropriateeffort to mitigate damages (see First Natl. Mtge. Co. v Federal Realty Inv. Trust, 633 FSupp 2d 985, 993 [ND Cal 2009], affd 631 F3d 1058 [9th Cir 2011]). Plaintiff is notseeking a loss of profits on the triple net market, but rather using that market to illustrate the lossof value directly caused by defendant's breach.
However, because defendant challenged several aspects of plaintiff's methodology, includingthe appropriate amount of the sale price attributable to the Chipotle lease, we must remit thematter to Supreme Court for its findings on actual damages. Further, in light of our holding,plaintiff may be entitled to counsel fees pursuant to section 16.12 of the contract.
Lahtinen, P.J., Malone Jr., Kavanagh and McCarthy, JJ., concur. Ordered that the judgmentis modified, on the law and the facts, without costs, by reversing so much thereof as found thatplaintiff is not entitled to damages, costs or counsel fees; matter remitted to the Supreme Courtfor further proceedings not inconsistent with this Court's decision; and, as so modified, affirmed.
Footnote 1: Plaintiff sold the property toLatham Land Holdings LLC in September 2009 for $2,348,037, explicitly retaining its legalclaims against defendant.
Footnote 2: In triple net lease arrangements,costs such as property taxes, insurance and maintenance are born by the lessee (seeInternational Trade Admin. v Rensselaer Polytechnic Inst., 936 F2d 744, 751 [2d Cir 1991]).