Newman Development Group of Pottstown, LLC v. Genuardi's Family Market, Inc.

CONCURRING AND DISSENTING OPINION BY

FORD ELLIOTT, P.J.E.:

I join in the Majority decision in all respects except the rejection of the reduction to present value of the Section 20.2.2 damages. Although I cannot disagree with the discussion of contract law as set forth by the Majority, I dissent purely on the basis of the actual record before the court.

As set forth by the Majority, reargument was granted to reconsider the decision of July 29, 2013. I joined the Opinion by Judge Stevens, now Justice Stevens, in his review of the proceedings below. We determined that Landlord, throughout the trial and post-trial proceeding, addressed the issqe of reduction to present value as a remedy. We further determined that nothing in this court’s earlier decision to remand precluded a reduction to present value. I set forth the rationale of the prior decision as the basis for my dissent.

We turn first to Tenant’s allegations regarding reduction to present value, mitigation, and reletting expenses. In order to address these claims, it is necessary to set forth in greater detail the positions taken by the parties during this lengthy matter.
Throughout these proceedings, Landlord consistently suggested to the courts that there were three possible damage amounts to which it was entitled. It is undisputed that Landlord’s primary damage theory requested damages of $5,511,219.00, representing lost profits from the sale of the shopping center. N.T. 11/10/05 at 52, 65, 82; Landlord’s Proposed Findings of Fact filed 4/5/06 at 91; Landlord’s Proposed Conclusions of Law filed 4/5/06 at 40, 49-50; Landlord’s Response to Tenant’s Motion to Strike *668New Damages Figures and Calculations filed 4/27/06 at 2, fn. 1; Landlord’s Post Trial Motion filed 9/18/06 at 2. The evidence in support of this theory of damages was presented through Richard Marchitelli, Landlord’s expert witness. Landlord held out Mr. Marchitelli’s theory of damages to be “the most comprehensive and appropriate measure of damages,” and this is the amount Landlord requested of Judge Mahon at both the trial and post trial levels. Landlord’s Proposed Conclusions of Law filed 4/5/06 at 6, 40, 52; Landlord’s Post Trial Motion filed 9/18/06 at 2. [Footnote 8]
As an alternative to its $5,511,219.00 damages request, Landlord proffered a lesser figure to which it alleged entitlement under Section 20.2.2 of the “Default & Remedies” section of the parties’ Lease.[Footnote 9] Under this theory, Landlord asserted that Tenant’s breach had deprived Landlord of the benefit of the bargain of the twenty year lease. Landlord’s Proposed Conclusions of Law filed 4/5/06 at 40-41. Landlord further asserted that pursuant to Section 20.2.2, it properly mitigated its damages by securing replacement tenants, and had incurred reletting expenses in doing so. Id. at 41.

Landlord thus requested at trial that Judge Mahon award Section 20.2.2 damages calculated by:

taking nine (9) months of rent [Tenant] would have already paid ($531,534)[Footnote 10] adding the present value of the remainder of [Tenant’s] Lease ($6,616,978), subtracting the present value of the Michael’s lease ($1,270,409), subtracting the present value of the PetSmart lease ($1,667,382) and finally, adding in the reletting expenses ($536,629), resulting in a total damages figure of $4,746,850.

*669Id. at 42 (underline in original).

In suggesting Section 20.2.2 damages of $4,746,850.00, Landlord insisted that despite its best efforts, the replacement tenants only signed ten year leases, and Landlord could not assume they would renew at the end of the ten year period. Landlord’s Proposed Conclusions of Law filed 4/5/06 at 42. Thus, the $4,746,850.00 figure did not include mitigation for the second ten year term of Tenant’s twenty year lease period.

Although disputing that it had an ongoing duty to mitigate during the second ten year period, Landlord proposed a second Section 20.2.2 damage figure in response to testimony from Tenant’s expert witness, whereby Landlord suggested that if it was determined that mitigation was required for the second ten year period, damages should be calculated as follows:

adding the nine (9) months of [Tenant’s] rent, $581,534, with the present value of [Tenant’s] Lease ($6,616,978), subtracting the present value of the PetsMart ($2,193,068) and Michael’s ($1,639,387) leases — both of which assume a fifty percent (50%) renewal for the remaining term of [Tenant’s] Lease, and adding in construction costs ($536,629) for a total of $3,852,-186.

Id. at 44 (underline in original).

It is thus apparent that Landlord conceded that any Section 20.2.2 damages awarded to it would be reduced to present value.[Footnote 11] This position is consistent with an exchange that occurred during the presentation of the testimony of Marc Newman in support of Section 20.2.2 damages.

In rebutting the damages calculations made by Mr. Marchitelli and Mr. Newman, Tenant had introduced the testimony and report of Michael Axler. Pertinent to the appeal currently before us, Mr. Axler opined that because Landlord had an ongoing obligation to mitigate after the expiration of the replacement tenants’ ten year leases, Mr. Newman erroneously failed to account for rent due during the second ten years of the twenty year term of Tenant’s lease. N.T. 1/19/05 at 63. Additionally, Mr. Axler suggested that the damage calculations performed by Mr. Newman should be reduced to present value, resulting in damages of $2,947,698.00 (Tenant’s rent over 20 years, minus rent from replacement tenants over 20 years, plus construction costs). Id. at 68-69. Exhibit D-100 (Mr. Axler’s “Response to Newman Alternate Damages Claim” (in which Mr. Axler used a rate of 9%)). When Tenant sought to introduce Exhibit D-100, Landlord objected and the following discussion over the propriety of reducing the damages to present value occurred:

[Landlord]: My objection is to any testimony or any of these calculations regarding the first ten years of [Tenant’s] lease, the PetsMart lease, and the Michael’s lease as indicated in this document.
*670The Court: And you’re offering the first ten years for what purpose?
[Tenant]: Well, the only difference in the first ten years presented by Marc Newman and Mr. Axler is the discounted present value and this is a portion of his opinion.
The Court: And do you object to that?
[Landlord]: Only to the extent that he offers an opinion as to what that percentage interest was to use for present value, the numbers.

N.T. 1/19/06 at 64-65 (emphasis added). After brief additional comments, Landlord clarified that it objected to “the introduction of this testimony as to present value.” Id. at 65 (emphasis added). Tenant then complained “[y]our Honor, she just changed her objection. A minute ago she said she was objecting to the rate, not the concept of discount.” Id. (emphasis added). The following exchange then occurred:

The Court: Well, you can’t introduce — it doesn’t make a difference what her objection is, it’s to the introduction of the present value based upon percentage calculation or something else. Is that the basis?
[Landlord]: That’s the basis, your Honor.
[Tenant]: I think, your Honor, if I understand [Landlord] correctly, what he is saying, [Landlord] agree[s] there should be discount for present value, but dispute[s] the rate. I would submit that’s inappropriate [sic] for cross-examination of Mr. Axler, not admissibility issue.
The Court: Is that your issue?
[Landlord]: Your Honor, the issue is two-fold. That he is offering expert testimony as to a factual matter that has not been included in his report, and—
The Court: One to ten years, one to ten are not going to be considered by me other than on the issue of present value, one to ten, ten years on the leases calculation of the figures introduced, if I allow it to be introduced for that purpose.
[Landlord]: Objection, your Honor.
The Court: What is your objection now?
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The Court: You’re still asking that it be exclude because of the rate Mr. Axler has used for purpose of determining present value?
[Landlord]: Yes, your Honor. The rate Mr. Axler has used, in and of itself, is an expert opinion as to what that rate should be. And this is a factual matter. It’s a matter for the Court to decide and it’s a matter that [Tenant] [was] on notice of that this testimony would be offered.
The Court: Are you saying I’m supposed to make a determination as to what the present value is?
[Landlord]: It is within the Court’s purview your Honor. Yes, you can, but there was also factual evidence as to what rate was to be used.

Id. at 65-67. It is clear from this exchange that Landlord did not object at trial to the reduction to present value. In addition, when Mr. Axler was later questioned about the present value rate used in his calculations on cross examination, re-direct examination, and recross examination, Landlord did not even renew its objection to that rate, much less contest that the underlying reduction to present value of the Section 20.2.2 damages was to occur. N.T. 1/19/06 at 137,139,145,147.

Further, Mr. Marchitelli was recalled to rebut Mr. Axler’s testimony and Ex-*671Mbit D-100, containing Mr. Axler’s present value calculation of Mr. Newman’s alternate damage figures. N.T. 1/20/06. Landlord’s Exhibit P-434 was introduced into evidence, correcting alleged errors in Mr. Axler’s calculations and providing Mr. Marchitelli’s present value calculation of Mr. Newman’s alternate damage figures resulting in total damages of $3,852,186.00. Id. at 68-72, 92. In so doing, Mr. Marchitelli used the same rate as had Mr. Axler to discount the figures to present value. Id. at 71.

Landlord continued to request Section 20.2.2 damages reduced to present value at the post trial level, averring that Landlord “[c]ould also be made whole by calculating damages based upon lost rental income as specifically set forth in Section 20.2.2.” Landlord’s Post Trial Motion filed 9/18/06 at 8; Landlord’s Memorandum of Law in Support of Post Trial Motion filed 11/8/06 at 18-19, 32. In its post trial request that the damage award be modified, Landlord stated:

[Judge Mahon] actually found Marc Newman’s calculation of damages in years 1-10 to be reliable. Thus, there is no question that [Landlord] is at least entitled to recover damages for present value of lost rent through the first 10 years and 9 months, ($2,713,-739.00 as set forth above).. [Landlord] should have, at a minimum been awarded the lost rental income for the first 10 years and nine months to which there is no dispute and no speculation.
While there was no legal obligation for [Landlord] to find a replacement tenant for the same lease length, if the Court determined some rent must be attribute to the last 9 years and 3 months, sufficient evidence and calculation to find such, has been presented to the Court. In fact, both [Tenant’s] “expert,” Axler and [Landlord’s] expert, Marchitelli, agreed that a 50% renewal probability is a reasonable assumption and methodology for calculating the remaining anticipated rent. While both experts concur that a 50% renewal probability is reasonable, Ax-ler’s calculations were admittedly incomplete. Marchitelli adopted and modified Axler’s calculations using standard real estate assumptions, which were supported by the testimony of March Newman and uncontested. Ultimately, Marchitelli calculated the present value of [Landlord’s] damages, per the Remedies section of the Lease, to be $3,852,186.00.

Landlord’s Memorandum of Law in Support of Post Trial Motion filed 11/8/06 at 24. Thus, Landlord’s Post Trial Motion preserved the request for a Section 20.2.2 damage figure reduced to present value.

Landlord argued on the previous direct appeal to the Superior Court that it had presented “two alternate theories of damages, either of which would have acted to award [Landlord] its expectation damages,” and that the damages awarded by Judge Mahon were “insufficient in that they failed to award [Landlord] its expectation damages, necessary to make [Landlord] whole.” Landlord’s Pa.R.A.P.1925(b) Statement of Matters Complained of on Appeal filed 1/31/07. As it had up to that point, Landlord structured its appellate brief to primarily argue in favor or damages based on the diminished sale price of the shopping center allegedly attributable to Tenant’s breach, and only secondarily requested Section 20.2.2 damages. Landlord’s Pa. R.A.P.1925(b) Statement of Matters Complained of on Appeal filed 1/31/07 at 21, 24.

*672Thus, we find it abundantly clear from the contents of the certified record that neither the trial court nor the prior panel of the Superior Court was asked to award Section 20.2.2 damages not reduced to present value. Quite to the contrary, Landlord’s damages requests were figures consistently so reduced. While the parties argued over numerous other aspects of this case, the propriety of reduction to present value was simply not made an issue. Unsurprisingly, the April 25, 2008 Memorandum of the Superior Court is thus silent on the topic, and we discern nothing in that Memorandum which would permit Landlord to abandon on remand its consistently held position in this regard, and argue instead that the trial court must award Section 20.2.2 damages not reduced to present value. Our exhaustive review of the record in this case compels the conclusion that it does not support Judge Mahon’s failure to reduce Landlord’s damages to present value. Therefore, we find it necessary to vacate the award of damages and remand the matter for calculation of damages reduced to present value.

Newman Development Group of Pottstown, LLC v. Genuardi’s Family Market, Inc., 2013 Pa.Super. 217 (2013), en banc reargument granted and case withdrawn 10/2/13.

Based on the above rationale, I respectfully dissent on this issue.

Judge Mahon rejected this damage theory and the accompanying proposed damage amount at both the trial and post trial level, finding it "highly speculative” and "inappropriate” to support a damage award. Opinion filed 8/15/06 at 14; Post Trial Order filed 12/19/06 at 1, fn. 2.

The Default & Remedies portion of the parties’ Lease set forth actions/in-actions that would constitute a "Tenant default,” §§ 20.1.1-20.1.2, then provided that in the event of a Tenant default, Landlord had the right to terminate the lease, § 20.2.1, and/or lease the premises to another party (without terminating the Lease), § 20.2.2. Pertaining to this reletting, Section 20.2.2 read as follows:

20.2.2. Reletting: Without terminating this Lease, Landlord may reenter and repossess the Leased Premises, or any part thereof, and lease them to any other Person upon such terms as are reasonable, for a term within or beyond the Term. Any such reletting shall be for the account of Tenant, and Tenant shall remain liable for the excess (if any) of: (a) all Rent which would be payable under this Lease by Tenant in the absence of such repossession; over (b) the proceeds, if any, of any reletting effected for the account of Tenant after deducting from such proceeds any Relet-ting Expenses ... No repossession of the Leased Premises or any part thereof pursuant to this section 20.2.2. shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such repossession, and Landlord may, at its option, sue for and collect all Rent and other charges due hereunder at any time when such charges accrue.
Lease Agreement, “Default & Remedies” § 20.2.2.

Landlord asserted that had Tenant not breached the Lease, Tenant would *669have taken possession of the space on December 1, 2004, and after the benefit of three months free rent, would have begun paying rent to Landlord on March 1, 2005. Landlord’s Proposed Conclusions of Law filed 4/5/06 at 41. Thus, by the time the shopping center was sold at the end of 2005, Tenant would have paid $531,534.00 in rent to Landlord. Id. at 42. Landlord explained that "this past due rent does not get adjusted to present value, just added into the final calculation of damages.” Id. at 42.

Were the Section 20.2.2 amounts not reduced to present value, the damages requested via Landlord’s alternate damage theory would have exceeded the $5,511,219.00 figure sought by its primary damage theory — a financially illogical and improbable scenario.