In these distressed economic times, it is not uncommon for a commercial tenant to discontinue its business operations and relinquish possession of the premises even if there are years left on the lease term. At that point, the landlord has a decision to make — keep the premises empty and attempt to collect rent from the tenant or mitigate his or her damages by leasing the premises to another tenant.
In Ferrick v. Bianchini, No. 3244 (Pa. Super. Ct. 2013), the Superior Court of Pennsylvania recently answered the question of whether a commercial landlord can accelerate the rent due for the remainder of the lease term against a tenant that abandoned the premises, and then lease the premises to another tenant and collect rent from the new tenant at the same time.
In Ferrick, a tenant who had planned on operating a restaurant-and-bar establishment in Center City Philadelphia fell in arrears on his rent and other charges due under the 10-year lease entered into by the parties.
There was a dispute between the parties as to how the tenant, Edward Bianchini, lost possession of the premises. While Bianchini indicated that the landlord, 12th Street Property LLC, changed the locks to the premises, thus denying him possession of the premises, the landlord noted that Bianchini abandoned the premises by ceasing his operations and removing fixtures from the premises, according to the opinion.
After Bianchini no longer possessed the premises, the landlord found a replacement tenant and re-let the premises.
The landlord thereafter filed a complaint in confession of judgment for money against the tenant, alleging that Bianchini was in default under their lease agreement for failing to pay rent, taxes, insurance and utilities and for vacating and abandoning the leased premises prior to the expiration of the lease term. In the complaint, the landlord sought both past-due rent and charges totaling more than $80,000, together with accelerated rent and fees for the remaining years of the lease term, for a total judgment in excess of $1.5 million.
Upon the filing of the complaint, the confessed judgment was simultaneously entered against Bianchini in the amount sought in the complaint. Bianchini then filed a petition seeking to strike or, in the alternative, to open the confessed judgment.
After the trial court denied the petition, Bianchini appealed that ruling to the Superior Court of Pennsylvania.
While Bianchini raised several grounds on appeal, one of the more interesting ones dealt with whether a landlord in Pennsylvania may obtain a judgment based upon the acceleration of rent due under a commercial lease and then re-let the premises afterwards.
On appeal, Bianchini argued that the trial court abused its discretion in refusing to open the confessed judgment because it entitled the landlord to both possession of the premises and fully accelerated rent for an eight-year period. Since the landlord re-let the premises to a replacement tenant, Bianchini claimed that the landlord was improperly seeking a double recovery by way of the entry of the confessed judgment against him as well as collecting rent from the replacement tenant for this overlapping period of time.
In making this argument, Bianchini relied upon the Superior Court’s previous rulings in Homart Development v. Sgrenci, 662 A.2d 1092 (1995), and H.A. Steen Industries v. Richer Communications, 314 A.2d 319, 322 (Pa.Super. 1973), for “the proposition that allowing a landlord to obtain both accelerated rent and possession amounts to a double recovery for a single wrong.”
The Superior Court in Ferrick, however, concluded that the cited cases do not apply because the landlord in Ferrick did not confess judgment for both possession of the premises and accelerated rent. As such, the Superior Court in Ferrick emphasized that “the issue, properly framed, is whether the landlord can confess judgment for accelerated rent when it was in possession of the property.”
The Superior Court believed that the record established that the tenant abandoned the premises when, after ceasing operation, he removed fixtures and equipment from the premises.
By agreeing with the trial court’s conclusion that Bianchini abandoned the premises, the Superior Court had to deal with the ramifications of the landlord renting the premises to a replacement tenant because a significant portion of the confessed judgment included accelerated rent for a period of time in which the landlord was also generating rental income from the replacement tenant.
The Superior Court first acknowledged the Supreme Court of Pennsylvania’s ruling in Stonehedge Square Limited Partnership v. Movie Merchants, 715 A.2d 1082 (Pa. 1998).
In Stonehedge, the Supreme Court held that “where a tenant abandons property, a non-breaching landlord has no duty to mitigate damages.” In other words, when a tenant abandons the premises, “the landlord may either choose to allow the property to stand idle and hold the tenant liable for the entire rent, or he may re-lease it and hold the tenant liable for the difference, if any.”
While the Superior Court indicated that the Supreme Court’s ruling in Stonehedge “does not disturb the general principle that a landlord must choose between taking possession of the property and collecting future rents,” the Superior Court reiterated that, “where a commercial tenant vacates the leasehold, the landlord may seek accelerated rent if the lease so provides, and re-let the premises” so long as the landlord credits the tenant at execution for sums paid by the replacement tenant.
According to the Superior Court, “the Restatement (Second) of Property similarly treats such situations where a landlord seeks both accelerated rent and possession.” In Ferrick, the Superior Court pointed out that, “if the landlord collects accelerated rent and receives possession of the property by abandonment, the landlord may keep the accelerated rent, but is required to account to the tenant for rent received from a new tenant.”
Since the landlord in Ferrick conceded that the tenant would be entitled to a credit against the judgment amount at execution if the landlord was to collect rent from the replacement tenant, the Superior Court refused to open the confessed judgment for the accelerated rent.
The Superior Court’s ruling in Ferrick illustrates the difference between a commercial tenant abandoning the premises and being evicted by way of judicial proceedings. If the tenant in Ferrick had remained in the premises, the landlord would have had to make the difficult decision of either keeping the premises vacant while accelerating the rent or taking possession of the premises and leasing it to another tenant. Most commercial landlords, especially ones with storefronts, do not wish to keep the premises vacant for a multitude of reasons and instead elect to mitigate their damages by renting the premises to another tenant.
By abandoning the premises, as both the trial court and Superior Court concluded, the tenant in Ferrick allowed the landlord to have the best of both worlds — the landlord has a judgment of record against the tenant that includes the accelerated amount due under the lease and the landlord can lease the premises to another tenant at the same time. •
Alan Nochumson is the sole shareholder of Nochumson P.C., where his law firm’s primary practice areas consist of real estate, litigation, employment and labor, and land use and zoning. He is also president of Bear Abstract Services, where his title insurance company offers comprehensive title insurance, title examination and closing services. He can be reached at 215-399-1346 or by email at firstname.lastname@example.org.