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Decided: July 21, 2015

In a case about entitlement to damages for non-payment of rent and related items, the Fourth Circuit held that the district court erred in calculating damages.  The Fourth Circuit thus affirmed the district court in part, vacated in part, and remanded the case for recalculation of appropriate damages.  

In November, 2000, Elderberry of Weber City, LLC (“Elderberry”) leased a skilled nursing facility to Living Centers – Southeast, Inc. (“Living Centers”) for a ten-year period.  Although the lease did not initially allow assignment without prior written permission from Elderberry, it was eventually amended.  The amended lease allowed assignment to FMSC Weber City Operating Company, LLC (“FMSC”), its affiliates, or subsidiaries without prior approval from Elderberry with a guaranty from Mariner Health Care, Inc. (“Mariner”), a company with majority ownership in FMSC and full ownership of Living Centers.  Under this amendment, the lease reset to an April, 2017 expiration date, and was assigned from Living Centers to FMSC in January, 2007, and from FMSC to Continiumcare of Weber City, LLC (“Continium”), a company owned and controlled by a then-manager of FMSC, in November, 2011.  During this period, the facility had a variety of problems.  In March, 2012, Continium stopped paying rent.  Elderberry and Continium tried to negotiate a rent reduction, but in May, 2012, Continium indicated it was no longer able to pay rent.  In August 2012, Elderberry hired a company to help it find and sign a new tenant for the facility, and on August 15, Elderberry sent a letter to Living Centers, Continium, Mariner, and their attorneys demanding payment of past due rent.  On August 17, 2012, Continium discharged the last patients in the facility, and abandoned the property.  On August 24, 2012, Elderberry mailed a lease termination letter to Living Centers, FMSC, Continium, and Mariner.

Mariner filed suit against Elderberry seeking a declaratory judgment that the guaranty was unenforceable.  Elderberry then filed suit against Living Centers, FMSC, and Continium for breach of lease and breach of contract, and against Mariner for breach of guaranty.  These suits were consolidated, and the parties filed summary judgment motions.  The district court denied the summary judgment motions, and found the guaranty was enforceable.  The district court then ruled in favor of Elderberry on all counts, and found Elderberry entitled to $2,742,029.50 in damages, plus interest.  The damages covered unpaid rent from April to August, 2012, and from September, 2012 to February, 2013, a subsequent rent shortfall, other unpaid bills from August, 2012 to February, 2013, maintenance and rehabilitation of the facility, and amounts paid to the company that helped find and sign the new tenant.  Living Centers, FMSC, Continium, and Mariner appealed.  

The Fourth Circuit first held that Elderberry was entitled to unpaid rents only through the date it terminated the lease.  The court reasoned, based on earlier case law, that upon a tenant abandoning a property, a landlord can recover unpaid rent for the balance of the lease only if the landlord does not terminate the lease.  Although Elderberry argued that the lease allowed it to both 1) terminate, and 2) retake possession of the property without termination and without absolving the lessee of liability for rent, the Fourth Circuit disagreed.  The Court argued that remedies allowing for future rent are to be strictly construed, leases should be construed against the lessor, the language of the lease here was itself inconsistent, and the Court’s reading would allow Elderberry to seek other possible remedies.  The Fourth Circuit thus found that Elderberry was entitled to unpaid rents only through the August 24, 2012 termination of the lease.

The Fourth Circuit next found that Elderberry was entitled to non-rent damages only through lease termination.  Based on case law and legal principles, the Court found that landlords are entitled to non-rent damages that occur prior to lease termination.  Based upon that finding, and the fact that Living Centers, FMSC, Continium, and Mariner did not specifically challenge the district court’s findings regarding non-rent damages, the Fourth Circuit found that Elderberry was entitled to non-rent damages that occurred prior to the August 24, 2012 lease termination.

The Fourth Circuit then found that Mariner’s guaranty did not violate the Georgia statute of frauds, and was thus enforceable.  Although the guaranty contained several blanks, which would normally violate the statute of frauds, the Court found that, under Georgia case law, the guaranty could be interpreted together with the lease amendment to which it was attached.  Further, the Court found that the statute of frauds allowed using parol evidence to determine the meaning of ambiguous guaranty terms.  Using the lease amendment and parol evidence, the Court found enforceable the guaranty in which Continium was the debtor who failed to pay rent from March, 2012 until lease termination, and Mariner was the guarantor.

Based on the foregoing, the Fourth Circuit affirmed the district court in part, vacated in part, and remanded for recalculation of damages.  

Full Opinion

Katherine H. Flynn