Maxima Corp. v. Cystic Fibrosis Foundation

GARRITY, Judge. This appeal involves a dispute over the provisions and implementation of a lease. The parties are 6933 Arlington Development Limited Partnership (hereinafter “Arlington”), the lessor, The Maxima Corporation (hereinafter “Maxi-ma”), an assignee of the original lessee, and Cystic Fibrosis Foundation (hereinafter “Cystic”), a subtenant of Maxima. By order of March 7, 1989, the Circuit Court for Montgomery County (Raker, J.) found that Maxima had breached its lease with Arlington, and ordered it to pay damages to both Arlington and Cystic.

Each party raises several questions for our consideration: MAXIMA’S QUESTIONS I. Whether the court erred in finding Maxima in breach of the lease and liable for damages; II. Whether the court erred in its measure of damages; ARLINGTON’S QUESTIONS III. Whether the court erred in allowing Cystic to remain in possession of the leased premises despite its finding that Maxima breached the lease; IV. Whether the court erred in denying Arlington’s claim against Cystic for hold over rent; ⁶⁰⁶ V. Whether the court erred in denying Arlington’s claim for refund of incentive payments made pursuant to the lease; CYSTIC’S QUESTIONS VI.

Whether the court erred in denying Cystic’s claims against Maxima for attorneys’ fees and costs; and VII. Whether the court erred in denying Cystic’s claim against Arlington for $170,000.00 in damages. FACTUAL BACKGROUND On March 11, 1986, Arlington entered into a lease and addendum to lease (collectively referred to herein as “Master Lease”) with Technassociates, Inc. (hereinafter “TI”) for Arlington’s building then under construction at 6931 Arlington Boulevard, Bethesda, Maryland. The premises leased were the entire second floor of the building (“Suite 200”) and approximately 5000 square feet in the basement of the building (Space “T100”).

Arlington and TI agreed on specifications for the construction of both spaces, and construction began on Suite 200. Completion was initially scheduled for August, 1986 but later moved to September, 1986. Because Arlington considered Suites 200 and T100 difficult to rent, it offered TI various incentives to enter into the lease. 1 Among them, Arlington agreed to waive the first six months of rent; to pay $260,000.00 to Technassociates as a “Signing Payment” upon execution of the lease; to pay $260,000.00 as an “Occupancy Payment” upon TI’s occupying the premises; and to pay a final $200,000.00 as an “Anniversary Payment” on the first anniversary of the commencement of the leased term. In accordance with the lease, Arlington paid TI the Signing Payment.

In May, 1986, Arlington also began preparing the leased premises for occupancy. Work continued on ⁶⁰⁷ both the second floor and the basement until the end of June 1986. At that time, a representative of Maxima contacted Joel Fernebok, general partner of Arlington, and told him that Maxima had acquired TI and TI’s interest in the lease, and that Maxima did not know if it would be moving into the leased premises. At that point, June 30, 1986, Arlington stopped preparation of the premises, leaving both suites approximately half completed.

TI then requested that Arlington consent to an assignment of the lease to Maxima and to a subletting of Suite 200 to the Cystic Fibrosis Foundation. In mid-July Arlington received an initial set of revised plans for Cystic’s use of Suite 200. Those plans were finalized in mid-August, after which Arlington resumed preparation of Suite 200 alone. In a letter dated September 4, 1986, Arlington consented to a subletting of Suite 200 by Maxima to Cystic.

On September 18, 1986, Maxima and Cystic entered into a “Sublease Agreement” which pertained only to Suite 200 and contained a termination date of August 31, 1992. When Cystic moved into Suite 200 on October 3, 1986, Maxima demanded the $260,000.00 Occupancy Payment from Arlington. Arlington maintained that it was not obligated to make the payment because the T100 space remained unoccupied. Arlington further determined that Maxima was responsible for a 30-day delay in occupancy of the premises leased to Cystic.

It offered Maxima part of the Occupancy Payment, nevertheless, if Maxima would acknowledge responsibility for the 30-day delay. In a November, 1986 letter Arlington tendered to Maxima a $204,441.55 check, the negotiability of which was conditioned on Maxima signing an attached addendum to the lease recognizing September 3, 1986 as the commencement date of the lease. Arlington sought such a recognition to establish that the rent payments for the entire leased premises would begin March 3, 1987 (following the six month waiver period). Maxima negotiated Arlington’s check but ⁶⁰⁸ did not sign the attached addendum. 2 On November 11, 1986, Maxima Vice President and General Counsel David R. Smith wrote the following to Arlington’s counsel: Please be advised that TI/Maxima intends on occupying the 5000 square feet of space at the Leased Premises not sublet to Cystic on or about December 15,1986.

We have reviewed the Premises and noted that a substantial amount of work is yet to be done in order to effect occupancy. We believe that work must commence immediately. On December 23, 1986, however, a Maxima representative offered Arlington $175,000.00 in consideration for being released from its obligations with regard to T100, an offer that Arlington rejected. In May, 1987 Maxima notified Arlington that, “[s]ince [Arlington] has stopped work on Suite T100, it is our belief that [Arlington] has breached [Arlington’s] obligation to complete said suite in a timely manner; thus, we do not feel obligated to accept the premises if completed.” Maxima qualified this position in June, 1987, however, by a letter that stated inter alia, “Maxima offers the same buy-out proposal it made previously.” In July, 1987, Arlington completed preparation of T100 pursuant to TI’s original plans.

By letter of July 7, 1987, Arlington notified Maxima that T100 was ready for occupancy. When Maxima did not occupy and pay rent for T100 by August, 1987, Arlington advised Maxima that it was in default of the lease and that Maxima had ten days in which to cure its default. In September, 1987, Maxima proposed a sublease of Suite T100 to Cystic, and in a letter of September 10, 1987, represented the following: ⁶⁰⁹ Please be advised that tenant intends to be responsible for Suite T100 and honor our responsibilities and obligations as set forth in the Lease as of the date of the signing of the Sublease of T100 with Cystic Fibrosis Foundation contingent upon the Landlord’s consent to the Sublease of Suite T100 with Cystic Fibrosis Foundation. Arlington rejected this proposal, and on September 21, 1987, notified Maxima of a failure to cure the default that, in its view, entitled it to terminate the lease and hence Maxima’s right to occupy the leased premises.

On October 9, 1987, Arlington notified both Maxima and Cystic that the lease was terminated and that it would repossess the premises by November 30, 1987. Cystic responded by filing a complaint seeking a declaration that it was entitled to remain in Suite 200, and seeking a monetary award for tenant incentive payments. Maxima, in turn, cross-claimed against Arlington seeking damages for breach of the Master Lease, indemnity, and declaratory relief. Arlington completed the picture by counterclaiming against Cystic for holdover rent as to Suite 200, and cross-claimed against Maxima for indemnity.

The trial court declared, inter alia, Maxima to be in default of its lease with Arlington and entered awards in favor of both Cystic and Arlington. 3 DISCUSSION I. A. Default and Failure to Cure The trial judge determined that Maxima was in default of its lease with Arlington by failing to occupy and pay rent on ⁶¹⁰ the T100 space. She also found that Maxima had failed to cure the default, stating: I find that Maxima told Joel Fernebok to stop building-out the T100 space because they didn’t know what the use of that space would be. Based on all of the evidence that I have heard, I don’t believe that Maxima intended to occupy T100, which is why they never directed him how to build it out, notwithstanding the November ’86 letter to Joel Fernebok to build the space, or at the same time negotiating a buy-out. No rent has been paid by Maxima for the T100 space ...

I find a breach on the part of Maxima, and I find that Joel Fernebok’s failure to complete the buildout earlier was due to Maxima’s conduct____ I find that Maxima did not cure but instead sought consent to sublet to Cystic which [Arlington] refused____ I find that [Arlington] did not unreasonably withhold their consent and that Maxima is in default, they paid no rent, and I believe they were stalling with respect to how they wanted it built out. We review the trial judge’s findings of Maxima’s default and failure to cure under the clearly erroneous standard. Messall v. Merlands Club, Inc., 233 Md. 29, 39 , 194 A.2d 793 (1963). That standard requires that we decide only whether there is any competent, material evidence legally sufficient to support the trial judge’s findings.

In making this determination, we assume the truth of all the evidence and of all the favorable inferences fairly deducible therefrom tending to support the trial court’s factual conclusions. Pahanish v. Western Trails, Inc., 69 Md.App. 342, 354 , 517 A.2d 1122 (1986); Carling Brewing Co. v. Belzner, 15 Md.App. 406, 412 , 291 A.2d 175 (1972). Maxima contends first that the trial judge was clearly erroneous in finding that it was in default of the lease. Our review of the record, however, indicates that the evidence was sufficient to support the trial court’s conclusion.

Clearly, Maxima was initially to occupy T100 in September, 1986. Maxima specifically agreed, by negotiating the par ⁶¹¹ tial Occupancy Payment from Arlington, that “the commencement date shall be deemed to be September 3, 1986 for all purposes of the lease.” (Emphasis added). The T100 space was in no way exempted from what the parties deemed “the Leased Premises.” In fact, David Smith of Maxima testified that when he demanded the $200,000.00 anniversary payment from Arlington, it was his belief that the payment was for both the T100 and Suite 200 spaces. Yet, it is undisputed that Maxima never occupied the space nor paid rent on it.

Maxima contends that the July, 1987, completion date of T100 was “simply too late” for it. The trial judge, however, believed and relied on evidence that indicated the delay in TIOO’s completion was in fact due to Maxima. There was testimony before the court that a representative of Maxima told Joel Fernebok of Arlington to stop building out the T100 space because, at that time, Maxima did not know what the use of the space would be. 4 Further, Mark Berman of Interplan, Inc., 5 testified that, in July of 1986, when revised plans were provided for the Suite 200 space, he received no instructions as to the preparation of the T100 space. This was confirmed by David Smith who testified that Maxima neither submitted plans for the preparation of T100, nor told Arlington to use the original plans prepared for TI’s anticipated use of the premises.

In short, we believe that the court’s finding of a default as to T100 is supported by competent and material evidence. Maxima next argues that any default that may have occurred as to Space T100 could have been cured by its ⁶¹² proposed sublease of the space to Cystic. Maxima further contends that Arlington’s refusal to agree to the sublease violated Section 22(a) of its Master Lease with Arlington. The trial judge, however, found Arlington’s refusal reasonable, a finding that is again subject to a clearly erroneous standard of review.

Section 22(a) of the Master Lease states that Maxima cannot sublet any portion of the leased premises without the prior written consent of Arlington, “which consent shall not be unreasonably withheld or delayed.” 6 As we have never specifically defined what constitutes “reasonableness” in this context, the parties present us with varying definitions of the term from other jurisdictions in which questions relating to commercial leases would be frequently entertained by a court. 7 The framework within which we view the authorities is perhaps best set forth in American Book Company v. Yeshiva University Development Foundation, Inc., 59 Misc.2d 31 , 297 N.Y.S.2d 156 (1969), in which the court wrote: reasons for refusal of consent by a landlord fall into two broad categories—objective and subjective. By “objective” are meant those standards which are readily measurable criteria of a proposed subtenant’s or assignee’s acceptability, from the point of view of any landlord ... ... Can the reasonableness or the unreasonableness of refusing consent vary with the identify and activities of the landlord? If so, we are relegated not to the objective ⁶¹³ standards by which any tenant may be measured, but to wholly subjective criteria which render effective judicial review difficult, if not impossible.

To the extent that rejection of a proposed subtenancy is based on the supposed need or dislikes of the landlord, a policy of judicial disapproval of such subjective criteria is discernible. Id. 297 N.Y.S.2d at 159-61 . Indeed, our review of the cases indicates that a landlord’s refusal of a sublet request is generally only deemed reasonable if based on objective grounds. That is, a landlord is normally expected to act pursuant to reasonable commercial standards, without regard to subjective attitudes personal to the landlord.

The case of Kendall v. Ernest Pestana, Inc., 40 Cal.3rd 488, 220 Cal.Rptr. 818 , 709 P.2d 837 (1985), for example, offered a short list of acceptable bases for a reasonable objection to sublet. Examples of bases for such good-faith reasonable objection would be inability to fulfill terms of the lease, financial irresponsibility or instability, suitability of premises for intended use, or intended unlawful or undesirable use of premises. Id. 220 Cal.Rptr. at 823 , 709 P.2d at 842 . Likewise, in Fernandez v. Vazquez, Fla.App. 397 So.2d 1171 (1981), the Court cited the following similar objective factors to be considered: (a) Financial responsibility of the proposed subtenant, (b) The “identity” or “business character” of the subtenant, i.e., suitability for the particular building, (c) The need for alteration of the premises, (d) The legality of the proposed use, and (e) The nature of the occupancy, i.e., office, factory, clinic, etc. Id. at 1174 .

Even in 1010 Potomac Associates v. Grocery Manufacturers of America, Inc., 485 A.2d 199 (D.C.App. 1984), the case that appellee urges on us, the court concluded that “the landlord has no reasonable basis for withholding consent if the landlord remains assured of all the benefits bargained for in the prime lease.” Id. at 210 . ⁶¹⁴ Arlington asserts that it did not believe Cystic’s subtenancy would secure it all the benefits of the Master Lease, primarily because Maxima refused to offer Arlington assurances that it would remain obligated on the premises. It points specifically to the above-mentioned letters from Maxima of May and June, 1987, in which Maxima stated that it was not obligated to, and did not intend to, lease the T100 space, due to what it considered Arlington’s late completion of the premises. These statements, however, must be viewed in the context of the parties’ ongoing negotiations as to T100. After Maxima was notified by Arlington in July, 1987 that T100 was completed, it forwarded to Arlington a copy of its proposed sublease with Cystic, Section 7 of which provided: 7.

Liability of Sublessor—Notwithstanding this Sublease Agreement, Sublessor shall remain liable to Lessor pursuant to the terms and conditions of the lease as specifically provided herein and in the case of default of Sublessee. Arlington responded to the proposed sublease via two letters of September 9 and September 10, 1987 stating: The Sublease Agreement is inconsistent with your letter of August 28, 1987, whereby you clearly and unambiguously indicated that Maxima was no longer interest[ed] in the T100 space. I will need you to clarify your intention with respect to assuming responsibility [with] respect to T100. Our client cannot consider your request to sublet your space when you have taken the position that you are not obligated for the space. sj: sjs >}s sjs # Once again, it is my understanding that you have taken the formal position that Tenant does not intend to take possession of and be responsible for the obligations of Tenant with respect to Suite T-100 under the Lease.

Since such is your position, your request for us to consider a sublease is inconsistent with that position. ⁶¹⁵ If you unequivocally state your intention to be responsible for Suite T-100 and honor your responsibilities and obligations set forth in the Lease, our client would be willing to then consider your request relating to Landlord’s consent of the sublease forwarded to us on September 8, 1987. Maxima responded, in letters of September 10 and September 11, 1987, that it intended to be responsible for Suite T100 and honor its responsibilities and obligations under the Master Lease as of the signing of the sublease of Suite T100 between it and Cystic. The record indicates, then, that not only was Maxima liable to Arlington for T100 under the Master Lease, but it also confirmed that responsibility in the provisions of its proposed sublease with Cystic, and subsequent correspondence with Arlington. We do not comprehend, therefore, why Arlington would refuse to consent absent some further assurance from Maxima, and question the legal significance of any such proffer of further assurance had it been made by Maxima.

We hold that the trial judge erred when she found Arlington’s refusal to agree to Maxima’s proposed sublease reasonable.