Tenant’s Award for Compensatory and Punitive Damages Reversed for Lack of Pre-Suit Demand

A recent case from the Maryland Court of Special Appeals demonstrates, once again, the risks assumed by a commercial landlord when it seeks to evict a tenant itself as opposed to going through the judicial process. Although the landlord ultimately prevailed, the case offers a stark reminder of the significant damages that a tenant may recover if the landlord’s self-help actions are ultimately determined to be improper.

The facts of the case are fairly routine in commercial leasing. The commercial tenant executed a written lease with the landlord that expired on October 31, 2016. After the lease’s expiration, the landlord and tenant, along with the landlord's management company, continued to negotiate a renewal of the lease while the tenant remained in the premises and paid monthly rent in the same amount as previously paid. In June 2017, however, the tenant notified the landlord that they were not going to renew the lease, and that they would vacate the premises by November 2017.

Obviously unhappy that the tenant decided to leave, the landlord notified the tenant that it considered the tenant a holdover tenant and, in accordance with the lease, demanded immediate payment of double rent retroactive to the expiration of the original lease in October 2016. Bear in mind that until that point, the landlord was only charging the tenant the monthly rent set forth in the (expired) lease, which was paid by the tenant and deposited by the landlord. Going forward, the tenant continued to pay monthly rent to the landlord, which the landlord deposited, but only in the prior amount - not the double rent required as a holdover tenant.

In September 2017, approximately two months before the tenant intended to vacate, the landlord filed a rent case in the District Court for Howard County, which the Court postponed until November 9, 2017. Unhappy with the delay, the landlord decided to pursue self-help and take possession of the premises and the tenant’s goods and inventory under a provision in the lease that gave the landlord a security interest in personal property and fixtures. A few days before the new trial date, the landlord effected a peaceful repossession. (The management company had advised the landlord against self-help, and refused to participate in the eviction.)

The tenant subsequently sued the landlord for, among other claims, conversion of its property. The landlord counterclaimed based on the failure to pay the double rent. The trial court ultimately granted the tenant approximately $140,000 in damages under the conversion claim, but offset those damages by the rent owed to the landlord in the approximate amount of $43,000. More significantly, the trial court also awarded the tenant punitive damages in the amount of $1,000,000.

On appeal, the Court of Special Appeals noted that the rent owed to the landlord could only be doubled as a holdover upon notice to the tenant; the landlord was not permitted to impose holdover rent retroactively to the date the written lease expired. However, the thrust of the appellate court's opinion dealt with conversion.

The court first explained that conversion can be either direct or constructive: (a) direct conversion occurs when a defendant wrongfully takes something that belongs to another; (b) constructive conversion occurs when a defendant has lawful possession of goods but then refuses to return those goods after demand.

Looking to the written lease, the appellate court ruled that (a) the tenant was in breach of the lease by its failure to pay the rent, (b) the lease authorized the remedy of repossession of the premises and property, and (c) the repossession was done peacefully. Accordingly, since the landlord had the initial right to repossess the property, there was no direct conversion.

Things became more complicated regarding constructive conversion.  While the lease provided that the landlord could repossess tenant’s goods, it also required the landlord to sell the property at a public or private sale, which the trial court ruled did not occur.  Accordingly, the initial proper taking became an improper constructive conversion when the landlord did not follow through with its obligations under the lease to sell the property, or so argued the tenant.  However, an element of constructive conversion is demand for return prior to filing suit. (The lawsuit itself did not count as a demand.) The appellate court ruled that the tenant never demanded return of the property, and reversed on the constructive conversion and punitive damages awards.  (Moreover, even if landlord sold the property, questions likely would have arisen as to the sale procedures and whether the sale was commercially reasonable.)

While the landlord ultimately prevailed based on what arguably could be characterized as a technicality, one can easily see how a court (let alone a jury) will treat a landlord that attempts self-help even when provided for under the lease. Here, even if the tenant demanded return of its property, it is unlikely given the factual background that the landlord would have done anything differently. (However, that is speculation.) But, had the demand been made and the property not returned, the elements of constructive conversion would have been met and the substantial judgment, especially the $1,000,000 punitive damage award, would have likely stood.

The case is Donegal Associates vs. Christie-Scott LLC, it can be found here.