Owner's Recovery Limited to Damage It Actually Suffered

Facts: The owner of two vacant warehouses, one of which had some interior office space, leased the buildings to a construction supply company that planned to convert the warehouses into a retail store. After demolishing the office space, the tenant halted renovations for economic reasons, and the property became rundown.

The owner sued the tenant for “waste” and breach of the maintenance and repair obligations in the lease, which ended in 2017 but had a renewal option. A California trial court ruled in favor of the owner and awarded it “cost of repair” damages of more than $1.2 million. The trial court calculated that amount based on the cost of the repairs the owner would have to make to the dilapidated property. The tenant appealed.

Decision: The appeals court reversed the trial court's decision and ruled in favor of the tenant.

Reasoning: The appeals court determined that the owner wasn't entitled to cost of repair damages for the tenant's alleged breach of the lease because: (1) the owner hadn't terminated the lease; (2) the lease hadn't expired; and (3) the tenant was still paying rent.

As the lessee of the space, the tenant continues to have a “possessory interest” in the leased property into at least 2017, while the owner as the lessor has only a “reversion interest,” the appeals court pointed out. It explained that under the terms of the lease and state law, an owner could not recover the cost of repair damages for a tenant's breach of its lease's maintenance and repair obligations when the lease had not expired or been terminated. Rather, the owner was limited to damages it actually suffered: injury to its reversion interest in the property. Additionally, to recover damages for waste while a lease remains in effect, an owner must prove that the tenant's actions caused damage that was “sufficiently substantial and permanent.”

Here, the tenant's actions didn't hurt the owner's reversion interest. Nonetheless, the owner collected the cost of repair damages. By collecting them without terminating the lease—and while continuing to receive monthly rent payments from the tenant—the owner had been “unjustly rewarded,” asserted the appeals court. The owner was “having and eating the proverbial cake,” it added.

• Avalon Pacific-Santa Ana, LP v. HD Supply Repair and Remodel, LLC, et al., February 2011