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Cheesequake Realty, L.L.C. v. Finkelstein

A-1877-08T3 (N.J. Super. App. Div. 2010) (Unpublished)

LEASES; SUBLEASES; UNJUST ENRICHMENT —Where a landlord has failed to seek to mitigate damages, the landlord may not collect damages from a tenant who abandoned its leased premises, but the landlord may still have a claim against a subtenant who remained on the premises without paying rent.

A gas station owner signed a ten year lease with a tenant. Under the terms of the lease, its tenant was to use the property solely to sell gasoline from a major oil refiner and to repair automobiles. The tenant’s performance was guaranteed by others. Toward the end of the lease, the tenant sub-leased parking spaces for three years without seeking the owner’s approval as required by the lease. The tenant vacated the premises before its lease expired, asserting a lease termination right due to circumstances where its gas supplier merged with another company, causing supply changes. The tenant had unsuccessfully negotiated acceptable terms with the new supplier. The owner rejected the tenant’s termination, advising it could sell unbranded petroleum products and that the guarantors would be liable for any breach of the lease. The parking spot sublessee continued to use the property without paying anyone for almost three years after the tenant, prior to its departure, had directed it to leave.

The lease required the tenant to deliver the property in good repair and safe condition. The tenant failed to clean out a storage area for waste oil. When the owner inspected the premises more than two years after the tenant departed, it found there were missing and broken ceiling tiles, bay lifts that were damaged, and a heating system that needed repair. The tenant acknowledged that it had not inspected the ceiling tiles or heating system before vacating the premises. The owner did not look for a new tenant until the tenant’s lease was about to expire, and put off any known inquiries. Also, there was no evidence of environmental damage or fuel leaks from tanks on the property during the tenant’s stay.

The owner filed suit to recover damages from the tenant, its guarantors under the lease, and the sublessee. The lower court, affirmed by the Appellate Division, dismissed the owner’s claim of breach of the lease and denied damages. It found that the owner had failed to make any effort to mitigate damages by seeking another tenant, and so could not claim rent due under the lease after the tenant surrendered the property. New Jersey law requires landlords to mitigate their damages following a tenant’s default.

With respect to claimed environmental damages, the lower court found there was no evidence of damage caused, or regulations violated, by either the tenant or its sublessee. The Appellate Division affirmed this ruling as well.

The lower court also awarded the owner an amount equal to the rent due from the sublessee under a theory of unjust enrichment, in that the sublessee received a beneficial use of the owner’s property for which it would be unjust to allow no payment. The Appellate Division affirmed this award, but vacated a prejudgment interest award on those rents, finding such an award was not mandatory when a claim is based on the equities of the situation and not based upon any duty owed and breached. The Court asked the lower court to consider and explain the basis for any amount of prejudgment interest awarded.

The Appellate Division also reversed the lower court’s judgment that had awarded the tenant return of its security deposit, finding that as this was a commercial lease, the deposit may be held not just as security for property damage, but also for the faithful performance by a tenant of all terms and conditions under the lease. The Court was mindful that the tenant admitted it had not checked the ceiling tiles or heating equipment and neglected to clean the storage facility.

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