Landlord Wins Rent/Counsel Fees Due to Lease Language and Tenant Loses at “Shell Game”

by Scott Reid

Thomas Onder
Shareholder, Stark & Stark

Well-written leases can help you make money. The New Jersey Appellate Division has issued an unpublished decision that bodes well for commercial landlords, who get stiffed by unpaying tenants that continue business under a different corporate name. In 40 Eisenhower Drive LLC v. Karoon Capital Markets Inc. and KFS Capital Markets Inc., A-2620-12T4 (App. Div., Dec. 11, 2014), the trial court awarded the landlord $155,485 for unpaid rent, plus $204,667 for counsel fees against not only the tenant, but the tenant’s corporate successor. The case was affirmed on appeal. The case is important for landlords to ensure successful collection against an unpaying tenant, especially ones playing a “shell game” with their names.

This case involved a breach of an office lease; the tenant left the premises, failed to pay rent and then proceeded with business under another name. 40 Eisenhower Drive LLC (the landlord) and Karoon Capital Markets Inc. (the tenant) entered into a 61-month lease; the tenant vacated in 2008 and made no rent payments after leaving the premises. No written lease agreement existed with KFS Capital Markets Inc. (the corporate successor), with whom the tenant did business under after leaving the premises.

In 2009, the landlord filed suit against the tenant for unpaid rent, as well as against the corporate successor under an alter ego theory, not a successor liability theory. Defendants filed an answer and counterclaim alleging: 1) breach of lease for: a) leasing the space to another securities firm, despite a lease provision prohibiting the same; b) failing to make agreed-upon renovations; c) violating the covenant of quiet enjoyment; and d) breaching the covenant of habitability with a broken air conditioning system and flooding; 2) violating the covenant of good faith and fair dealing; 3) fraud; 4) consumer fraud; and 5) failure to mitigate damages.

The trial court found that the tenant was liable for all rents due and owing. Further the trial court found that although the landlord did breach the lease, the lease did not materially affect and/or impair the tenant’s ability to conduct its business at the premises. More importantly, the trial court found that even though a successor liability claim was not filed, nor the complaint formally amended, the successor liability claim could be allowed against the corporate successor.

The Appellate Division affirmed the trial court, holding that the successor liability claim was properly noticed during the discovery stage, with parties engaging in discovery relevant to a successor liability claim. Further, the Appellate Division affirmed that evidence was introduced at the trial stage regarding the successor liability claim without objection. As New Jersey is a notice pleading state, such actions provided adequate notice of the claim.

For landlords, this decision illustrates the importance and value of preparing good leases and cases, both before and during litigation. Here the lease language was crucial in ensuring judgment for the rent against the tenant, as well as all counsel fees.

Do you have all the language you need to win a lease dispute and recover counsel fees?

Further, should your lease language and procedures be improved and updated to maximize your opportunities for recovery for a breach and minimize your risks of loss if you breach?

Additionally, prior to filing suit on any matter, it is recommended that the landlord and their counsel thoroughly understand and prepare the case, looking at all claims that can be asserted. Here, the landlord’s counsel only asserts an alter ego claim in the complaint, but the court held that counsel adeptly ensured the successor liability claim for the real deep-pocket, the corporate successor, by asking the correct questions during discovery and at trial without any objection from the tenant or corporate successor. 

— Thomas Onder is a shareholder and member of Stark & Stark’s Commercial, Retail and Industrial Real Estate Group. He litigates commercial eviction and enforcement matters regularly in the Tri-State area, and writes on commercial real estate issues. He can be reached at (609) 219-7458 or by emailing [email protected].

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