Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

A Landlord’s Duty to Mitigate in Washington, D.C., Maryland and Virginia

Under common law, a landlord had no duty to accept or procure a new tenant in order to mitigate damages (i.e., take reasonable action to avoid additional injury or loss) resulting from a tenant's breach of a lease, including with respect to an abandonment or refusal to occupy its premises. The rationale for this traditional view arose from the characterization of a lease as a conveyance of a real property interest, and not as a contract. In recent years, many states have enacted statutes applicable to residential landlords that impose a duty to mitigate damages.   There is no clear consistency, however, in the law regarding a commercial landlord's duty to mitigate damages. The modem trend, followed in approximately half of the states, is to require commercial landlords to mitigate damages. This modern view characterizes the lease as a contract rather than a conveyance of real estate, and it is an established principle of contract law that parties to an agreement have a duty to mitigate their damages. There are certain exceptions to the historical common law view that a landlord has no duty to mitigate, which in different variations, are currently recognized by some of the "traditional view" states. One exception imposes a duty to mitigate once the landlord re-enters the premises following an abandonment by the tenant. There are different standards as to what constitutes re-entry. For example, merely accepting the keys to the premises or keeping the premises in good repair would not typically be considered a re-entry. A second exception imposes a duty to mitigate on a landlord if the lease contains the common "re-entry clause," which permits the re-entry of the premises following abandonment of the premises by the tenant. The District of Columbia, as discussed below, is among the jurisdictions that follow this exception. 

Among the states that impose the duty to mitigate on commercial landlords, there is no consensus as to when, or how, that duty is met. Further, there is no consensus among the states as to whether the landlord or the tenant has the burden of proof regarding the landlords efforts to mitigate damages. Typically, the landlord does not need to re-let the premises in order to satisfy the duty to mitigate. Instead, the landlord must only exercise reasonable diligence by taking steps such as advertising and engaging the services of a broker.

It is an important reminder to note that in the states that do not impose a duty on a commercial landlord to mitigate damages following a default by tenant, the parties can agree to the contrary in the lease. The default law only comes into play absent clear language in the agreement. Even in some states that do impose a duty to mitigate, the landlord and tenant can usually agree to negate such a duty contractually provided there is no violation of public policy. Commercial landlords and tenants are thus better served by agreeing on the respective rights of each party in the lease document, and it is crucial that the parties negotiating and drafting the lease understand the governing law. The laws of the District of Columbia, Virginia and Maryland relating to the duty to mitigate will be discussed more fully in Parts II, III  and IV to follow. 

Note that the article that is the basis for this post first appeared in the October, 2011 issue of Commercial Leasing Law & Strategy.      

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A Virginia federal court has ruled that by proactively replacing defective drywall rather than waiting to get sued and found liable, a contractor was left without liability insurance coverage. This decision should send shivers down the spine of not just contractors, but also owners and developers.

The builder, Dragas Management, built 70 houses in the Tidewater Virginia area with Chinese drywall. After it received multiple reports of health symptoms and property damages, Dragas filed claims on multiple liability and umbrella insurance policies. It also stated in writing to the carriers that it was planning on beginning a remediation protocol and forwarded the same to the carriers. Four home owners filed suit against Dragas and later voluntarily dismissed the cases based on the remediation protocol.

Initially, both insurance companies denied coverage and one filed a declaratory judgment suit. Eventually, one carrier agreed to defend Dragas subject to a reservation of rights. Dragas in turn claimed it was entitled to coverage for its remediation costs. The carriers argued that because the liability policies obligated the insurers to pay damages for which the builder became legally obligated to pay, the builder’s voluntary remediation plan was not covered under the policies.

The recent decision is actually round three of this issue in the case. The trial court initially agreed with the insurance carriers and found that Dragas’ complaint seeking coverage failed to state a claim. In round two, Dragas’ amended complaint survived a motion to dismiss by alleging more facts surrounding the threats of litigation by the homeowners as justification for its remediation protocol. Third time being the charm, on summary judgment the court ruled that in fact there was no insurance coverage. The mere threat of litigation did not rise to the level of a “legal obligation to pay”, so there was no insurance coverage. As stated by my good friend Chris Hill at Construction Law Musings, apparently good deeds still go punished.

While this decision may be correct from a strict language reading, the policy and industry implications are just horrible. This result basically states that to keep your insurance coverage intact, you cannot fix the problem, mitigate damages, and remove the condition that may even be creating significant personal injuries to occupants as alleged in these drywall lawsuits. This would seem to be an arena where the General Assembly in Virginia can and should pass a statute that affords some level of cushion to builders for doing the right thing.
 

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A decision issued this month by the Supreme Court of Virginia, Kaltman v All American Pest, answers a question often debated by Virginia lawyers regarding the economic loss rule.  The case also may contain a hidden Trojan horse to contract defenses that everyone should pay attention to.

As we have discussed here on several occasions, the economic loss rule is a critical concept in Virginia construction law.  Stated simply, a party cannot sue under Virginia law for economic losses without establishing they have a contract.  Another case and its progeny, Richmond v. McDevitt Street, ruled that a plaintiff cannot sue in tort for a duty assumed solely by contract.

In Kaltman, a worker failed to properly clean his equipment after a commercial job.  The next day, he used the same equipment on a residential home, including on porous surfaces.  The result was a high-powered commercial pesticide was used on home despite it being inappropriate for residential use.  Despite multiple rounds of cleaning, the owners could not remove the pesticide smell from the home.  The owners claimed personal injuries and property damage from their home being rendered uninhabitable by the smell.

The defendants request that the trial court dismiss the case based on the economic loss rule barring tort claims.  The court agreed.  On appeal, the Supreme Court reversed and found that the owners could allege an independent tort duty to protect against personal injury and property damage.  While the court threw out the willful and wanton conduct allegations, it allowed both negligence and negligence per se to survive.

Why does it matter if you can sue in both contract and tort?  I can think of several strategic and practical reasons:

1. The tort claims may more easily trigger insurance coverage;
2. The tort claims may escape the net of contractual notice of claims provisions; and
3. The tort claims may escape the restrictions of limitations of liability clauses.
4. The tort claims may allow broader damages more easily than contract claims.

Image by US Air Force

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We delve into a more legal, technical and lengthy post this week for a good reason — a recent decision from a Virginia trial court (PDF of decision) points to a new avenue for claims by buyers of real estate in Virginia.

Virginia generally looks to the sales contract to evaluate liability. Sales contracts often have very limited warranty and disclosure obligations placing the buyer into the position of "caveat emptor," or let the buyer beware. Fraud claims have traditionally operated as a separate path to liability; however, fraud claims are notoriously difficult to allege prove. They require the buyer to allege claims with extreme specificity and prove them to the elevated standard of "clear and convincing evidence" rather than a simple preponderance. Fraud claims also exclude liability for statements of opinion or future performance.

A decision from Charlottesville, just reported this week by Virginia Lawyer's Weekly (VLW subscription only) allowed a new potential claim to survive the initial pleading stage. A buyer of a residence suffered flooding caused by a clogged drain of a neighboring property. The buyer learned that the drain had clogged and caused flooding of the residence several times before the purchase. The purchase contract contained a home inspection contingency, but the inspection did not reveal the problem. The sellers and agent did not disclose the problem.

The buyer sued the real estate agent who was also a partial owner and thus seller of the property. The buyer included claims for fraud, constructive fraud and also for a violation of the agent's statutory duty to disclose known property defects contained in Virginia Code § 54.1-2131(B). On motions, the court dismissed the fraud and constructive fraud claims finding there was no showing of active concealment of the flooding as opposed to mere lack of disclosure. The court permitted a count based on "Breach of Statutory Duty to Disclose Material Adverse Facts" based on the code section.

This case may present a novel situation in that the agent was also a partial owner and thus seller of the property. The statute does not create a specific cause of action. A prior 2004 case from Loudoun County (VLW subscription only) had ruled the statute does not allow a separate cause of action. Agents and sellers should beware of this case as it may provide a complete end run around the contract and traditional concepts of caveat emptor.

Originally posted at the Washington Business Journal, reprinted with permission.

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Virginia's General Assembly has passed a bill that, among other things, raises the upper limit of cases that may be filed in the General District Court.  This increase will potentially make it easier to try certain matters more cost effectively moving forward.

General District Court is a court not of record with very limited discovery, i.e. no access to depositions or interrogatories and even only limited means of obtaining documents and witnesses via subpoena.  While this naturally limits the parties' ability to evaluate the case and evidence, it dramatically reduces the potential legal fees associated with litigation.  At the current time, General District Court has had concurrent jurisdiction with circuit court for matters that are between $4,500 and $15,000.

The bill passed by the General Assembly raises the upper limit on General District Court to $25,000.  While this does not completely solve the challenges faced when trying to handle cases cost effectively, it certainly makes it easier to file suit on some smaller cases.

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In October 2010, Henry Gifford filed a lawsuit against USGBC alleging misrepresentation claims against USGBC and some of its individual founders regarding its LEED rating system. The crux of the suit centers on Gifford’s claims that USGBC and the LEED green building rating system makes false promises about energy performance of LEED buildings. The original complaint named Rick Fedrizzi, Rob Watson and other individuals as defendants, included misrepresentation style claims, and also included monopolization anti-trust based claims.

On Monday, Gifford and the other plaintiffs filed an Amended Complaint. Unlike the original claims, which included class action claims, the new lawsuit focuses on false advertising and consumer protection act claims. The new complaint drops the anti-trust and class action claims. They also dropped the individual defendants.

Energy performance has been an open sore for LEED that critics have pointed to, from the New York Times poking at the energy performance of a courthouse in Ohio to the USGBC’s own regional case study showing the energy usage was wildly different in performance compared to design modeling in Illinois. USGBC had already pushed through LEED for New Construction 3.0 which shifted credit focus far more towards energy issues than version 2.2.

The plaintiffs may have a difficult time demonstrating that they individually were harmed and have standing to sue. That does not mean that disconnects between energy performance and modeling are not a threat to USGBC. Indeed, the marketplace may present a greater threat to USGBC and LEED maintaining its current preeminence.

The advent of green building codes such as IGCC and ASHRAE 189.1 certainly represent a significant potential shift that is coming. Energy Star is already available for owners interested in focusing on actual energy performance as opposed to design modeling. Actual energy performance of buildings will occupy a greater focus as energy prices inevitably go up in the future. Design and construction standards, certification systems, and codes that are directed towards improving energy performance in the built environment would seem to have a better chance at ultimately prevailing over theoretical modeling.

Originally published in the Washington Business Journal, reprinted by permission.
 

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Arlington County has been widely criticized for its aggressive lawsuit over the proposed Interstate 395 HOT lanes expansion, which includes allegations that individual state and federal officials committed civil rights violations in approving the project. In a time of significant economic troubles and governmental budget challenges, the county has reportedly paid over $1 million in legal fees advancing this case.

The county may now be reaping an ugly harvest from the negativity it is sowing. Arlington County, with the support of the business community and in particular the Arlington Chamber of Commerce, is currently seeking renewal of a transient occupancy tax that charges Arlington hotel guests and uses those funds directly to promote tourism. In a hearing on the bill in front of the General Assembly’s House Committee on Finance chaired by Del. Timothy Hugo, R- Fairfax.

Del. Hugo reportedly punted on action on the bill until a representative of Arlington County would appear and defend the County’s action on the HOT lanes lawsuit.

The Washington Post quoted Del. Hugo yesterday as saying, "If they have so much money to spend on frivolous, intimidating, abusive lawsuits on private individuals," then the tax is not needed. The Post indicates further that Del. Hugo filed three budget amendments prohibiting state funding for the Columbia Pike Streetcar produce, reducing Arlington transportation funding, and requiring an audit of Arlington’s road maintenance funding.

The Chamber and others have tried to get Arlington to drop this suit. I have previously been strongly critical of the Arlington lawsuit, especially the civil rights claim stating they should have avoided the suit “instead of further killing Arlington’s credibility in Richmond.” That appears to be exactly what has happened but the County does not seem to appreciate this prescience. This lawsuit, particularly the civil rights claims, needs to end. Still, picking this bill as the target for Richmond’s ire seems like misplaced aggression.

Reprinted with permission from the Washington Business Journal

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Last week EPA issued its "pollution diet" for the Chesapeake Bay. The total maximum daily load (TDML) of various materials is established by EPA in the diet and includes a 25% reduction in nitrogen, a 24% reduction in phosphorous, and a 20% reduction in sediment according to Engineering News Record (subscription only). The plan also includes annual total watershed limits.

This announcement was tied to EPA's express approval of Virginia's state Watershed Implementation Plan (WIP). A statement issued by Virginia Governor Bob McDonnell stated in part, "[T]he approved plan balances the important environmental protection concerns with the need to protect jobs in agriculture and farming. While we maintain our concern about aspects of the EPA watershed model and enforcement authority, as well as the significant additional public and private sector costs associated with plan implementation, we believe Virginia's plan will make a significant contribution to improving water quality in the Bay."

The efforts at EPA to regulate stormwater run-off from development has been a topic we have covered here previously. EPA regulatory junkies will already know that the agency announced in December its plans to move forward with standards regarding greenhouse gas emissions from fossil fuel power plans and petroleum refineries. Certain permitting requirements on stationary sources, in addition to GHG emission regulations of some vehicles, kicked in on January 2, 2011.

It is a tough balancing act between environmental regulation and the economy. The economic climate has battered the construction and development industry and while there are some modest signs of improvement, particularly locally, it is not a explosive market. Similarly, the Bay shows some signs of improvement according to the 2010 State of the Bay report issued by the Chesapeake Bay Foundation, but continues to by a "system dangerously out of balance". Hopefully we can manage the path between Scylla and Charybdis and get this right.

Reprinted with permission, originally published at the Washington Business Journal.

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Real estate lawyers and developers know that overcoming NIMBYism is a huge challenge. We are finding that even after approval, you still may face other hurdles including neighbors or even your business competitors challenging or appealing your zoning or permit approval.

Virginia Lawyer’s Weekly recently reported that the Supreme Court of Virginia issued an “unusual order” ... “acting with uncommon speed” when it ordered a halt to two planned local government hearings in Prince William County in such a case.

Spectrum Healthcare obtained zoning and permit approval and started construction of a health care facility as part of a bid for a federal government contract. A competitor of Spectrum, CRA, lost out on the federal contract award and filed a bid protest. CRA separately requested a zoning interpretation from local officials that the use of the facility would violate local ordinances. The zoning administrator rejected CRA. CRA then tried to “appeal” that interpretation to the local Board of Supervisors and Board of Zoning Appeals (BZA).

Spectrum asked the local circuit court to step in and issue an injunction stopping the CRA appeals. The circuit court refused finding that Spectrum should first exhaust its administrative remedies. Spectrum then filed an expedited review request to the Supreme Court of Virginia. This request resulted in the rapid order from the court ordering a stay of the BZA and Board of Supervisors hearings pending the circuit court’s complete review.

The standard in Virginia is that only an “aggrieved person” may appeal a “determination” of a zoning administrator. Even beyond the Spectrum case, I have started to hear rumblings of other parties aggressively attacking zoning and permit decisions, including properties which are not adjoining or even nearby but which instead involve business competitors. We can expect this issue to continue to percolate, and possibly be the topic of legislation soon. Be warned that approval may not be the end of challenges.

(Full disclosure: My colleague, Raighne Delaney, represents Spectrum Healthcare in this case.)

Reprinted with permission from the Washington Business Journal.

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