3601 Group Inc. v. Alfalfas Northwest
DO NOT CITE. SEE RAP 10.4(h).
Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 51329-0-I
Title of Case: 3601 Group Inc., Apellant v. Alfalfas Northwest,
et al. , Respondents
File Date: 12/01/2003
SOURCE OF APPEAL
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Appeal from Superior Court of King County
Docket No: 00-2-27456-4
Judgment or order under review
Date filed: 10/09/2002
JUDGES
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Authored by Anne L Ellington
Concurring: Ronald E. Cox
Susan R. Agid
COUNSEL OF RECORD
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Counsel for Appellant(s)
Vincent T. II Lombardi
Short Cressman Burgess PLLC
999 3rd Ave Ste 3000
Seattle, WA 98104-4088
Kenneth Wendell Masters
Attorney at Law
241 Madison Ave N
Bainbridge Island, WA 98110-1811
Charles Kenneth Wiggins
Attorney at Law
241 Madison Ave N
Bainbridge Island, WA 98110-1811
Counsel for Respondent(s)
H. Troy Romero
Romero & Montague PS
155 108th Ave NE Ste 202
Bellevue, WA 98004-5901
IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
3601 GROUP, INC., a Washington ) No. 51329-0-1
corporation, )
) DIVISION ONE
Appellant, ) ) v.
) )
ALFALFA'S NORTHWEST, INC., )
a Colorado corporation; ALFALFA'S, )
INC., a Colorado corporation; and )
WILD OATS MARKETS, INC., a )
Delaware corporation, ) UNPUBLISHED OPINION
)
Respondents. ) FILED:
)
ELLINGTON, J. The only question here is whether the jury was properly
instructed as to damages flowing from breach of a commercial lease.
Because the court instructed the jury to decide a question upon which no
evidence had been presented, and the record indicates the instruction may
have affected the verdict, we reverse and remand for a new trial.
BACKGROUND
3601 Group, Inc.1 entered into a commercial lease with Alfalfa's
Northwest, Inc. (Alfalfa's), which Alfalfa's later breached. Following the
breach, 3601 Group signed a long-term lease with its first replacement
tenant, Thrifty Payless. Payless also broke its contract, however, and
eventually settled its obligations by paying 3601 Group $1.5 million. 3601
Group later entered into a third lease with Fremont Fresh Market, a
separate company having ownership in common with 3601 Group. 3601 Group
then sued Alfalfa's Northwest for breaching the lease. Summary judgment
was granted as to liability, and Alfalfa's does not appeal that ruling. A
jury trial was set to decide damages.
Pretrial Rulings. With respect to remedies for breach of a commercial
lease, a landlord in Washington has two options. The landlord may
terminate a lease and relet to his own account, in which case the tenant's
obligation for unaccrued rent ends when the new tenancy begins.2 On the
other hand, the landlord may elect to enforce the lease, and relet on the
tenant's behalf, in which case the tenant remains liable for rent for the
balance of the lease term (less rents actually received), and for
reasonable costs of reletting.3 There is no requirement that the landlord
notify the tenant which remedy is chosen if the lease preserves both
options. Here, the lease provided that 3601 Group could, at its option,
treat the leases as terminated and relet the property for its own benefit,
or hold Alfalfa's to the lease and relet on Alfalfa's behalf. The lease
contained no requirement that 3601 Group notify Alfalfa's which remedy it
chose.
Before trial, Alfalfa's proposed a jury instruction that 3601 Group had
elected the first of these remedies unless it had given Alfalfa's specific
notice to the contrary.4 In response to this proposed instruction, 3601
Group moved in limine to preclude Alfalfa's from presenting any evidence or
argument on this theory. In the same motion, 3601
Group argued in the alternative that the court should give 3601 Group's
version of the instruction. That instruction gave the jury certain factors
to consider in making its determination, which would necessarily lead to
the conclusion that 3601 Group had elected to hold Alfalfa's to the lease.5
The trial court issued an oral ruling on this motion, which both
parties apparently treated as granting 3601 Group's motion to preclude
Alfalfa's from presenting the lease termination theory to the jury.
Accordingly, neither party addressed the issue or introduced evidence on
the matter.
Instructions. Following trial, Alfalfa's proposed instruction was
again considered.6 3601 Group once more objected that the jury should not
be asked to decide which remedy 3601 Group had elected, and further argued
that Alfalfa's proposed instruction did not accurately state the law, was
not supported by sufficient evidence, and was inconsistent with the court's
pretrial ruling. The court agreed that Alfalfa's proposed instruction was
an inaccurate statement of the law.7 The court also acknowledged that no
evidence existed to support Alfalfa's theory that 3601 Group had elected to
terminate the lease for its own benefit. Nevertheless, the court decided
to put the issue to the jury, and crafted an instruction requiring the jury
to determine which remedy 3601 Group had elected.8
In the face of this instruction, 3601 Group requested that the court
admit additional portions of Exhibit 83, a three-page letter written by
3601 Group's counsel to Alfalfa's counsel shortly after the breach. During
trial, the court had admitted only two statements from the letter as
relevant to mitigation: 'L & M Partners {3601 Group's predecessor} has
several very interested prospective tenants for the Fremont site which
Alfalfa's promised to lease,' and 'It is very likely that a new lease could
be in place in a matter of weeks.'9 The rest of the letter explained that
if Alfalfa's would sign a subordination agreement that would protect the
3601 Group's construction financing, 3601 Group would 'use every effort to
find a new tenant so that it can release Alfalfa's from the leases.'10
Should Alfalfa's refuse to sign the agreement, however, the letter stated
that 3601 Group would 'have no recourse but to immediately commence a
lawsuit . . . for breach of contract' and that the potential damages 'far
exceed lost rents, but will include all damages which result from the
breach.'11 These portions tended to demonstrate 3601 Group's intent to
enforce the terms of the lease.
The court refused to admit additional portions of Exhibit 83. In closing
argument, Alfalfa's used the admitted portion to argue that 3601 Group's
failure to obtain substitute tenants within a couple of weeks was evidence
of its intent to terminate the lease and relet for its own benefit.
The jury concluded 3601 Group had incurred damages as a result of
Alfalfa's breach. In the special verdict the jury found positive damages
in seven of eight enumerated categories (e.g., tenant improvements,
interest costs, etc.). But the jury offset these damages by a negative
figure of almost $1.3 million under the category 'Realization of Rents.'
This resulted in a net award of <$579,620>.
An offset was authorized by the instructions only if it constituted
'damages that {3601 Group} should not recover . . . as a result of {its}
failure to mitigate its damages.'12 3601 Group moved for judgment as a
matter of law or a new trial, arguing, inter alia, that the election of
remedies instruction confused the jury, misstated the law, and was not
supported by substantial evidence, and that the verdict was inconsistent
with the law and was so inadequate as unmistakably to indicate it was the
result of passion or prejudice. The court denied the motion and entered
judgment on the verdict.
DISCUSSION
A challenge to jury instructions is reviewed for abuse of discretion.13
Instructions must be supported by substantial evidence, must allow the
parties to argue their theories of the case, and must properly inform the
jury of the applicable law.14 It is prejudicial error to instruct the jury
on a question upon which there is not substantial evidence to support a
decision.15
3601 Group argues the remedy instruction was improper, because the court's
pretrial ruling excluded evidence on that very issue. Alfalfa's contends
the ruling merely clarified that Alfalfa's could not argue that 3601 Group
had itself breached the lease. Any ambiguity in the court's words,
however, is belied by the parties' understanding of the ruling, as
evidenced by their clear conduct at trial.
In its pretrial motion, 3601 Group requested exclusion of any evidence or
argument that its post-breach actions or omissions indicated a decision on
its part to treat the leases as terminated and to relet the premises for
its own benefit, thereby releasing Alfalfa's from future rent obligations.
3601 Group argued Alfalfa's lease termination theory was an affirmative
defense that was neither adequately pleaded nor preserved, and that the
argument was simply an attempt to relitigate liability. Alfalfa's
responded it had properly pleaded and preserved this affirmative defense
and should be permitted to argue the theory to the jury, but characterized
the theory as part of its defense that 3601 Group failed to mitigate its
damages.
The court first stated, 'The liability issues will not be before this
jury.'16 The court went on to say, however: 'The issue or issues relating
to all of the affirmative defenses that were, in the Court's view, properly
pled, will be before this jury.'17 By this the court appeared to accept
that Alfalfa's was attempting not to relitigate liability, but merely to
advance its affirmative defense of failure to mitigate.
But the court's decision became less clear when it continued, 'I will not
allow this jury to be presented with evidence that is sought to be used to
establish that somehow the {3601 Group} terminated this lease by their
actions.'18 This ruling would seem to grant exactly the request made by
3601 Group, and was bolstered when the court addressed Alfalfa's pretrial
request to admit Exhibit 83, the letter between the parties' counsel
stating that replacement tenants might be found within weeks of Alfalfa's
breach. The court reserved ruling on the exhibit, indicating that its
decision would depend on whether Alfalfa's offered it as evidence of
failure to mitigate or as evidence that 3601 Group elected to treat the
leases as terminated. The court later admitted only the parts relevant to
mitigation.
Finally, the court concluded:
But at this point I will grant {3601 Group's} Motion in Limine {to exclude
Alfalfa's lease termination theory}, I guess, in part and reserve in part.
I'm granting it to the extent of precluding any reference in opening
statement to {Alfalfa's} theory . . . that {3601 Group} breached this lease
by their actions. Their actions themselves, however, are still admissible,
so that's part of the Motion in Limine that I'm not granting, I guess.19
While the court expressly granted 3601 Group's motion, it stated that what
was precluded was reference to Alfalfa's theory that 3601 Group 'breached
this lease by their actions.' The court did not expressly mention
Alfalfa's theory that 3601 Group elected to terminate the lease, retake
possession of the property, and relet it for 3601 Group's own benefit which
was the subject of the motion.
The parties each argue the interpretation of the ruling that supports
their respective positions on appeal. But whatever confusion appears on
the cold record, it is apparent that both parties treated the ruling as
excluding reference to Alfalfa's termination remedy theory. This is so
because neither party referred to the theory during opening remarks and
neither presented any evidence relating to this issue during trial.
After the close of evidence, Alfalfa's argued that certain evidence--
including Exhibit 83 supported giving the proposed remedy election
instruction. But the court rejected Alfalfa's arguments and conceded that
no evidence supported a conclusion either way. The court also repeatedly
remarked that the jury would need to be instructed as to what factors to
consider in deciding the issue. Nevertheless, when the court could not
determine any suitable factors to include in the instruction, it simply
gave an instruction directing the jury to decide the issue, without
explaining how it should do so. The court then denied 3601 Group's request
to admit additional portions of Exhibit 83. In closing argument, Alfalfa's
used the exhibit as evidence that 3601 Group had elected to treat the lease
as terminated and relet the premises for its own benefit:
So when the plaintiff made the decision not to put in these very interested
prospective tenants in a couple of weeks . . . it decided, I am going to do
this for my own account. As the judge has instructed you on the law, that
means that Alfalfa's is released of all future rent obligations from the
time that tenant starts paying rent.20
Evidence to support an instruction must rise above speculation and
conjecture.21 Contending the evidence was sufficient, Alfalfa's points to
the lease itself, which established the landlord had the two remedies
available; to redacted Exhibit 83, which indicated 3601 Group had other
prospective tenants and could have a replacement lease signed within weeks;
to the 3601 Group's failure to relet the property for several months; to
3601 Group's lease to its owner ('himself') in the form of Fremont Fresh
Market, a separate company with common ownership, after Thrifty Payless
bought out of its lease; and the fact that 3601 Group waited several years
before filing suit.
Even cumulatively, however, these facts do not rise above 'mere speculation
and conjecture' that 3601 Group elected one remedy over the other.22 As the
court repeatedly acknowledged, there was no evidence to support the
instruction. In the absence of such evidence, the decision to instruct the
jury to decide which remedy 3601 Group had elected was manifestly
unreasonable, and therefore was an abuse of discretion.23
Alfalfa's argues that any error was harmless, first because the jury could
have reached the same result by concluding that 3601 Group failed to
mitigate its damages, and second because so long as the jury offset the
entire $1.5 million from Payless, the net award would be a negative number,
regardless of the remedy theory. But the first argument assumes the jury
accepted certain evidence and rejected other evidence, which we may not do
on review, and the second argument ignores the fact that the jury had to
decide not just how much of the settlement should be offset, but also the
total against which any offset was calculated a figure which would have
changed significantly if the jury found 3601 Group relet to its own account
at some point. Indeed, extrapolating from the amount awarded as late fees,
3601 Group's expert concluded that the likely
explanation for the verdict is that the jury decided 3601 Group elected to
terminate the lease and relet to its own account when it leased to Fremont
Fresh Market. The expert's calculation matched within a few dollars the
result obtained by the jury.
Whether the jury could have come to the same or to a similar verdict absent
the erroneous instruction is not the question. A harmless error is one
that is trivial and in no way affected the outcome of the case.24 Because
we cannot say that the court's error in giving the instruction had no
effect on the outcome, it was not harmless. We reverse and remand for a
new trial.
Reversed.
WE CONCUR:
1 3601 Group acquired the property in question from L & M Partners, a
company with which 3601 Group had common ownership. L & M Partners was the
original lessor, but for the purposes of this opinion, we follow the
practice of the parties in their briefing, and refer to the lessor as 3601
Group.
2 Hargis v. Mel-Mad Corp., 46 Wn. App. 146, 151, 730 P.2d 76 (1986).
3 See id. at 153 (quoting Restatement (Second) of Property sec. 12.1 cmt. i
(1977)).
4 This instruction is not part of the record on appeal. We rely on the
description in the parties' briefs.
5 3601 Group's proposed instruction provided, in pertinent part:
To determine whether the landlord relet the space for its own account, you
should consider the following factors: Did the parties agree in their
lease that Alfalfa's would be liable for 3601's damage in the event of a
breach by Alfalfa's? or (2) Did 3601 give notice to Alfalfa's that it would
relet the premises and hold Alfalfa's responsible for damages resulting
from Alfalfa's breach?
If your answer is 'Yes' to either question, then you shall decide that 3601
relet the space for Alfalfa's account.
If your answer is 'No' to both questions, then you shall decide that 3601
relet the space for its own account.
A tenant who contends the landlord chose to relet the property for the
landlord's own account . . . has the burden of proving the landlord made
that choice.
Clerk's Papers at 314.
6 It is not clear from the record why this issue was revisited.
7 Alfalfa's proposed instruction relied on a misinterpretation of Pollock
v. Ives Theatres, 174 Wash. 65, 24 P.2d 396 (1933), where the court held a
landlord may seek damages after acceptance of surrender and termination by
clearly manifesting an intent to do so, even when the contract does not
specifically provide this option. The case does not address a situation
where, as here, the lease does specifically include this option.
8 This instruction provided:
When a tenant breaches a lease and abandons the premises, the landlord has
a duty to mitigate the tenant's damages by reletting the property. A
landlord may choose (1) to complete surrender and termination by re-
entering the premises and reletting 'for his own account'; or (2) to re-
enter and relet 'for the tenant's account,' charging to the tenant any
difference between his agreed rent and the rent received from the
replacement tenant.
Under option 1, if the landlord accepts the tenant's surrender of the
premises and relets the property for its own account, the tenant's
liability for unaccrued rent ends when the landlord finds a new tenant for
the premises. The tenant is only liable for unpaid rent until the premises
is actually relet to a new tenant who begins paying rent, plus the
reasonable costs of reletting the premises, such as real estate commissions
and reasonable costs incurred for renovating or improving the space for any
new tenant.
Under option 2, the tenant remains liable for future rent for the balance
of the lease term, the reasonable costs of reletting the premises, and
reasonable costs of renovating or improving the space for any new tenant,
amortized over the term of the new lease, all of which amount is to be
offset by any rent received from future tenants.
If you determine that option 2 was chosen by the landlord, then in your
determination of damages you should use the following measure of damages
for any amounts proven by 3601 Group:
(1) The full amount of the rent and other payments Alfalfa's was obligated
to pay to 3601 Group under its leases from the time the rent and other
payments were due to commence until 3601 Group secured another tenant for
the space and it began paying rent. Other payments may include but are not
necessarily limited to so-called 'triple-net' charges and late fees due
under the leases;
(2) Any lost rental amounts due on the parking lot;
(3) The difference between: a) the rent and other payments Alfalfa's was
obligated to pay to 3601 Group, under the term of its leases; and b) the
amount of rent and other payments that 3601 Group actually received from
other tenants it obtained to replace Alfalfa's;
(4) 3601 Group's reasonable expenses it incurred in renovating or
improving the space for any new tenant, amortized over the term of the new
tenant's lease; and
(5) 3601 Group's reasonable expenses it incurred in reletting the space,
including real estate commissions.
Clerk's Papers at 704-05.
9 Brief of Appellant, App. D; Ex. 83.
10 Id.
11 Id.
12 Clerk's Papers at 724.
13 Goodman v. Boeing Co., 75 Wn. App. 60, 68, 877 P.2d 703 (1994).
14 State v. Riley, 137 Wn.2d 904, 908 n.1, 909, 976 P.2d 624 (1999).
15 Manzanares v. Playhouse Corp., 25 Wn. App. 905, 910, 611 P.2d 797 (1980).
16 Report of Proceedings (RP) (July 22, 2002) at 22.
17 Id.
18 Id. at 23.
19 Id. at 24-25.
20 RP (Jul. 26, 2002) at 215.
21 See Bd. of Regents of Univ. of Washington v. Frederick and Nelson, 90
Wn.2d 82, 86, 579 P.2d 346 (1978).
22 See id.
23 See State ex. rel. Carroll v. Junker, 79 Wn.2d 12, 26, 482 P.2d 775
(1971).
24 Crittenden v. Fibreboard Corp., 58 Wn. App. 649, 659, 794 P.2d 554
(1990).