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Gamesa Energy USA, LLC v. Ten Penn Center Associates, L.P.

Supreme Court of Pennsylvania

September 26, 2019

GAMESA ENERGY USA, LLC AND GAMESA TECHNOLOGY CORPORATION INC., Appellants
v.
TEN PENN CENTER ASSOCIATES, L.P. AND SAP V TEN PENN CENTER NF G.P. L.L.C., Appellees

          ARGUED: March 5, 2019

          Appeal from the Judgment of Superior Court entered on March 19, 2018 at No. 1635 EDA 2016 affirming in part and reversing in part the Order entered on May 20, 2016 in the Court of Common Pleas, Philadelphia County, Civil Division at No. 03768 March Term, 2013.

          SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

          OPINION

          DOUGHERTY, JUSTICE

         We granted discretionary review of this commercial landlord and tenant dispute to determine whether the Superior Court erred in holding the tenant was limited to damages for breach of contract and could not also recover the rent it paid following the landlord's breach, despite prevailing on its claims for both remedies at trial. After careful review, for the reasons that follow, we affirm.

         I. Background

         In 2008, Appellants, Gamesa Energy USA, LLC and Gamesa Technology Corporation, Inc. (Gamesa), entered into a commercial lease agreement (the Lease) to rent 35, 000 square feet of office space in Philadelphia (the Premises) from Appellees, Ten Penn Center Associates, L.P. and SAP V Ten Penn Center NF G.P. L.L.C. (collectively Ten Penn Center). The base terms of the Lease provided for a ten-year term ending September 2018, with annual rent escalating from $1, 113, 805 in year one to $1, 144, 470 in year ten, and a "tenant improvement allowance, " or per-square-foot credit, for Gamesa to build out the office space to its specifications.[1]

         Additional relevant provisions of the Lease are its terms setting forth criteria for subleasing and default. The Lease permitted Gamesa to sublease the premises, as long as Ten Penn Center approved of the arrangement. Specifically, the Lease provided, in pertinent part:

Tenant shall not . . . sublet all or any part of the Premises or permit the same to be occupied or used by anyone other than Tenant or its employees without Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. . . .

Lease, Art. 20.1 (emphasis added). The Lease required Gamesa to submit its sublease requests to Ten Penn Center in writing, including the following components: the proposed sub-lessee's name and address, a description of its business, its "most recent financial statement and other evidence of its financial responsibility, " its intended use of the premises, and the terms and conditions of the proposed sublease. Id. at Art. 20.2. Upon receipt of such a request, the Lease required Ten Penn Center to grant or refuse its consent to the proposed sublease within thirty days. Id. With regard to default, the Lease provided, in relevant part, "[i]t shall be an 'Event of Default' under this Lease if . . . Tenant vacates the Premises or attempts to remove or manifests an intention to remove any or all of Tenant's property from the Premises otherwise than in the ordinary and usual course of business . . . ." Id. at Art. 22 (emphasis in original). In the event of a default by Gamesa, the Lease entitled Ten Penn Center to terminate the lease, repossess the premises, accelerate the amount of rent owed for the remainder of the ten-year lease term, charge interest on overdue rent, and recover related attorney's fees. Id. at Art. 23.

         In May 2011, following Gamesa's submission of the information required under Article 20.2 of the Lease, Ten Penn Center approved a request to sublease approximately 15, 000 square feet, or forty percent of the Premises, to Viridity Energy, Inc. (Viridity) through August of 2018. N.T. 10/14/15, at 66-69. Ten Penn Center allowed Gamesa to use a portion of its improvement allowance to outfit the space for Viridity, after which point Gamesa's remaining credit balance was approximately $391, 000. Id. at 73.

         In April 2012, Gamesa informed Ten Penn Center it would be moving out of the Premises as part of a corporate consolidation, and would continue to pay its monthly rent and attempt to find a sub-lessee for the open space. Id. at 92-93. Gamesa vacated the Premises on May 18, 2012. Id. at 94-95. Viridity remained in the Premises under the terms of its sublease with Gamesa. Though Gamesa submitted its June 2012 rent payment eighteen days late, and its July rent two days late, the parties agree Gamesa continued to make all of its rent payments on time thereafter. Id. at 118, 139.

         On June 12, 2012, Gamesa submitted a request to Ten Penn Center for consent to sublease 5, 200 square feet of the Premises to Business Services International, LLC (BSI), a business entity comprised of two foreign corporations formed for the particular purpose of subleasing office space through Gamesa. Id. at 89-90; Trial Court Findings of Fact and Conclusions of Law, dated February 23, 2016, at 4 ¶13. The proposed BSI sublease anticipated rental payments totaling $265, 460 over a three-year term. N.T. 10/15/15, at 17-18. Ten Penn Center responded on June 26th, informing Gamesa it was in default of the Lease for vacating the Premises and, as a result, Ten Penn Center had no obligation to entertain the request to sublease. N.T. 10/14/15, at 102-104; Letter dated June 26, 2012, Trial Court Exhibit P-9. Ten Penn Center also noted Gamesa's late rent payment for June. Id. Nevertheless, Ten Penn Center provided comments and questions about the proposed BSI sublease, and requested BSI's financials, which had not been included with the initial request. Id; see Email and Attachments dated June 12, 2012, Trial Court Exhibit P-7. Via letter dated July 5th, Gamesa objected to the assertion a default had occurred, but provided Ten Penn Center with the requested information. Email dated July 5, 2012, Trial Court Exhibit P-13. On July 13th, Ten Penn Center reiterated its position asserting Gamesa was in default for vacating the Premises; however, Ten Penn Center proposed it would grant consent to the BSI sublease if Gamesa forfeited its remaining tenant improvement allowance. N.T. 10/14/15, at 124-25, 140-41. Thereafter, negotiations between the parties stalled, and the proposed sublease with BSI never materialized.

         On March 23, 2013, Gamesa filed a complaint against Ten Penn Center, asserting claims of breach of contract, tortious interference in business relationships, and unjust enrichment. Complaint at 9-14. Gamesa alleged Ten Penn Center materially breached the Lease by declaring Gamesa in default without basis; failing to accept or reject the sublease proposal within thirty days as required by the Lease; and unreasonably withholding or conditioning its consent to the sublease. Gamesa sought a declaration the Lease had been terminated as of the date Ten Penn Center declared Gamesa in default, and damages reflecting, inter alia, lost revenue associated with the proposed BSI sublease and return of all rent payments Gamesa made to Ten Penn Center since July 2012. In 2015, prior to trial, Ten Penn Center provided Gamesa with the remainder of its tenant improvement allowance, and Gamesa improved the unfinished portion of the Premises. N.T. 10/14/15, at 154, 178. Until and through the trial, Gamesa continued to pay its rent, accept sub-rent from Viridity, and attempt to recruit potential sub-lessees, including hiring brokers, developing marketing materials, and coordinating building access for prospective sub-lessees. Id. at 176-80.

         Following a non-jury trial, the trial court entered a verdict in favor of Gamesa, determining Ten Penn Center had breached the Lease in three specific ways: first, by advising Gamesa it was in default; second, by failing to approve or reject the proposed BSI sublease within thirty days of receipt of the request; and third, by unreasonably withholding, conditioning, or delaying its approval. Trial Court Findings of Fact and Conclusions of Law dated February 23, 2016, at 6, ¶¶24-25. The court noted Ten Penn Center did not declare a default of the Lease in April 2012 when it learned Gamesa would move out of the Premises, nor when it actually moved out on May 18, 2012, but declared the default only after receiving Gamesa's request for the BSI sublease, on June 26, 2012. Id. at ¶¶10-12, 22. The court found Gamesa had submitted a good faith and reasonable sublease application for BSI, noting the foreign corporations comprising BSI had a history of working in the United States and working together as well as with Gamesa, and provided references from the Governor's Office of International Business Development in support of their business development activities within the state. Id. at 4-5, ¶¶14-17, 20-21. The court further found Ten Penn Center's continuing claim Gamesa was in default resulted in Gamesa's reasonable belief it could not acquire a new subtenant while the validity of its own lease was unresolved. Id. at 6, ¶24.

         With specific regard to Ten Penn Center's declaration of default and its purported failure to accept or reject the sublease application within thirty days, the trial court concluded these defaults by Ten Penn Center constituted a material breach, as they prevented Gamesa from obtaining any additional subtenant, while Ten Penn Center continued to collect rent from Gamesa. Id. at 8, ¶3. In reaching this result, the court first determined Gamesa did not default on the Lease as it "did not have the requisite intent to abandon the Premises, " and continued to pay rent and occupy the Premises through its subtenant Virdity. Id. at 7-8, ¶2. In addition, the court concluded Ten Penn Center's conduct - specifically, its delay of subtenant approval, its attempt to renegotiate the tenant improvement allowance, its operating under a self-declared default without demanding immediate repossession of the Premises, and its continued collection of the full rent - did not conform to standards of good faith and fair dealing, and thus was relevant to determining the materiality of the breach. Id. at 8-9, ¶3, citing Restatement (Second) of Contracts §241(e) ("In determining whether a failure to render or to offer performance is material, the following circumstances are significant . . . (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing."). As a result, the court determined Ten Penn Center's breach was material and sufficient to terminate the Lease retroactively to July 22, 2012, the date when, by the trial court's calculation, Ten Penn Center failed to reject or approve the proposed BSI sublease after it had also wrongfully declared Gamesa in default.[2] Id. at 9, ¶4. For breach of contract, the court awarded Gamesa damages equal to the amount it would have received under the proposed three-year BSI sublease (totaling $265, 463 plus pre-judgment interest). The court also concluded Ten Penn Center was unjustly enriched in the amount of rent paid by Gamesa to Ten Penn Center from the July 22, 2012 Lease termination until the conclusion of trial, and awarded Gamesa additional damages of $3, 639, 202.87, i.e., the reimbursement of rents paid from July 22, 2012 through the end of trial. See id. at 9-10, ¶¶5-6.

         Both parties filed post-trial motions. Gamesa requested the court mold the verdict to include pre- and post- judgment interest, which the trial court granted. Ten Penn Center requested to supplement the trial record with evidence Gamesa had subleased space in the building after trial, and requested the court vacate judgment against it, but the trial court denied both requests. Ten Penn Center filed a praecipe to enter judgment on the entire verdict amount including damages for breach of contract and termination; judgment was entered, and Ten Penn Center timely appealed to the Superior Court.

         In its published opinion, a three-judge panel of the Superior Court affirmed the trial court's award of damages to Gamesa based on breach of contract by Ten Penn Center, i.e., the value of the BSI sublease, but reversed the retroactive termination of the Lease and resultant award of rents paid after July 22, 2012 based on unjust enrichment. See Gamesa Energy USA, LLC v. Ten Penn Center Associates, L.P. 181 A.3d 1188 (Pa. Super. 2018).

         Reviewing the express language of the Lease, which provided, "[i]t shall be an 'Event of Default' under this Lease if . . . (ii) [Gamesa] vacates the Premises[, ]" the panel first determined the trial court erred in concluding Gamesa had not defaulted by vacating the Premises. Id. at 1192-1193, quoting Lease at Art. 22 (emphasis in original). Because the Lease clearly specified Gamesa would be in default if it vacated the premises, and Gamesa undisputedly moved out on May 18, 2012, the panel determined Gamesa did vacate the premises and thus did default on the Lease; however, since Ten Penn Center chose not to terminate the Lease, as allowed under its terms, and did not seek any damages as a result of Gamesa's default, the panel further determined - and Ten Penn Center acknowledged at trial - Ten Penn Center waived any legal remedies it had due to breach of contract by Gamesa. Id.

         Next, the Superior Court panel reviewed the trial court's finding Ten Penn Center breached its duties under Articles 20.1 and 20.2 of the Lease. Id. at 1193. The panel considered the Lease's proviso that Gamesa was not permitted to sublet portions of the Premises to another party "without [Ten Penn Center's] prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed." Id., quoting Lease at Art. 20.1. The panel further observed that, upon Gamesa's written request including the proposed sub-lessee's "most recent financial statement and other evidence of financial responsibility, " Ten Penn Center was required to approve or deny the request within thirty days. Id., quoting Lease at Art. 20.2.

         The panel determined the trial court's finding Ten Penn Center unreasonably and impermissibly delayed its consent was factually and legally erroneous. Id. On its review of the record, the panel noted Gamesa, despite making its first request for approval of the BSI sublease on June 12, 2012, did not provide BSI's most recent financial statement to Ten Penn Center until July 5, 2012; thus, under the thirty-day deadline provision in Article 20.2 of the Lease, Ten Penn Center's approval or denial was required by August 4, 2012 and not, as the trial court calculated, July 22, 2012.[3]Id. The panel reasoned Ten Penn Center's response on July 13th, proposing Gamesa forfeit its remaining tenant improvement allowance in exchange for approval of the BSI sublease, was a counteroffer - and therefore a rejection - of the original offer which placed a new offer on the table for Gamesa to consider. Id., citing Yarnall v. Almy, 703 A.2d 535, 539 (Pa. Super. 1997) ("[A] reply which . . . changes the terms of the offer, is not an acceptance, but, rather, is a counter-offer, which has the ...


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