A thought-provoking nonprecedential opinion on the issue of election of remedies pursuant to a commercial lease was recently decided by the Superior Court. The court affirmed in part and reversed in part an approximately $4 million judgment in favor of Gamesa Energy USA and Gamesa Technology Corp. in the matter of Gamesa Energy USA and Gamesa Technology v. Ten Penn Center Associates and SAP V Ten Penn Center, 2018 Pa. Super 59. The large award, entered by the Philadelphia Common Pleas Court pursuant to a bench trial, consisted of $265,460 for lost rent but most of the balance of the judgment was based on unjust enrichment.

A review of the facts indicates the parties entered into a 10-year commercial lease in 2008 for approximately 35,000 square feet of office space at 1801 Market St. in Center City Philadelphia. The lease terms under review are the terms defining default and those defining the tenant application and landlord approval process to enter into subleases for portions of the premises. The lease also contained a “tenant improvement allowance” to allow tenant Gamesa Energy USA (Gamesa) to construct the office space to its specifications.

The Superior Court had to determine whether Gamesa breached the lease when it physically vacated the premises in May 2012 (but continued to pay rent) or whether Ten Penn Center Associates (TenPC, as referred to in the opinion) materially breached the lease in July 2012 by unreasonably, and untimely, withholding consent to allow Gamesa to sublet a portion of its premises to an entity known as Business Services International (BSI). According to the opinion, Gamesa sought damages arising from TenPC's failure to approve the BSI sublease, a declaration that the lease had been terminated in July 2012 and that TenPC return the rent paid by Gamesa after July 2012 under the theory of unjust enrichment.

The trial court held TenPC breached the lease by incorrectly declaring a breach and by failing to timely approve the subtenant application presented by Gamesa for BSI. TenPC defended by alleging that Gamesa was already in breach at the time the request to approve a subtenant was made, due to vacating the premises, and that its rejection of the application to sublet to BSI was permissible under the terms of the lease.

The Superior Court reversed the trial court finding that Gamesa did not breach the lease by vacating the premises. Since Gamesa continued to pay rent, the trial court took that as evidence that Gamesa did not vacate. The Superior Court held the trial court “conflated” the meaning of vacate by imposing a requirement of abandoning the premises. The Superior Court held that abandon and vacate are two distinct legal events in the context of a lease. The trial court erred as a matter of law because “vacate” does not require an intent to abandon. Consequently, TenPC correctly asserted Gamesa was in default and was entitled to seek legal remedies. However, since TenPC choose not to terminate the lease or pursue damages, those remedies were waived which, in hindsight, set the stage for a judgment against it.

The Superior Court's review of the BSI sublease application is the first of two interesting twists. The trial court found TenPC breached the lease not only by incorrectly declaring a default but also breached the lease by failing to approve the proposed BSI sublease on or before July 22, within 30 days of its presentation, as required. The Superior Court held that TenPC's response was timely, noting that the 30-day period did not begin to run until July 5 when TenPC was provided with all of the information germane to the request to sublet. The court reasoned that the date was not outcome-determinative because the offer was rejected on July 13 by TenPC's counteroffer to Gamesa. In its counteroffer, TenPC offered to approve BSI as a subtenant in exchange for Gamesa waiving the balance of its tenant improvement allowance. Gamesa did not respond to the counteroffer.

The second twist is that the Superior Court found while the counteroffer was timely, it was not reasonable. The court refused to second guess the trial court determination that Gamesa's request was “a good faith and reasonable sublease application.” The court found TenPC's decision to deny the sublease application, based on Gamesa default and BSI's poor financials, as unreasonable and a violation of the lease provision requiring that a sublease approval cannot not be unreasonably withheld.

TenPC challenged the finding of $265,460 in damages by arguing that the testimony of Gamesa's representative about how BSI “moved on” when it could not get sublease approval was inadmissible hearsay. In finding reasonably certain damages based on that testimony, the court cited Commonwealth v. Tselepis, 181 A. 2d 710, 712 (Pa. Super. 1962), finding a statement is properly qualified as an explanation of a course of conduct if it is “evidence to the reason an action is taken.”

Nonetheless, TenPC gained significant relief in that the unjust enrichment award was vacated. TenPC argued, and the Superior Court agreed, that Gamesa elected its remedy by continuing under the terms of the lease after July 2012. Consequently, the Superior Court disallowed Gamesa from benefiting from a retroactive termination of the lease. Once a party chooses “inconsistent remedial rights” the doctrine of election of remedies precludes benefiting from the rights not chosen. The Superior Court found that all of the evidence indicates that Gamesa continued to benefit from the lease after July 2012; consequently the trial court actions in retroactively terminating the lease and then awarding post-termination unjust enrichment relief was in error. The parties stipulated that Gamesa was still searching for subtenants at the time of trial, had requested and received the remaining improvement allowance and used it to build out its leased space, and that both Gamesa and a subtenant that was approved in May 2011, Viridity Energy Inc., continued to pay rent.

The case is instructive on different levels. The obvious takeaways are the black-letter law distinction between vacate and abandonment. If a tenant is paying rent while vacating the premises, the act of vacating is a breach—even if rent is paid. Similarly, a counteroffer is both a rejection and new offer. Had the court not found the counteroffer as unreasonable; the counteroffer—as a rejection and a new offer—would have satisfied TenPC's obligations under the lease to timely respond to the BSI sublease application.

The larger issue is election of remedies. The concurring opinion of President Judge Emeritus Correale F. Stevens reminds us that the Pennsylvania Supreme Court has not addressed whether inconsistent remedies may be simultaneously pursued in Pennsylvania, noting that our Supreme Court declined to do so in Schwartz v. Rockey, 932 A.2d 885, 892-93 (2007). The main issue in Schwartz concerned punitive damages under the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The Schwartz court specifically stated it was not required under the facts of the case “to definitively determine whether inconsistent remedies may be simultaneously pursued in a civil action in Pennsylvania.” The Schwartz court made the limited ruling that a complaint that seeks only contract damages may be amended to substitute an equitable remedy at some point prior to the entry of a final judgment, noting the important factors to consider in permitting an amendment are whether the plaintiff gleaned information, not previously known, during discovery, the promptness of the amendment and whether detrimental reliance of the opposing party is implicated. None of this appears to apply here.

In the absence of an election in Gamesa, Stevens concluded that the current state of Pennsylvania law requires vacating the unjust enrichment award as inconsistent in light of the award of contract damages for TenPC's breach of the sublease clause, based on the Superior Court's finding that Gamesa chose to continue under the terms of the lease.

James M. Lammendola is an assistant professor at Temple University's Fox School of Business who was in private practice for 20 years. Contact him at [email protected] or 215-204-4124.