By Whitney Pakalka

On August 10, 2015, the Fourth Circuit released its amended published opinion in the civil case of Elderberry of Weber City, LLC v. Living Centers – Southeast, Inc., a case decided on July 21, 2015. The Court found that Plaintiff Elderberry of Weber City was not entitled to damages that accrued after it terminated a lease held by Defendants. The Fourth Circuit vacated the award of damages in part and remanded for the district court to recalculate damages for the period of time up to the termination of the lease.

Assignments and Termination of the Lease

In November 2000, Elderberry leased a skilled nursing facility in Weber City, Virginia to Living Centers for a ten-year term. The lease was amended to allow Living Centers to assign its lease to FMSC Weber City Operating Company or any of its subsidiaries or affiliates on the condition that Living Centers first obtain a guaranty from its parent company, Mariner Health Care, Inc. The required guaranty was attached as an exhibit to the lease amendment and was signed by an officer of Mariner in Georgia.

In 2007, Living Center assigned the lease to FMSC, who in turn assigned it to ContiniumCare of Weber City in November 2011.   At this time the facility was experiencing numerous problems, including nonpayment of utility vendors and being listed as a “Special Focus Facility,” thus subjecting it to increased health and safety inspections. Continium stopped making rent payments on March 2012. After hiring a company to secure a new tenant, Elderberry sent a letter to Living Centers, Continium, and Mariner demanding payment of past due rent. Continium did not make payments but instead abandoned the property. Elderberry then mailed notice that it was terminating the lease to Defendants on August 24, 2012, terminating the lease as of midnight that same day.

Mariner filed suit against Elderberry in the Northern District of Georgia seeking a declaration that its guaranty was unenforceable under the statute of frauds. Elderberry then filed a breach of lease action in the Western District of Virginia against Living Centers, FMSC, and Continium, along with a breach of contract action against Mariner. Both actions were consolidated in the Western District of Virginia. The district court denied the parties’ cross motions for summary judgment, and after a bench trial, entered judgment for Elderberry for accrued and future damages, plus pre- and post-judgment interest.

On appeal, Defendants argue that the district court erred in awarding damages that accrued after Elderberry terminated the lease and in finding that the guaranty satisfies the statute of frauds. The Fourth Circuit reviewed the district court’s grant of summary judgment de novo and reviewed the judgment entered after the bench trial under a mixed standard of review. Findings of fact were reviewed for clear error and conclusions of law, including interpretations of written contracts, de novo.

Rent and Non-Rent Damages are Available for the Period Before Termination of a Lease

As required by the lease, the Court applied Virginia law, which entitles a landlord to sue for rent due on the balance of the lease when a tenant abandons the property only if the landlord does not terminate the lease. tenBraak v. Waffle Shops, Inc., 542 F.2d 919, 924 (4th Cir. 1976). Although Virginia law does not allow a landlord to recover future damages from a lessee who abandons the premises, they may provide for such recovery in the lease. Under Virginia law, parties to a contract may provide an exclusive remedy only where the language used clearly shows an intent that the remedy be exclusive, and these provisions must be strictly construed against the lessor. The intent of the parties as expressed in the contract controls and is to be determined from the language of the contract.

The lease stated that in the event of default, the lessor’s remedies shall include (1) a right to terminate the lease upon written notice, (2) a right to reenter the premises and resume possession (which will not be deemed a termination and will not free the lessee from liability for rent or other obligations under the lease, and (3) the remedies provided in the lease are in addition to any rights provided by statute or otherwise. The Fourth Circuit rejected Elderberry’s argument that the rights under the lease are cumulative, instead finding that it would not make sense to allow a lessor to simultaneously terminate and continue application of the lease. The Court found that by terminating the lease, Elderberry extinguished its right to future rent upon reentry, but is entitled to rent accrued prior to termination of the lease.

Turning to non-rent damages, the Court found that under Virginia law a landlord may seek compensation for a tenant’s failure to return the facility in the required condition. Furthermore, where a lease permits the landlord to terminate the lease, the lessor is still entitled to recover non-rent liabilities accrued up to the time of termination.

The lease here required the lessee to pay for utility services, taxes, and insurance premiums, and additionally required the lessee to return the premises in good order and repair or pay costs associated with such repairs. The lease further required the lessee to comply with all applicable health and safety requirements. The Fourth Circuit found that all of these covenants could provide for accrued damages up to the point of termination. However, on appeal Defendants did not challenge the inclusion of utility, maintenance, and other fees in the damages award, and were thus deemed to have waived the argument. The Court held that Elderberry was entitled to non-rent damages prior to termination

Contemporaneous Writings Attacheded or Incorporated by Reference May Satisfy the Statute of Frauds

The Fourth Circuit applied the principle of lex loci contractus, which requires application of the law of the state where the contract became effective. Because Mariner’s officer signed the guaranty in Georgia, the law of that state was applied. Under Georgia law, for a guaranty to be binding on the guarantor, it must be in writing, signed by the party to be charged, and must identify the debt, the principal debtor, the promisor, and the promisee. John Deere Co. v. Haralson, 599 S.E. 2d 164, 166 (Ga. 2004). Georgia case law and statutory law allows for omitted material to be supplied from contemporaneous writings where the information can be readily identified in documents that are incorporated by reference or are physically attached to the contract at issue. See White House Inn & Suites, Inc. v. City of Warm Springs, 676 S.E. 2d 178, 179 (Ga. 2009); C.L.D.F., Inc. v. The Aramore, LLC, 659 S.E. 2d 695 (Ga. Ct. App. 2008). Additionally, while parol evidence cannot supply missing terms, under Georgia law it may be used to explain ambiguities in descriptions.

Here, the guaranty identifies Mariner as the promisor, but includes several blanks where required identifications were not made. The guaranty identifies Elderberry as the landlord and Living Centers as the original tenant, but the current tenant is identified as Family Senior Care Holdings or any of its subsidiaries or affiliates. The Fourth Circuit concluded that this identification is ambiguous, but used the Assignment and Assumption Agreement whereby FMSC assigned the lease to Continium to conclude that Continium is clearly the principal debtor. Because Continium stopped paying rent after March 2012 until Elderberry terminated the lease on August 24, 2012, the Fourth Circuit concluded that these are the rent payments for which Continium was the principal debtor and for which Mariner is the guarantor.

Damages Award Was Vacated in Part, Reversed in Part, and Remanded

 The Fourth Circuit concluded that the district court erred in awarding rent and non-rent damages that accrued after the termination of the lease. The Court rejected Defendants’ claims that the guaranty was invalid. The judgment was vacated in part, reversed in part, and remanded for a recalculation of the damages for the appropriate period.