A recent opinion by the Fourth District Court of Appeal serves as a reminder to commercial tenants of the challenges of proving lost profit damages in landlord-tenant disputes.
In the case of Victoriana Building, LLC v. Ft. Lauderdale Surgical Center, LLC, the landlord appealed the circuit court’s final judgment in the tenant’s favor regarding the landlord’s breach of the lease, and the tenant cross-appealed the lower court’s decision not to award it damages for alleged lost business value or out-of-pocket expenses.
The appellate panel affirmed the circuit court’s findings in favor of the tenant and guarantor on the liability issues, and it also reversed the denial of the tenant’s out-of-pocket expenses claim. However, the court affirmed the lower court’s denial of the tenant’s lost business value claim.
On the liability issues, the appellate court concluded that the trial court properly determined that “the landlord first breached the lease by failing to provide code-compliant means of fire egress, and that the tenant therefore was excused from any further obligation under the lease.” Because the lease required the tenant to prepare the premises for the tenant’s specific use, and because the landlord breached its obligations under the lease, the appellate court found the landlord liable for all of the tenant’s out-of-pocket expenses to build out the space. These expenses totaled more than $975,000. Property owners should take note that a landlord can be liable for a tenant’s construction costs if it fails to perform its obligations under a lease.
As to the tenant’s lost business value claim, the appellate court found as follows with respect to the ruling by the trial court:
[T]he court properly determined that the tenant’s proof was speculative and therefore insufficient. “Lost profits are typically proven by one of two methods: (1) the before and after theory; or (2) the yardstick test.” (citation omitted). “The yardstick test is generally used when a business has not been established long enough to compile an earnings record that would sufficiently demonstrate lost profits and compares the profits of businesses that are closely comparable to the plaintiff’s.” (citation and quotation marks omitted). Here, the tenant’s expert consultant, in analyzing the viability of the tenant’s proposed facility, did not evaluate any comparable facility’s profitability as a “yardstick,” and the tenant’s expert CPA acknowledged that his report, which was based on the consultant’s report and forecast, was only “as good or as bad as [the consultant’s] forecast.” Thus, the tenant’s proof was insufficient.
Just as landlords should be aware of their potential liability for failure to perform their lease obligations, tenants also should be aware that an award of any damages other than out-of-pocket expenses will require additional proof. This appellate opinion illustrates that businesses which are seeking lost profit damages must understand the nature of the expert analysis and testimony that the courts will require in order to support their claims.
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