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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 467

September Term, 2010

THE CARROLL INDEPENDENT FUEL COMPANY v. WASHINGTON REAL ESTATE INVESTMENT TRUST

Graeff, Kehoe, Thieme, Raymond G., Jr. (Retired, Specially Assigned), JJ.

Opinion by Graeff, J.

Filed: December 1, 2011

This case arises from two lease agreements, in which Washington Real Estate Investment Trust ("WRIT"), appellee/cross-appellant, leased two service stations located in the Westminster Shopping Center to the Carroll Independent Fuel Company, appellant/crossappellee ("CIF"). After the leases were terminated, a dispute arose regarding: (1) the responsibility for cleaning up contamination found in the soil and groundwater surrounding the service station buildings; and (2) whether CIF failed to surrender possession of the premises, requiring it to pay a holdover fee in the amount of three times the annual rent. WRIT filed suit in the Circuit Court for Carroll County, and after an eight-day trial, the court found that CIF was not liable for the environmental contamination, but CIF was a holdover tenant required to pay $624,621.09, plus attorneys' fees in the amount of $25,000. On appeal and cross-appeal, the parties present several questions for our review,1

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CIF presents the following questions for review:

1. Whether a tenant's failure upon termination of a lease to remove fuel tanks from an area adjacent to the leased premises constitutes "holding over" under the lease, where the lease vests ownership of the tanks in the landlord, and where the lease contains no provision requiring the tenant to remove the tanks. 2. Whether a tenant's failure upon surrendering possession of leased premises to provide the landlord with an inspection certificate of the buildings formerly occupied by the tenant, which certificate is due ten days after surrender, constitutes a "holding over" under the lease, where such failure did not deprive the landlord of possession of the leased premises or cause the landlord to suffer any damages. 3. Whether a tenant's failure to remove a trespasser from the leased premises after termination of the lease constitutes "holding over" by the tenant, where the tenant's obligation under the lease to remove trespassers did not (continued...)

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(...continued) survive lease termination and where the tenant otherwise lacked a leasehold or other interest in the leased premises sufficient to evict the trespasser.

4. Whether the court's imposition of holdover fees in the amount of $624,000, in the absence of actual damages, constitutes an unenforceable "penalty" under Maryland law, when the leases authorize the imposition of the fee as a component of compensation "in addition to" actual or consequential damages and not as a reasonable forecast of damages in the event of a breach. WRIT, as a cross-appellant, presents the following questions for our review: 1. Whether the Circuit Court correctly concluded that Carroll was a holdover tenant required to pay holdover rent as stated in its leases when (i) Carroll failed to remove underground storage tanks registered to it under Maryland law for months after Carroll claims to have terminated the leases; (ii) the leases prohibited Carroll from permitting any other persons from occupying the property without the express written consent of WRIT, no such consent was given, and an entity other than Carroll occupied and operated from the property for years before and months after Carroll claims to have terminated the leases; (iii) surrender of the property was required to be "in accordance with the provisions" of the leases and Carroll failed to provide to WRIT an environmental certificate required under the leases; and, (iv) Carroll continued to pay base rent and repeatedly returned to the property to perform invasive environmental testing and conduct other activities after the time it claims to have terminated the leases. 2. Whether the Circuit Court erred in refusing WRIT's request for prejudgment interest when (i) the Court concluded that holdover rent was owed by Carroll to WRIT under the leases on specific dates identified by the Court; and, (ii) under well-established Maryland law, pre-judgment interest is recoverable as a matter of right under contracts in writing to pay money on a date certain, such as rent. 3. Whether the Circuit Court erred in awarding WRIT the sum of $25,000.00 in attorneys' fees and expenses when (i) the leases require Carroll to indemnify WRIT for its attorneys' fees and expenses; (ii) the judgment (continued...) -2-

which we have consolidated and reworded as follows: 1. Did the trial court err in finding that CIF was a holdover tenant because it failed to (a) remove gas tanks, (b) deliver an environmental inspection certificate, and (c) remove a third-party from its property? 2. Was the imposition of holdover fees an unenforceable penalty? 3. Did the circuit court err in failing to award prejudgment interest to WRIT? 4. Did the circuit court err in awarding WRIT $25,000 in attorneys' fees, an amount substantially less than requested? For the reasons set forth below, we shall reverse the judgment of the circuit court finding that CIF was a holdover tenant, but affirm the order awarding attorneys' fees. FACTUAL AND PROCEDURAL BACKGROUND On July 15, 1988, CIF, a wholesale distributor of motor fuels that sells to retail service station operators, entered into a ten-year commercial lease agreement with WRIT to lease a gasoline service station in Westminster, Maryland. Approximately one year later, on September 8, 1989, CIF and WRIT entered into another ten-year commercial lease agreement for another adjacent gasoline service station.2

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(...continued) obtained by WRIT against Carroll totaled $624,621.09, but the Court awarded WRIT an amount less than five percent (5%) of that judgment and substantially less than the attorneys' fees and expenses actually incurred by WRIT; and, (iii) the Court's Memorandum Opinion does not establish that the Circuit Court fully examined the record in order to properly exercise its discretion in connection with the award of WRIT's fees and costs.

The service stations were two back-to-back buildings, designated as Units #30 and #31. The surrounding land housed the tanks, pipes, pumps, canopies, and equipment related to operation of the service stations. According to the Maryland Department of the (continued...) -3-

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The Leases The parties agree that the leases are virtually identical. The leases conveyed a leasehold interest in the "Demised Premises," which are defined as: the former "Shell" service station fronting at the intersection of Rt. 140 and Englar Rd., located in Westminster, County of Carroll, State of Maryland, and shown outlined in red on the plot plan attached hereto . . . , being a store containing approximately 2464 square feet of gross leasable area . . . , and being part of the Westminster Shopping Center . . . . and the former "Texaco" service station fronting at the intersection of Rt. 140 & Englar Road, located in Westminster, County of Carroll, State of Maryland, and shown outlined in red on the plot plan attached . . . , being a store containing approximately 1670 square feet of gross leasable area . . . , and being part of the Westminster Shopping Center . . . . An addendum to the lease required CIF to install new gasoline tanks at each of the leased properties. Specifically, it provided: at [CIF]'s sole cost and expense and without any cost or expense to [WRIT], install three new gasoline tanks . . . within the boundaries shown on the attached plan . . . . [WRIT] shall not be responsible for any such construction costs whatsoever, including the cost of bringing utilities to and hooking the same up with the "Additions.". . . *** Said "Additions (including all existing or new) shall, at the end of the term (or options period) belong to [WRIT] ([including] equipment,

(...continued) Environment, both sites were "heavily contaminated" with petroleum before CIF occupied them. -4-

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improvements, gasoline tanks, islands, canopies, etc.).[3] The leases permitted CIF to sublet or assign the premises with "the prior written consent of" WRIT, stating: [Except for subletting a retail gasoline dealer franchise,] [CIF] shall not assign this Lease, in whole or in part, nor sublease all or any part of the Demised Premises nor permit other persons to occupy the Demised Premises or any part thereof, nor grant any license or concession for all or any part of the Demised Premises, without the prior written consent of [WRIT]. In the event [CIF] desires to sublet a portion of the Demised Premises, [CIF] shall give to [WRIT] thirty (30) days' written notice of [CIF]'s intention to do so. . . . If this Lease be assigned or if the Demised Premises or any part thereof be sublet without the express written consent of [WRIT] first being obtained, [WRIT] may collect rent from the assignee, subtenant or occupant and apply the net amount collected to all rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of this provision or the acceptance of the assignee, subtenant or occupant as Lessee, or a release of Lessee from the further performance by [CIF] of the covenants on its part to be observed or performed hereunder. The leases also addressed CIF's obligation at its termination of the lease. The original leases provided as follows: 36. SURRENDER OF PREMISES Upon the expiration or sooner termination of this Lease, [CIF] agrees to quit and surrender the Demised Premises, broomclean, in good condition and repair, reasonable wear and tear and casualty excepted, together with all keys and combinations to locks, safes and vaults and all improvements, alterations, additions, fixtures and equipment at any time made or installed in, upon or to the interior or exterior of the Demised Premises, except personal property and other unattached movable trade fixtures put in at [CIF]'s expense, all of which shall thereupon become the property of [WRIT] without any claim by [CIF]

WRIT wanted to own the tanks because it wanted "turn-key usable gas station[s] to be able to sublet" after termination of its lease with CIF. -5-

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therefore, but the surrender of such property to [WRIT] shall not be deemed to be a payment of rent or in lieu of any rent reserved hereunder. Before surrendering the Demised Premises, [CIF] shall remove all of [CIF]'s said personal property and unattached movable trade fixtures. If [CIF] shall fail to remove any of [CIF]'s said personal property and trade fixtures, either said property shall, at the option of [WRIT], be deemed abandoned and become the exclusive property of [WRIT] or [WRIT] shall have the right to remove and store said property, at the expense of [CIF], without further notice to or demand upon [CIF], and hold [CIF] responsible for any and all charges and expenses incurred by [WRIT] therefore. If the Demised Premises be not surrendered as and when aforesaid, [CIF] shall indemnify [WRIT] against all loss or liability resulting from the delay by [CIF] in so surrendering the same, including without limitation any claims made by a succeeding occupant founded on such delay. [CIF]'s obligations under this Section shall survive the expiration or sooner termination of the term of this Lease. 37. HOLDING OVER Should Lessee remain in possession of the Demised Premises after the expiration of the term of this Lease (or any renewal term hereof) with or without the consent of Lessor, express or implied, such holding over shall, in the absence of a written agreement to the contrary, be deemed to have created and be construed to be a tenancy from month to month, terminable on thirty (30) days written notice by either party to the other, at twice the rentals (prorated on a monthly basis) in effect during the rental year immediately preceding the expiration of the term of this Lease (or any renewal term hereof) and otherwise subject to all of the other terms, covenants and conditions of this Lease insofar as the same may be applicable to a month-to-month tenancy. CIF and WRIT agreed to two extensions of each lease.4 In the second amendment, the leases were extended indefinitely on a month-to-month basis, leaving either party with the authority to terminate the leases by providing written notice to the other party 30 days before the proposed date of termination. The second amendment also modified the original

The first amendment to the leases was entered into on September 16, 1999, and the second on May 30, 2005. -6-

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holding over provision of the lease, specifying: In the event Landlord or Tenant shall give the other party such written notice of termination as aforesaid, this Lease shall cease and terminate as of the termination date set forth in such notice as if such termination date were the last day of the term of this Lease. On the termination date specified in such notice, Tenant shall, without notice, quit and surrender the Demised Premises to Landlord in accordance with the provisions of the Lease. TIME IS OF THE ESSENCE. Any holding over by the Tenant after the termination date shall be an unlawful detainer and Tenant shall be subject to immediate eviction. Tenant acknowledges and agrees that under no circumstances may Tenant hold over in the Demised Premises after termination date unless Tenant obtains Landlord's prior written consent to do. Tenant further acknowledges and agrees that if Tenant does hold over after the termination date without obtaining Landlord's prior written consent, (i) any notice and cure period otherwise granted to Tenant under the Lease before Landlord may exercise its rights and remedies thereunder shall be null and void; (ii) Tenant shall pay Landlord a holdover fee of three (3) times the Basic Annual Rent then in effect, prorated on a daily basis, per day for each day that Tenant holds over past the termination date set forth in Landlord's notice ("Daily Holdover Use and Occupancy Fee"); (iii) Landlord may accept the Daily Holdover Use and Occupancy Fee and concurrently commence legal proceedings to regain possession of the Demised Premises and/or pursue any and all other rights and remedies available to Landlord under the Lease and/or the law; and (iv) in addition to any other rights and remedies provided to the Landlord under the lease and/or the law, Tenant shall indemnify and hold Landlord harmless from and against any and all loss, liability, damages and expenses (including without limitation, consequential damages, attorneys' fees, the costs of investigation and settlement of any claims) sustained or incurred by Landlord on account of or resulting from such failure to vacate. Both leases required a surrender of the Demised Premises upon the termination date of the leases. They required CIF to provide an environmental inspection certificate declaring that the "Demised Premises" were free of hazardous substances: Within ten (10) days following Lessee's re-delivery of possession of the Demised Premises to Lessor ("Delivery Date"), Lessee shall provide Lessor with a certification from an independent, licensed inspector, dated as of the -7-

Delivery Date, which shall certify to Lessor that: a) Inspector has made a site inspection of the Demised Premises, and b) The Demised Premises at the Delivery Date were free of dangerous and/or toxic substances or materials in quantities or concentration which would require clean up under applicable governmental regulations. Termination of the Leases In a letter dated July 15, 2005, CIF provided notice to WRIT that it was terminating its leases with WRIT, effective August 15, 2005.5 In the notice, CIF wrote that it "will be in contact with [WRIT] regarding the removal of the underground tanks." On August 15, 2005, CIF shut down its businesses and vacated both sites. In a letter dated August 19, 2005, counsel for WRIT advised B&E Automotive ("B&E"), a mechanic shop that worked out of one of the service stations on the leased properties, that it, as CIF's subtenant, had remained on the property past expiration of CIF's lease term. WRIT demanded that B&E "vacate the Premises in accordance with the terms of Tenant's lease," but it left open the possibility of negotiating a direct lease with B&E. WRIT sent a copy of the letter to CIF. In a letter dated August 26, 2005, counsel for WRIT advised CIF, that, "while [CIF] has ceased its operations on the premises, a subtenant of [CIF], B&E Automotive Services,

Prior to terminating the lease, CIF tried to renegotiate the leases with WRIT; it desired to lease the entire corner and invest in modernizing the property. WRIT declined, explaining that it had decided to convert the property into a bank and demolish the service station buildings. -8-

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Inc., continues its use and occupancy" of one of the plots of land. WRIT further stated that CIF "has not yet removed its underground storage tanks or provided the environmental inspection certification required upon termination of possession." WRIT warned that it would not deem CIF "to have vacated and surrendered possession of the Premises" until CIF removed its subtenant, the underground storage tanks, and provided the environmental certificate, and WRIT stated that it reserved its right under the leases to collect daily holdover fees. Counsel for WRIT also confirmed a recent conversation in which [CIF] advised that [it] intended to remove the underground storage tanks, conduct all required and necessary remediation and abatement due to any spillage or discharge of any oil, petroleum or chemical liquids or solids and any other hazardous substance contamination, and have an independent inspection conducted of the premises to provide certification that the premises are free of dangerous and/or toxic substances or materials . . . . Between January 30 and February 1, 2006, CIF removed the gasoline storage tanks and contamination was discovered. CIF removed tons of contaminated soil, and retained an environmental consultant to proceed with a site assessment. By letter dated February 27, 2006, WRIT sent a Notice of Default to CIF, stating that: (1) CIF had failed to remove its tanks by the termination date; (2) CIF had not provided the environmental inspection certificate; (3) CIF owed WRIT $12,987.71 in attorneys' fees, consultant fees, and rent as of February 20, 2006; (4) two of CIF's rent checks were returned by the bank, and therefore, not paid; (5) the amount owed as of the date of the letter was $21,311.87; and (6) B&E remained on the premises. CIF continued to work on remediation until approximately March 2007, at which time -9-

CIF decided to "shut the job down" and discontinue remediation efforts. At this point, WRIT took over remediation of the property. On May 15, 2007, WRIT combined the two sites and leased it to Susquehanna Bank. The building plan for the new bank required demolition of both service station buildings, which occurred in October 2007. The Lawsuit On October 29, 2007, WRIT filed its Complaint against CIF, and on November 5, 2008, it filed its Amended Complaint. CIF asserted eight claims in its Amended Complaint: four tort claims; two breach of contract claims; and two claims seeking a declaratory judgment regarding CIF's continuing liability to remediate the contamination of the soil and groundwater. WRIT dismissed three of its four tort claims, and the trial court granted CIF's motion for judgment on the remaining tort claim, finding that CIF was not liable under a negligence theory. In the two breach of contract claims, one for each lease, WRIT alleged that CIF had failed to keep the properties "in the condition required by law, in that petroleum products have contaminated the soil and groundwater," and it failed "to surrender possession of the [properties] upon termination in the condition required by the [leases]." WRIT requested a judgment of $3,000,000, consisting of rent at the holdover rate and additional damages, including attorneys' fees and costs and expenses associated with remediation. In its claims for declaratory judgment, WRIT requested that the trial court "declare

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that, in addition to a money judgment," CIF be liable to WRIT "for all damages until such date as the [properties are] in the condition that [they were] required to be upon surrender of possession" and that CIF pay all fees, costs, and other "damages incurred by WRIT in order to remediate the environmental contamination and restore the [properties] to the condition in which [they were] required to be upon surrender of possession" at termination of the lease. Trial commenced in April 2009 and continued for eight days.6 The majority of WRIT's case related to establishing CIF's liability for the soil and groundwater contamination. CIF characterizes its defense as primarily . . . establishing that: (i) the certificate requirement applies only to the condition of the "Demised Premises," as defined in the leases, which means the service station buildings; (ii) there was no evidence that the buildings were contaminated or that WRIT otherwise suffered any losses associated with the absence of a certificate; (iii) CIF is responsible for soil and groundwater contamination under Section 2 of the Addenda (the "indemnity clause") only if the contamination came to exist at the property during CIF's tenancy; (iv) the property was heavily contaminated prior to CIF's tenancy; and (v) there is no evidence that any spills, leaks or other discharges of petroleum occurred during CIF's tenancy. With respect to the holdover issue, there were three grounds on which WRIT asserted that CIF was a holdover tenant: (1) the failure to remove underground fuel tanks; (2) the failure to provide an environmental certificate; and (3) B & E's continued presence. With respect to the fuel tanks, John Haines Phelps, the President of CIF, testified that CIF did not

The trial occurred on the following days: April 27 through April 30, 2009, and June 29 through July 2, 2009. -11-

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remove the tanks because, based on the language in the lease, it believed that ownership of the tanks vested in WRIT upon termination of the lease. It discovered, however, that WRIT never registered the tanks in its name, leaving the tanks registered in CIF's name. Concerned that the Maryland Department of Environment ("MDE") would have found CIF liable for unauthorized abandonment of the tanks,7 CIF removed the tanks between January 30 and February 1, 2006. CIF continued to pay base rent for both properties during that time. With respect to the failure to provide an environmental inspection certificate, Mr. Phelps testified that CIF did not deliver the certificate because it was aware that WRIT was going to demolish the buildings and convert the property into a bank. CIF construed the lease as requiring a certificate that the building, not the surrounding area, was free of hazardous substances, and given that the buildings were going to be demolished, it concluded that a certificate of inspection of the buildings was "unnecessary." With respect to the claim regarding B&E, William Gusler, a WRIT employee and maintenance engineer, testified that B&E was operating on the leased property in 2003, and did not leave the site until March 2006. CIF, however, claimed that it first heard of B&E's existence at the start of the dispute between CIF and WRIT in 2007. In accordance with its lease with WRIT, CIF subleased the property to independent dealers who operated the

The environmental regulations governing underground storage tanks provide that, if an underground storage tank system is closed for more than six months, the owner or operator must permanently close the underground storage tank system if it does not meet certain performance standards. COMAR 26.10.10.01(C) (2010). -12-

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service stations at the sites. CIF's leases with the independent dealers permitted additional subleases with CIF's consent. None of the independent dealers, however, requested or received consent from CIF for a sublease. According to Mr. Phelps, if there had been a B&E sign on either of the buildings, it would have been "a sub-entity of the dealer" that had entered into a sublease agreement with CIF. Mr. Phelps testified that CIF had never noticed a B&E sign on either of the two service station buildings. The Circuit Court's Ruling On January 22, 2010, the circuit court issued its Memorandum Opinion and Order. The court ruled against WRIT on the counts seeking a declaratory judgment holding CIF liable for future related costs. It found that CIF was not liable for environmental

contamination that predated its tenancy, and that WRIT had not shown by "a preponderance of the evidence" that CIF caused the contamination of the sites. The court further refused, for two reasons, to award WRIT damages based on lost rental income as a result of the contamination of the sites. First, there was insufficient evidence that CIF caused the contamination. Second, it found that WRIT failed to show damages, noting that WRIT intended to use the land for a bank, and the evidence showed that construction could occur while remediation efforts were occurring. The court then addressed the issue of "holdover rent." It noted that WRIT claimed that CIF "was a holdover tenant by not removing the tanks from the premises in August 2005 when CIF provided notice that they were vacating." The court, citing Nehi Bottling Co. v.

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All-American Bottling Corp., 8 F.3d 157 (4th Cir. 1993), and Longmier v. Kaufman , 663 S.W.2d 385 (Mo. Ct. App. 1983), found persuasive the argument that "this is akin to a residential tenant leaving all of his personal belongings in an apartment after he has informed management that he is vacating." The court rejected CIF's argument that this did not constitute holding over because, pursuant to the terms of the lease, the tanks were to become WRIT's property, stating that "CIF was well aware that WRIT was not interested in leasing the property for a gasoline station, but rather they wanted to convert it to a bank." Accordingly, the court found that CIF was holding over from September 2005 through January 2006, and WRIT was entitled to holdover rent for that period of time in the amount of $123,460.81.8 The court then addressed WRIT's claim that CIF was a holdover tenant because it allowed "B&E Automotive to use the premises from August of 2005 until March of 2006." Although the court stated that it did "not have sufficient evidence as to any business relationship" between B&E and CIF, the court found that CIF "had notice that B&E Automotive was utilizing their leased land, so in [the] light most favorable to CIF, B&E was a trespasser and CIF was obligated under the rental agreements to have B&E removed from the premises when CIF left in August of 2005." The court calculated the holdover rent for

The holdover fee was three times the amount of rent, prorated over the number of days CIF was a holdover tenant. The court calculated the rent for each month and then deducted $41,620.80, the $8,324.16 per month in rent that CIF paid for the period from September 2005 to January 2006. -14-

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the period, September 2005 to March 2006, to be $174,321.99 and credited rent payments in the amount of $41,620.80, finding that WRIT was entitled to $132,701.19.9 The court then addressed WRIT's argument that CIF was a holdover tenant "because of their failure to provide the environmental certificate showing the `demised premises' to be free from contamination." The court agreed with CIF that the certificate was required only for the buildings, and not the grounds, finding that the environmental certificate requirement "does not extend liability to CIF for underground soil and water contamination." The court found that CIF had a duty to "have an inspector certify that the buildings themselves are free from hazardous waste and other environmental contamination." It concluded that WRIT "was entitled to charge holdover rent until CIF could certify that they had not left the demised premises in a dangerous state." The court found CIF liable to WRIT for holdover rent from September 2005 through October 2007, when the buildings were demolished, in the amount of $624,621.09. The court next addressed WRIT's request for attorneys' fees. Although WRIT requested fees in the amount of $708,411.10, the court found that it was entitled to recover only for the fees related to collecting the holdover fees. Referring to the Maryland Rules of Professional Responsibility, and noting that the hourly rates billed were high for attorneys

The court noted that the holdover rent for CIF's failure to remove the storage tanks "will naturally merge, and be covered by the debt for B&E Automotive['s] presence, since it is for the same period plus two additional months." -15-

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in Carroll County, the court awarded attorneys' fees in the amount of $25,000. The total monetary award to WRIT was $649,621.09. On March 8, 2010, CIF filed a Motion for Relief from Judgment and a New Trial. It argued that the term "holding over" in the leases meant possession of the properties past expiration of the lease term, and that none of the conduct cited by the court

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