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Circuit City Stores, Inc. v. Rockville Pike Joint Venture Limited Partnership No. 122, Sept. Term, 2002

Finality of judgments; duty of Landlord to mitigate damages incurred as result of defaulting tenant.

Circuit Court for Montgomery County Case No. 182973
IN THE COURT OF APPEALS OF MARYLAND

No. 122 September Term, 2002 ______________________________________

CIRCUIT CITY STORES, INC.

v.

ROCKVILLE PIKE JOINT VENTURE LIMITED PARTNERSHIP

______________________________________ Bell, C.J. Eldridge Raker Wilner Cathell Harrell Battaglia, JJ. ______________________________________ Opinion by Wilner, J. ______________________________________ Filed: August 1, 2003

This is a dispute between the owner of a shopping center, Rockville Pike Joint Venture Limited Partnership (Rockville), and one of its former tenants, Circuit City Stores, Inc. (Circuit City). The substance of the dispute, litigated in the Circuit Court for

Montgomery County, arose from a default by Circuit City on its lease and the subsequent demolition of the leased premises and erection of a larger building, which Rockville found necessary in order to attract a replacement tenant. Rockville won its case in the first round of litigation in 1999 but then had the victory snatched from it two years later through the granting of a motion to vacate or modify the initial judgment. That produced a secondary procedural issue of whether the Circuit Court had any authority to modify the judgment. The Court of Special Appeals reversed the latter ruling, holding that, even if the Circuit Court had authority to modify the 1999 judgment, it erred in doing so. We shall conclude that (1) the trial court had no authority to reopen and modify its judgment, (2) it erred substantively in concluding that, as a result of the demolition of the premises, Circuit City had no further obligation under its lease, but (3) Circuit City is entitled to litigate any dispute over the amount of credit to which it may be entitled against that obligation. In order to give effect to that third conclusion, we shall direct that the case be remanded for further proceedings in the Circuit Court.

BACKGROUND In July, 1987, the parties entered into a 20-year lease of approximately 28,500 square feet of retail space in the Wintergreen Plaza Shopping Center, located on Rockville Pike in

Montgomery County. Rockville regarded Circuit City as an "anchor" tenant for the shopping center. Three provisions in the lease are of special relevance: (1) In Rider 2 to the lease, Circuit City agreed that it would "continuously operate its business at the Demised Premises" throughout the term of the lease, except for customary retail holidays, reasonable periods for taking inventory, and periods not to exceed 60 days in order to accomplish a permitted assignment or subletting. (2) Paragraph 20 of the lease prohibited Circuit City from assigning the lease or subletting the leased premises without the prior written consent of Rockville, which consent was not to be unreasonably withheld or delayed. The paragraph required Circuit City, with respect to any proposed transfer of all or substantial part of the premises, to submit certain information to Rockville regarding the transfer and gave Rockville specified time periods in which to approve or disapprove the transfer. If the transfer was approved, Rockville could elect either to release Circuit City from further liability under the lease and receive all of the rend paid by the transferee or to divide equally with Circuit City any rent to be paid by the transferee that was in excess of the rent due by Circuit City under the lease, until the amount paid to Circuit City reimbursed it for tenant improvements it had made. Subject to those provisions, Circuit City was not relieved of any liability under the lease by reason of an assignment or subletting. (3) Paragraph 24, captioned "Landlord's Remedies," provided, among other things, that if Circuit City failed to observe any of the material terms and covenants in the lease,

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failed to cure a default within 30 days after receipt of written notice from Rockville, and, as a result, the covenants to be performed by Circuit City were not being performed, Rockville had the right to terminate the lease and, immediately and without demand or notice, enter the premises, repossess it, and expel Circuit City. The paragraph provided that, notwithstanding any entry by Rockville, whether by termination or otherwise, Circuit City remained liable for and agreed to pay amounts equal to the installments of rent and other charges reserved in the lease, as if the lease had not been terminated, whether or not the premises remained vacant. If the property was re-let by Rockville, Circuit City would be entitled to a credit equal to the net amount of rent received by Rockville, after deduction of all actual and reasonable expenses incurred in the re-letting, including any remodeling costs. In the summer of 1995, Circuit City decided to relocate its store to a different shopping center. Among the reasons cited for that decision were that the store was too small and that sales were not meeting the company's expectations. Circuit City did not inform Rockville of its decision until January, 1996. Rockville was then in the process of attempting to refinance the center. In September, 1996, it offered to expand the leased premises to 45,000 square feet and asked Circuit City to reconsider its decision, but Circuit City rejected that offer. Circuit City retained a broker to assist in finding a replacement tenant and apparently submitted a number of proposals to Rockville, which found none of them suitable for the space. One of the proposed replacement tenants was MARS, Inc., a retailer of musical instruments, equipment, and accessories.

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On October 21, 1997, without having found a replacement tenant acceptable to Rockville and with more than 10 years remaining on the lease, Circuit City closed the store and vacated the premises. Two days later, Rockville declared Circuit City in violation of the continuous operation requirement and therefore in default. In December, 1997, Circuit City again proposed MARS, Inc. as a subtenant, and, indeed, in January, 1998, it entered into a sublease with that company. On February 3, Rockville rejected the sublease, however, explaining that it regarded Circuit City as an anchor tenant and expressing its belief that MARS could not fulfill that role. Rockville noted that Circuit City had a very large customer base, that its store averaged nearly $17 million in annual sales, and that it drew a substantial number of customers to the shopping center. MARS, it said, had a limited customer base and would not attract a large number of customers to the center. Its projected annual sales were only half those of Circuit City and it was not an anchor tenant in any other shopping center. The sublease, moreover, obligated MARS to remain for only six months, and, even though Circuit City would remain liable, Rockville was not willing to risk another vacancy in such a large area of the shopping center. Rockville noted that Mars was a start-up company that was heavily in debt and that the private placement memorandum produced as part of its effort to raise capital warned that its stock was speculative and involved a high degree of risk. Circuit City responded two weeks later with an action for a declaratory judgment that Rockville's rejection of the MARS sublease was arbitrary, unreasonable, contrary to fair dealing, and thus in violation of the lease and that Circuit City was therefore relieved of any

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further obligation under the lease. That produced a dual reaction on Rockville's part. On March 31, 1998, it gave formal notice that it was terminating the lease. It declared Circuit City in default by publicly announcing its decision to vacate the property without first having obtained an approved subtenant or assignee, by failing to operate its business continuously throughout the lease term, and by failing to maintain fire insurance. By reason of that default, Rockville advised that it had reentered and repossessed the premises, that Circuit City had no further authority to enter on or convey any interest in the premises, and that Circuit City remained liable for the payment of amounts equal to the rent and other charges due. Contemporaneously with that notice, Rockville filed a counterclaim for breach of contract. In addition to seeking damages for the amount of rent due during the remaining term of the lease, Rockville claimed that the breach frustrated its attempt to refinance the shopping center and that further actions by Circuit City had prevented it from finding a replacement tenant. Both parties subsequently amended their initial pleadings, Circuit City to seek damages and Rockville to seek a declaratory judgment. While the litigation was pending, Rockville found a prospective new tenant

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