Opinion
20-P-1421
02-14-2022
SEAPORT B/C RETAIL OWNER LLC v. SEAPORT REBEL RESTAURANT LLC & another.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
This appeal arises from a dispute over a tenant's obligation pursuant to the terms of a commercial lease to seek and use all diligent efforts to obtain a liquor license. After a jury-waived trial, a judge of the Superior Court entered judgment in favor of the plaintiff, landlord Seaport B/C Retail Owner LLC (Seaport Retail), and subsequently denied the motion of the tenant, Seaport Rebel Restaurant LLC (STK), and STK's guarantor, The ONE Group Hospitality, Inc. (TOGH) (together, the defendants), to amend the findings and judgment or, in the alternative, for a new trial. On appeal, the defendants argue that: (1) the judge erred in concluding that STK breached the lease; (2) Seaport Retail failed to prove it was harmed by any alleged breach; and (3) the judge improperly calculated damages. We affirm.
Background. We summarize the facts as found by the judge, leaving certain facts for our later discussion. See, e.g., Cavadi v. DeYeso, 458 Mass. 615, 624 (2011).
1. Lease and guaranty. Seaport Retail owns retail space in Seaport Square in Boston. On January 20, 2016, after approximately one year of negotiations, STK entered into a ten-year agreement with Seaport Retail to lease 8,323 square feet on two floors (premises), to be used as a steakhouse restaurant. Section 20.27(A) of the lease required STK "to apply for (by no later than September 1, 2016), seek and use all diligent efforts to obtain, and to have duly approved by the appropriate governmental authorities and officials of the City and the State, as soon as possible, a so-called 7-day all alcoholic beverages liquor license" (emphasis added).
Other provisions of the agreement permitted Seaport Retail to terminate the lease in the event of a nonmonetary default, provided that STK was so notified and given thirty days to cure. If Seaport Retail terminated the lease in the event of a default, STK remained "liable for ... Rent and other charges" as they would have "become due if this Lease had not been terminated." The lease further provided that, if the premises were relet by Seaport Retail, STK "shall be entitled to a credit in the net amount of Rent received by [Seaport Retail] in reletting, after deduction of all expenses incurred in reletting the Demised Premises (including, without limitation, remodelling costs, and brokerage fees), and in collecting the Rent in connection therewith."
The same day that the lease was executed, STK's parent company, TOGH, signed a limited guaranty of certain of STK's obligations under the lease. In relevant part, the guaranty provided:
"Landlord agrees that Guarantor's liability under this Guarantee [sic] shall apply (and be limited in all respects) to only the covenants, conditions and agreements to be performed and observed by Tenant (and its successors and assigns) under the Lease relating to the payment of Minimum Rent and additional rent under Articles VII, VIII and XII during the first thirty-six (36) full calendar months of the Term of the Lease, but specifically excluding any liquidated damages or acceleration of rent whether permitted by the Lease or at law" (emphasis added).
2. Efforts to obtain liquor license. The number of liquor licenses available in Boston is limited by statute. See G. L. c. 138, §§ 12, 17. In the two years preceding the execution of the lease, the Legislature increased the number of full, on-premises, all alcoholic beverages liquor licenses in Boston from 650 to 665. See St. 2014, c. 287, §§ 71-73; St. 2015, c. 119, §§ 18-19. The fifteen new licenses were free, fully transferable, and available for establishments anywhere in the city. Ten of those free licenses became available in January 2016, the same month that the lease was executed. The licensing board awarded all ten licenses shortly thereafter, and none were available by early February 2016. Relevant here is that one of those licenses was awarded to another tenant of Seaport Retail, for a different establishment in the Seaport.
The remaining five licenses became available on September 1, 2016. An entity seeking one of those licenses was required to submit an application that conformed with the licensing board's requirements, and the manager of record listed in the application was required to attend a public hearing. The licensing board would then vote to approve or deny the application without considering potential future applicants, meaning the board would not postpone its decision to hear from all those who applied in the same time period. The board could deny an application if it determined that granting the requested license would not serve a "public need."
The parties understood that STK needed a liquor license to operate a restaurant in the Seaport. STK and TOGH were both unfamiliar with the procedures for applying for a liquor license in Boston. However, for approximately seven months after executing the lease, STK made no effort to inform itself of the process and general practice for obtaining a license. If the defendants had educated themselves about the process, they would have known that many applicants would seek the free liquor licenses and STK would have to act quickly to obtain one.
On August 23, 2016, STK requested that the deadline for filing the liquor license application be extended from September 1 to September 30, 2016, and expressed that STK was "confident that there will be no issues in getting the license." The following day, the parties signed an agreement to extend the deadline as requested. On or about August 25, 2016, STK engaged an attorney to represent it in connection with the liquor license application. STK had been referred to that attorney nearly a month earlier by an affiliate of Seaport Retail.
On September 6, 2016, STK submitted its application to the licensing board. Because the person designated in the application as the manager of record was not a Massachusetts resident, however, she was not eligible to serve in that role under the licensing board's rules. STK incorrectly indicated on the application that the designated person was a Massachusetts resident, but the licensing board gleaned otherwise based on the person's criminal offender record information (CORI) form. As a result, the board informed STK that it would not schedule a hearing on the application.
In October 2016, the board awarded four of the five free liquor licenses to entities that had submitted applications in August 2016. Thereafter, on November 9, 2016, STK submitted a revised application designating a new manager of record who resided in Massachusetts. STK first contacted that person in late October 2016. STK did not submit the designated manager's proof of citizenship documents in connection with the application until January 5, 2017. The licensing board then scheduled a hearing for January 25, 2017.
In the interim, on January 18, 2017, the board granted the last remaining free license to an entity located near the Seaport area in South Boston. That application was filed on November 23, 2016. Following the scheduled hearing on STK's application, the licensing board voted to deny the application. The licensing board later explained that the basis of the denial was that no licenses were available at the time of the vote. STK made no efforts to purchase a liquor license on the secondary market, the price of which was between $350,000 and $400,000.
Seaport Retail declared an event of default under the lease, citing, in part, STK's failure to use all diligent efforts to obtain a liquor license, and then notified STK that it had thirty days to cure the defaults. Thereafter, STK exercised its option to terminate the lease under section 20.27, because it had not obtained a liquor license within the period prescribed under the lease. Seaport Retail then issued a letter to terminate the lease due to STK's failure to cure the defaults alleged in its earlier letter. Seaport Retail ultimately subdivided the premises and relet it to replacement tenants.
By that time, Seaport Retail had spent $374,300 to substantially complete the "Landlord's Work" detailed in the lease.
3. Present action. Seaport Retail brought this action in the Superior Court asserting claims against STK and TOGH for breach of the lease and guaranty and seeking declarations concerning the parties’ rights under those two instruments. The defendants filed a counterclaim seeking declarations (1) that STK properly terminated the lease on or about February 10, 2017, or, alternatively, that the lease expired on April 11, 2017, and (2) regarding the extent of TOGH's obligations under the guaranty.
Following a jury-waived trial over the course of four days, the judge issued comprehensive findings of fact, rulings of law, and an order for entry of judgment. The judge concluded that STK breached the lease by failing to use all diligent efforts to obtain a liquor license, Seaport Retail was entitled to recover from TOGH under the guaranty, and Seaport Retail was entitled to the full amount of three years’ minimum rent plus STK's pro rata share of real estate taxes and common area maintenance costs under the guaranty, totaling $2,192,757. The defendants subsequently moved to amend the judgment or findings of fact or, in the alternative, for a new trial, which motion the same judge denied by a written decision and order.
The judge also concluded that STK did not breach the lease by failing to timely submit tenant construction documents. The parties make no argument about that ruling on appeal.
Discussion. "When reviewing the trial judge's decision, we accept [the] findings of fact as true unless they are clearly erroneous, and we give due regard to the judge's assessment of the witnesses’ credibility." Andover Hous. Auth. v. Shkolnik, 443 Mass. 300, 306 (2005). Our review of the judge's conclusions of law is de novo. See Martin v. Simmons Props., LLC, 467 Mass. 1, 8 (2014).
1. Breach. The defendants contend that STK did not breach the lease because STK applied for a liquor license before the September 30 contractual deadline and responded to all subsequent requests from the licensing board. Putting aside the question whether STK met the September 30 deadline by submitting a flawed application, we turn to the issue whether the defendants used "all diligent efforts" to obtain a liquor license as required under the lease.
"What constitutes diligent effort presents a question of law," but "[w]hether [a party] acted diligently is a factual question." Lynch v. Andrew, 20 Mass. App. Ct. 623, 625 (1985). The lease does not define "diligent efforts." However, the trial judge concluded that the term required STK to use "as much steady earnest and energetic effort as possible." The judge later explained that definition was not meaningfully different from the one advanced by the defendants, which was based on the language in Macksey v. Egan, 36 Mass. App. Ct. 463 (1994), and would require STK to put forth its "best efforts," meaning to "put its muscles to work to perform with full energy and fairness the relevant express promises and reasonable implications therefrom." Macksey, supra at 472. Cf. Sechrest v. Safiol, 383 Mass. 568, 570-571 (1981) (contract conditioned on receipt of permits or town approval obligated party to make reasonable effort to obtain them); Stabile v. McCarthy, 336 Mass. 399, 403-404 (1957) (same).
Applying that standard, the record demonstrates that STK failed to use "all diligent efforts" to obtain a liquor license. STK waited until shortly before the original contractual deadline to even familiarize itself with the process for obtaining a liquor license in Boston or hire counsel to assist. While STK did submit an application shortly thereafter, the application failed to conform to the licensing board's residency requirement for the manager of record, and STK took over two months to amend the application. Even then, STK failed to provide the citizenship documents for the newly designated manager of record for nearly two more months. By the time that information was provided and the hearing was held, STK was effectively precluded from obtaining one of the five free licenses because they already had been granted to other applicants. Notwithstanding STK's work to garner support from the local neighborhood association and the mayor's office, it failed to use "all diligent efforts" given the deficiencies with its application and its failure to promptly rectify them.
Given our conclusion that STK was in breach, we decline Seaport Retail's invitation to revisit the trial judge's ruling on summary judgment, that the lease did not require STK to attempt to purchase a liquor license on the secondary market if its application for one of the five free licenses was unsuccessful.
2. Causation. The defendants next argue that Seaport Retail failed to demonstrate another essential element of its claim, namely, that it was damaged as a result of STK's breach. The defendants contend that STK was unlikely to be granted one of the five free licenses even if it exercised all diligent efforts because there were "literally dozens of applicants" for the licenses and STK would be unable to demonstrate that a "public need" supported its application given its restaurant concept (steakhouse) and location (the Seaport).
A party may recover for a loss sustained as a result of a breach if "the loss is of such a nature that it was reasonably foreseeable by the parties and follows as a natural consequence and proximate result of the breach or was actually within their contemplation at the time the contract was entered into." International Totalizing Sys., Inc. v. PepsiCo, Inc., 29 Mass. App. Ct. 424, 430 (1990). See Taylor v. International Indus., Inc., 8 Mass. App. Ct. 865, 868 (1979) ("Recovery is limited to the damages caused by the defendant's breach and ‘can be had only for loss that would not have occurred but for the breach’ " [citation omitted]).
The defendants’ position that STK was never likely to obtain one of the five free liquor licenses runs contrary to the trial judge's express findings on the issue. The trial judge found that the Seaport location did not preclude STK from receiving a free license from the board, citing the facts that one of the ten free licenses that became available shortly before the execution of the lease was awarded to a bar in the Seaport and the last of the five free licenses STK was obligated to apply for was awarded to an entity that operated on the edge of the Seaport. On the defendants’ postjudgment motion, the trial judge further explained that she made "a reasonable inference ... that STK would, more likely than not, have been granted a license" had it made a timely, complete, and accurate application. In reaching this conclusion, the judge again noted that "two recent applicants from the Seaport had received liquor licenses," and reiterated that STK was effectively barred from obtaining one of the five free licenses given its delay in submitting a complete, accurate application along with the necessary information. The judge was permitted to rely on the board's issuance of other licenses in the area to support her ultimate finding. See Twin Fires Inv., LLC v. Morgan Stanley Dean Witter & Co., 445 Mass. 411, 420 (2005) ("we are bound by a judge's findings of fact that are supported by the evidence, including all inferences that may reasonably be drawn from the evidence"). See also Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 510 (1997) ("So long as the judge's account is plausible in light of the entire record, an appellate court should decline to reverse it").
To the extent that the last license was issued to an entity in South Boston rather than the Seaport, that distinction is not consequential. Regardless, whether the entity was technically in South Boston or the Seaport, it was permissible to consider its close proximity to the premises as relevant.
The parties dispute who bore the burden of proving the likelihood that STK would have succeeded in obtaining a liquor license had all diligent efforts been exerted. See Schwartz v. Travelers Indem. Co., 50 Mass. App. Ct. 672, 682 & n.12 (2001) (plaintiff must prove harm occurred as result of breach to recover more than nominal damages). Compare Restatement (Second) of Contracts § 245 comment b (1981) (party in breach bears burden of proving condition would not have occurred regardless of lack of cooperation). Assuming for the purposes of our analysis that the burden of proof rested with Seaport Retail, for the reasons stated above, we conclude that it put forth sufficient evidence to support the judge's finding in its favor.
The defendants argue that certain statements in the record supporting Seaport Retail's position, that STK was obligated to purchase a liquor license if it did not obtain a free one, constituted admissions by Seaport Retail that the licensing board was never likely to award one of the free licenses to STK. These statements were made in an affidavit of Seaport Retail's expert provided in support of summary judgment, in a pretrial memorandum, and during closing argument at trial. However, the defendants cite no authority that permits us to assign a preclusive effect to such statements, particularly where the judge reached her ultimate conclusions by weighing the evidence presented at trial. See Ortiz v. Jordan, 562 U.S. 180, 184 (2011) ("Once the case proceeds to trial, the full record developed in court supersedes the record existing at the time of the summary-judgment motion").
The affidavit was the subject of a motion to strike filed by the defendants and the judge expressly did not consider it in ruling on the summary judgment motion.
We note that the expert at issue testified at trial and was the subject of cross-examination. That expert testified that he advised one of his clients seeking a free license for a restaurant in a different neighborhood "at the outset that it was much more likely that they would have to buy one." With respect to STK, the expert testified that, in making its public need determination on the application, the board would consider that "the Seaport is chockablock full of national chain steakhouses" and "a national chain that was not a steakhouse might be in a better position." He also agreed with the assessment of STK's counsel in November 2016 -- when only one free license remained available -- that the outlook on STK's application was not "promising." This testimony is not in direct conflict with the judge's finding on causation, but, even if it was, the judge was "free as fact finder[ ] to accept or reject that [expert] testimony once admitted." Ulin v. Polansky, 83 Mass. App. Ct. 303, 307-308 (2013). See Balles v. Babcock Power Inc., 476 Mass. 565, 574 (2017) (evidence contrary to judge's finding of fact did not establish that finding, supported by other evidence, was clearly erroneous). We accept the judge's findings of fact, as they are supported by the trial evidence.
Given STK's material breach of its obligation to use "all diligent efforts" to obtain a liquor license, it was not permitted to terminate the lease under section 20.27(A) based on the board's denial of STK's application. See Lynch, 20 Mass. App. Ct. at 626 ("When [one party], through [its] actions, bring[s] about a failure to satisfy a condition, [it] may not claim the benefit of that failure").
3. Damages. Finally, the defendants argue that, under the terms of the lease, they were entitled to but did not receive credit for a portion of the replacement rent collected by Seaport Retail after it relet the premises to replacement tenants. We disagree.
Pursuant to the guaranty, TOGH was liable for STK's obligations to pay minimum rent, taxes, and operating expenses for the first three years of the lease term (October 1, 2017, through September 30, 2020). Because Seaport Retail was able to relet the premises, STK was entitled to a credit for the rent received from the replacement tenants less expenses incurred by Seaport Retail in reletting the premises. Here, the trial judge found that "Seaport Retail's cumulative costs to re-let the Premises exceeded or will exceed the rent it receives from the replacement tenants" during the three-year period covered by the guaranty. Therefore, the judge awarded Seaport Retail the full amount of three years’ rent plus STK's pro rata share of real estate taxes and common area maintenance costs.
The defendants contend that the manner in which the judge calculated damages was contrary to the lease term setting forth Seaport Retail's remedy in the event of a default. In relevant part, that section of the lease provides that "Tenant shall be entitled to a credit in the net amount of Rent received by Landlord in reletting, after deduction of all expenses incurred in reletting the Demised Premises." Construing that provision, the defendants take the position that use of the term "net amount" denotes that, in calculating damages, either the reletting costs should have been amortized across the term of each lease signed by a replacement tenant, or the reletting costs should have been considered in connection with all replacement rent received over the ten-year term of the original lease.
Stated another way, the defendants contend that the judge erred in deducting all of Seaport Retail's reletting costs from the replacement rent recovered over just the three-year period that was the subject of TOGH's guaranty. This argument is contrary to the plain language of the lease, permitting Seaport Retail to deduct "all expenses incurred in reletting the Demised Premises" from the net amount of rent collected by the replacement tenants (emphasis added). Where Seaport Retail sought to recover only the first three years of rent under the guaranty, it was entitled to offset all expenses incurred in reletting the premises from the amount of rent received during that relevant period.
To the extent that the defendants argue the result is a windfall to Seaport Retail, this argument rests on the premise that all replacement tenants will pay rent over the full term of their leases and ignores the express provisions of the lease and guaranty setting forth the parties’ agreed-upon remedies in the event of a default. Here, Seaport Retail established the damages to which it was entitled under the lease and guaranty by a preponderance of the evidence and, therefore, we see no reason to disturb the judge's damages calculation. See, e.g., Don v. Soo Hoo, 75 Mass. App. Ct. 80, 85 (2009) (plaintiff must prove damages with reasonable certainty; mathematical precision not required).
By way of example, evidence was presented at trial that Seaport Retail renegotiated and ultimately terminated one of the replacement leases after the tenant's business was unsuccessful.
For the same reasons stated above, we conclude that the judge did not abuse her discretion in denying the defendants’ motion to amend the judgment or findings of fact or, in the alternative, for a new trial. See R.W. Granger & Sons, Inc. v. J & S Insulation, Inc., 435 Mass. 66, 79-80 (2001).
Judgment affirmed.
Order denying motion to amend or for a new trial affirmed.