A trial judge’s $1.1 million in compensatory and punitive damages award in favor of a commercial tenant dissipated when the Court of Special Appeals found that the landlord’s self-help eviction was lawful. Donegal Associates v. Christie-Scott, LLC (No. 385, Sept. Term 2019) (11/19/20). Adding insult to injury, the Court remanded the case for entry of a money judgment against the tenant, already out of business as a result of the abrupt termination of its 12-year tenancy. This dramatic turnabout was required, the Court held, because the tenant failed to prove that the landlord’s repossession of the leased premises and seizure of the tenant’s furniture, fixtures, and inventory constituted a tortious conversion. The Court confirmed that, in appropriate circumstances, a commercial tenant can be evicted without notice or judicial process, and also broke some new ground regarding the law of constructive conversion.
The tenant operated a hair salon from premises that it had leased for 12 years. The written lease expired in October 2016, but the tenant stayed in the property and paid rent at the pre-expiration rate while the parties negotiated the terms of a new lease. The expired lease provided that at expiration, the landlord could treat the tenant as one at-will and charge a market rent, or deem it a tenant holding over liable for rent at double that rate. The lease also provided that all of its other terms would remain in effect for as long as the tenant remained in possession of the property. Slip Op. at 2–3.
In June 2017, the tenant signed a lease for space elsewhere and informed its existing landlord that it would move out in November. Shortly thereafter, the landlord declared the salon to be a holdover tenant and billed it for double the rent. When the tenant failed to pay, the landlord eventually filed a failure to pay rent action in district court, which set the matter for trial on November 9. Three days before trial, however, the landlord went to the salon, changed the locks and alarm codes, and denied further entry by the tenant and its employees except to retrieve their personal property and professional tools. The salon’s furniture, fixtures, equipment and inventory were retained by the landlord. Id. at 7–8.
In seizing the property, the landlord relied on lease provisions that said if the tenant failed to pay rent, the landlord could (a) “without further notice” terminate the lease and remove tenant from the premises, “by force if necessary”; (b) enter and relet the premises; and “(c) Perfect and otherwise enforce a lien, which Tenant agrees that Landlord shall have, on all personal property, fixtures and trade fixtures of Tenant … [which] may without notice and without liability to Tenant or other party be sold by Landlord at public or private sale with the proceeds being applied to amounts owed by Tenant and toward damages resulting from Tenant’s breach of this Lease.” Id. at 6.
The tenant filed a complaint in the circuit court the very next day, alleging wrongful eviction, trespass, tortious interference with contract, and conversion. It eventually abandoned all but the conversion claim, arguing successfully at trial that, as a holdover tenant under an expired lease, it was entitled to 30 days’ notice to quit pursuant to Md. Code Ann., Real Prop. Article (Real Prop.) § 8-402(b)(1). Slip Op. at 15; 25, n. 14. Because there was no such notice, the trial judge determined that the landlord took possession of the property “without legal right under the lease to do so,” and thus was liable for its conversion. Id. at 17. The judge also concluded that $1 million in punitive damages was appropriate because the landlord kept the tenant’s property and offered it to another stylist to open a new salon on the premises knowing that this course of action would destroy the tenant’s business. Id. at 18.
Although the Court of Special Appeals accepted the trial judge’s findings of fact, it rejected all of its legal conclusions. On the question whether notice to quit was required, the Court noted that while Real Prop. § 8-402(b)(1)(i) provides that a landlord must ordinarily give a holdover tenant 30-days’ notice to before repossessing the premises, Real Prop. § 8-402(a)(4) provides that the statute does not limit other remedies “under the lease or under applicable law.” Id. at 25, n. 14. The lease under review provided that upon the tenant’s default, the landlord “may without notice, terminate the lease, enter upon the premises, and ‘enforce a lien’ on all property in the salon.” Id. The landlord did just that and, the Court concluded, was within its rights to do so. Id. at 22, citing K & K Management, Inc. v. Lee, 316 Md. 137, 167–68 (1989).
To reach this conclusion, the Court addressed the intersection of tort and landlord-tenant law. Conversion is an intentional tort that encompasses “any distinct act of ownership or dominion exerted by one person over the personal property of another in denial of his right or inconsistent with it.” Slip Op. at 21 (citations omitted). Conversion can be either direct (where the defendant’s initial exercise of dominion and control was unlawful or without right) or constructive (where the defendant’s initial possession of the property was lawful, but there was a wrongful detention of it after due demand for its return). Id.
The Court looked to landlord-tenant law before rejecting the trial court’s finding of a direct conversion of the tenant’s property. While the Legislature has imposed limitations on the extrajudicial eviction of a residential tenant, Real Prop. § 7-113, “a commercial landlord is permitted, although it is not encouraged, to resort to self-help to repossess premises and property within the premises in the following circumstances: (1) the tenant is in breach of a lease; (2) that authorizes the remedy of repossession; and (3) the repossession can be done peacefully.” Id. at 23. The Court found that all three requirements for a lawful self-help eviction were satisfied in the case before it.
First, the tenant was in breach for its failure to pay the full, i.e., two times market, rent due, and the trial court so found. Second, the lease, which by its terms remained in effect despite its expiration or the tenant’s breach, clearly authorized the landlord to “‘[p]erfect and otherwise enforce a lien’ on ‘all personal property, fixtures, and trade fixtures’ in the salon,” and to sell it, publicly or privately, without notice. Id. at 24–25. Finally, the repossession was, in fact, effected peacefully, that is, in a manner designed to “avoid a confrontation possibly leading to violence.” Id. at 25, quoting K & K Management, 316 Md. at 179. The landlord entered the property on a Monday, a day he knew that the salon would be closed. The sole employee on site taking inventory was asked to leave, but was permitted to take her personal belongings, and left without incident. Id. As the landlord’s self-help eviction and repossession satisfied all three legal requirements, its initial exercise of control over the tenant’s property was lawful. There was no direct conversion.
Although not decided below, the Court went on to determine whether the landlord might have been liable for a constructive conversion by retaining the lawfully obtained property after a demand for its return. The Court noted that “a party claiming constructive conversion must show a demand and refusal,” but found neither in this case. Id. at 27 (citations omitted).
The tenant argued that filing suit just one day after the seizure satisfied the demand requirement. Finding no Maryland case on point, the Court looked to other jurisdictions before holding, “as have other courts addressing the issue, that the demand and refusal required to establish constructive conversion must be made prior to filing suit for conversion.” Id. (citations omitted). There was little discussion of this issue of first impression, and none on whether a demand for the tenant’s property would ultimately have been fruitful in light of the contractual lien on the property under the lease.
The absence of either a direct or construction conversion doomed the award of compensatory damages (calculated by the trial court as the value of the tenant’s furniture, fixtures, equipment and inventory, less the back rent and related lease charges owed to the landlord), and thus any claim on which a punitive damages award might be based. To make matters worse for the tenant, the appellate court found that the trial judge’s findings with respect to the rent and other lease payments owed by the tenant were not appealed by either party. The case was therefore remanded for the circuit court to turn its $1.1 million judgment in favor of the tenant into a $43,000 judgment against it. Id at. 29.
This was not, however, a total loss for the tenant. The Court ordered that the costs of the appeal, typically assessed against the losing party pursuant to Md. Rule 8-607(a), would be paid by the landlord, even though it was the prevailing party Id. at 29, n. 16.