A former tenant that broke its lease at the Montgomery Park office building in Baltimore remains on the hook for nearly $10 million after a federal appeals court held Tuesday that the landlord made “commercially reasonable” but unsuccessful efforts to lease the vacated space.
In its published decision, the 4th U.S. Circuit Court of Appeals rejected NCO Financial Systems Inc.’s argument that Montgomery Park LLC did not try hard enough to find a new tenant, which would have reduced the $9.85 million in compensation NCO owes for its early departure, including late fees and interest.
The 4th Circuit held that Montgomery Park’s fruitless attempts to find a new tenant satisfied its obligation, under the lease and common law, to try to mitigate the financial damages caused by NCO’s early departure.
Montgomery Park, as the landlord, was under no legal obligation to make an extraordinary effort to find a new tenant specifically for the abandoned space, the appellate court stated.
Rather, Montgomery Park satisfied its mitigation obligation with its efforts to fill 500,000 square feet of empty space — including the 100,000 square feet NCO abandoned — at the 1.2 million-square-foot office building in Baltimore’s Pigtown area.
The landlord’s efforts included retaining an international brokerage firm and distributing brochures, hanging banners and conducting tours of the building to attract tenants. But these efforts proved unsuccessful, as Montgomery Park filled only 7,000 square feet, the 4th Circuit stated in upholding a decision by U.S. District Judge George L. Russell III in Baltimore.
“Based on the (district) court’s findings, this was not a case where Montgomery Park sat on its hands so that it could benefit from NCO’s ongoing rent obligation,” Judge Paul V. Niemeyer wrote for the 4th Circuit.
“Rather it made substantial efforts to mitigate damages in the context of leasing its vacant space,” Niemeyer added. “Unfortunately, these efforts were made in the context of a difficult market with a difficult building – a situation made yet more difficult by NCO’s breach. NCO certainly has not demonstrated a likelihood of a better result with any other combination of marketing tactics.”
Montgomery Park’s appellate attorney praised what he called the 4th Circuit’s recognition of his client’s efforts to comply with the duty to mitigate.
“The obligation was to use commercially reasonable efforts” to re-lease the space, said Howard G. Goldberg, of Goldberg & Banks PC in Pikesville. “They did everything that they could have to perform that obligation.”
NCO’s appellate attorney, Stephen Nichols, did not immediately respond Wednesday to a message seeking comment on the 4th Circuit’s decision. Nichols is with Offit Kurman in Bethesda.
NCO ended its 12-year lease at Montgomery Park about four years early in 2011, an act that has sparked more than a decade of federal court litigation. The courts found that NCO left the building without having satisfied the lease’s early termination option, leaving NCO liable for the remaining rent, late fees and interest not mitigated by Montgomery Park finding a new tenant within those four years.
NCO argued before the district court and 4th Circuit that Montgomery Park failed to really try to find a replacement tenant, citing the landlord’s decision to advertise other vacancies but not NCO’s abandoned space on the CoStar website, widely regarded as hosting the definitive listing of available office space. NCO also said Montgomery Park directed would-be tenants away from the abandoned space.
But the 4th Circuit said Montgomery Park made a valid “strategic decision” not to list online NCO’s old space – or several other vacancies -– based on the landlord’s belief that having many listings at once on CoStar would create, in Russell’s words, “the impression that the building was somehow sick or not able to be leased. And, indeed, the building suffered from this.”
NCO’s allegation that Montgomery Park steered would-be tenants from NCO’s old space “achieves little, as none of these tenants ultimately decided to rent any space in the building,” Niemeyer wrote. “As the district court found, tours were conducted and offers were made, but unfortunately, ‘very few, if any, were accepted for the purpose of leasing any space within Montgomery Park, much less the NCO space in this case.’”
NCO had “the burden to demonstrate a failure to mitigate damages, not a failure to employ every idea it believes would have increased the chances of re-leasing the space,” Niemeyer added.
The federal courts have jurisdiction in the litigation based on an amount in controversy exceeding $75,000 and a diversity of state residency between Pennsylvania-based NCO – now known as EGS Financial Care Inc. — and Baltimore-based Montgomery Park LLC.
Niemeyer was joined in the opinion by Chief Judge Roger L. Gregory and Judge Pamela A. Harris.
The 4th Circuit rendered its decision in NCO Financial Systems Inc. v. Montgomery Park LLC, No. 20-2370.