Katz Deli of Aventura, Inc. v. Waterways Plaza, LLC

Citations: 183 So. 3d 374; 2013 Fla. App. LEXIS 18929; 2013 WL 6212040Docket: Nos. 3D12-3409, 3D13-124

Court: District Court of Appeal of Florida; November 26, 2013; Florida; State Appellate Court

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The consolidated appeal and cross-appeal challenge the damages awarded for a breach of contract that resulted in the constructive eviction and eventual closure of Katz Deli of Aventura. The court agrees that prospective lost profits were the appropriate measure of damages but finds the trial court's determination that such profits beyond the initial lease term would be speculative to be correct, thereby affirming the lower court's decision.

Katz Deli of Aventura, part of the Haibi family's chain, operated successfully in Pembroke Pines before expanding to Aventura, leasing a space in Waterways Plaza. The original lease for a smaller location was followed by a new lease in 2002 for a larger space of 15,386 square feet, with a monthly rent starting at approximately $25,000 and potential renewals extending to 2022. The lease required the landlord, Waterways Plaza, LLC, to perform necessary repairs, including the roof, which was identified as needing replacement prior to Waterways' acquisition of the Plaza in June 2002.

Waterways failed to timely repair the roof, leading to significant leaks and mold issues that caused a drastic decline in Katz's business, rendering the premises unfit for restaurant use by May 2003. Katz filed suit against Waterways for breach of contract and constructive eviction after paying rent through May and placing June rent into the court registry. After Katz vacated the premises in July 2003, Waterways completed the roof repairs and subsequently leased the space to new tenants at significantly higher rents.

Katz alleges willful eviction by Waterways, who aimed to capitalize on a new market-rate lease. Katz filed for breach of contract and constructive eviction, alongside a lis pendens for an equitable lien based on a lease provision limiting the tenant's claims to the landlord's interest. The trial court dismissed the equitable lien but determined Katz experienced constructive eviction due to Waterways’ gross negligence in maintaining the roof, constituting a lease breach. During a damages hearing, Katz's expert accountant calculated projected lost profits, while Waterways contended that market value of the destroyed business should be the damage measure. Katz's owner, Ron Haibi, valued the business at approximately $1.5 million, based on an insurance policy and a prior purchase offer. The court ultimately awarded Katz future lost profits of about $800,000 through April 2007, denying claims for profits beyond that date due to uncertainty and rejecting various out-of-pocket expenses related to the eviction. Katz was awarded attorney’s fees but denied a contingency fee multiplier. On appeal, Katz seeks compensation for the rent difference with new tenants, extended lost profits, reimbursement for out-of-pocket expenses, reinstatement of the equitable lien, and a contingency fee multiplier. Waterways cross-appeals, arguing for market value as the appropriate damages measure, asserting insufficient evidence was presented for Katz Deli's market value. Constructive eviction, resulting from Waterways' negligence, breached the covenant of quiet enjoyment and contract obligations, aiming to restore Katz to its pre-breach position.

A successful plaintiff in a breach of contract case cannot be placed in a better position than if the contract had been performed. Damages recoverable are those that naturally result from the breach and were reasonably contemplated by the parties at the contract's formation. Exact injuries do not need to have been foreseen, as long as the consequences of the breach were expected. The method of calculating damages can differ based on the circumstances, with reliance or expectation damages (such as lost profits) being awardable, but not both.  

In assessing damages, a trial court's choice of calculation method is reviewed de novo, while factual findings regarding damages amounts are reviewed for clear error. In cases of total business destruction, damages are typically measured by the market value at the time of loss, not lost profits. Conversely, if a business continues to operate after a negligent act, it can recover lost profits but not both lost profits and market value.

This case involves uncertainty about when the negligent act and lease breach occurred, as leaks began in 2002, but the business did not become untenable until May 2003. The precise "date of loss" under the market value theory is unclear, as is the market value of Katz, which was negatively impacted by the leaks. Katz was not completely destroyed during the events in question, as it attempted to reopen but faced challenges due to cash flow issues. The company itself continued to exist, retaining some inventory and community goodwill.

Determining when a business is "completely destroyed" lacks a clear standard, but it is evident that the business in question never reopened. Granting market value damages for a business that has been gradually diminished due to a defendant's breach would be inequitable and inconsistent with Florida law. Waterways secured a new lease with different tenants just twenty-six days after Katz vacated, prior to completing necessary roof repairs, and for significantly higher rent, indicating that Katz could not have resumed operations at that location. Consequently, Katz was compelled to seek another location with limited resources and a tarnished reputation stemming from prior issues with the business premises. The majority of Katz's financial investment was tied to the Aventura location, exacerbating losses in both business and family finances.

Given these circumstances, lost profits are a legitimate measure of damages, as Waterways’ ongoing breach led to a gradual decline in the business's market value, making market value damages inadequate for compensating Katz. The primary objective in breach of contract cases is to restore the plaintiff to their pre-breach position, achievable only through an award of lost profits substantiated with reasonable certainty.

Florida jurisprudence supports that lost profits can be recovered for both established and new businesses as long as a method for measuring prospective profits exists. Key Florida cases, Twyman v. Roell and New Amsterdam Casualty Co. v. Utility Battery Manufacturing Co., establish that while prospective profits are often deemed speculative, they can be recovered if there is a reliable basis for estimating losses. Specifically, Twyman allows for recovery without requiring an established business record, focusing on the causal connection between the defendant's actions and the damages, alongside a standard for determining the damage amount.

A "yardstick" for measuring lost profits must be reasonable, with the loss resulting from the defendant's actions requiring a degree of certainty. Lost profits cannot be based on speculation, but uncertainty in the exact amount does not bar recovery if some loss is obvious. In this case, Katz Deli's history of success at multiple locations, sales data, and expert projections provided a sufficient basis for calculating lost profits. The duration of lost profit damages is not strictly defined by the lease term; however, a renewal option must be reasonably certain for those damages to be recoverable. Katz argued it would have renewed its lease through 2022 due to its previous success and below-market rent, supported by evidence of subsequent tenants continuing to operate in the space. The possibility of subleasing at higher rates was also noted as a potential source of profit. Ultimately, whether the lease renewal and associated lost profits were reasonably certain is a factual determination for the finder of fact. If tried without a jury, the trial judge's factual findings are presumed correct on appeal unless demonstrably erroneous.

The trial court determined that an award for lost profits beyond the initial lease term was speculative, a conclusion that, while potentially contestable, was not deemed clearly erroneous, leading to the affirmation of the denial for such profits. For a lis pendens to be validly filed, there must be a connection between the legal or equitable title to the property and the plaintiff’s claims, which was not established in this case. Citing precedent, the court found that a similar contract provision limited the tenant's recovery against the landlord without conferring an interest in the realty, thus upholding the dismissal of the equitable foreclosure and lis pendens. 

Regarding the trial court's denial of a contingency fee multiplier, the decision was reviewed under an abuse of discretion standard. Factors considered included the necessity of a multiplier for competent counsel, the attorney's ability to mitigate nonpayment risks, and relevant factors from Rowe, such as the amount involved and results obtained. In this case, Katz had access to skilled counsel and could have pursued the case on various fee arrangements without needing a multiplier, given the apparent certainty of Waterways' liability. Consequently, the trial court's decision was not an abuse of discretion.

Additionally, the trial court mistakenly stated that the lease allowed for two five-year renewals, whereas it actually allowed for three. The lease initially required a monthly payment of approximately $25,000, with a $4,000 rebate contingent on timely payments. An analysis of Katz Deli’s sales projections and actual sales was performed to determine a discount rate for future projections, which included adjustments for business growth and the local market. Although some cases indicate that plaintiffs in wrongful eviction cases may claim both lost profits and the difference in market value and rent, Katz sought recovery for one or the other, as the lost profit calculation already factored in lower rental payments.

In cases of complete destruction of a business, plaintiffs typically aim to demonstrate total destruction to pursue a recovery based on market value, which is often greater than lost profits from a short period. However, in this instance, Katz opted to pursue lost profits due to the uncertainty surrounding the business's market value after prolonged damage. Evidence indicates that the lost profits awarded to Katz likely fall below the market value prior to the incidents. Waterways contended that Sarah’s Tent ceased operations after the trial date, which is irrelevant to the case's outcome. The Florida Supreme Court, in Florida Patient's Compensation Fund v. Rowe, outlined criteria for trial courts to determine reasonable attorney’s fees, including factors such as required time and labor, the novelty of legal issues, customary fees, results obtained, client-related time constraints, the nature of the lawyer-client relationship, and the lawyer's experience and reputation. Minor arguments raised by the parties were deemed meritless and not specifically addressed.