Lafayette Rentals, Inc., Appellant/Cross-Appellee-Defendant v. Low Cost Spay-Neuter Clinic, Inc., Appellee/Cross-Appellant-Plaintiff (2024)

MEMORANDUM DECISION

Case Summary

[1] Lafayette Rentals, Inc. (“Landlord”) appeals the trial court's judgment in proceedings brought by its tenant, Low Cost Spay-Neuter Clinic, LLC (“Clinic”). On appeal, the Landlord argues that the trial court erred by terminating the lease agreement (“the Lease”) as of April 2023. On cross-appeal, the Clinic argues that the trial court erred when it concluded that the Landlord's breaches of the Lease were not sufficiently material to terminate the Lease when the Clinic vacated the premises in November 2022. We conclude that the trial court's findings regarding the termination of the Lease are clearly erroneous. The Landlord's breach was material, and the Clinic was entitled to rescission of the Lease in November 2022. Accordingly, we reverse and remand.

Issues

[2] The Landlord raises one issue, which we restate as whether the trial court's termination of the Lease as of April 2023 was clearly erroneous. On cross-appeal, the Clinic raises one issue, which we restate as whether the trial court clearly erred by concluding that the Landlord's breaches were not sufficiently material to warrant termination of the Lease as of November 2022.

Facts

[3] The Clinic is a charitable not-for-profit corporation that provides low-cost veterinary services. At the request of several governmental entities, the Clinic established a clinic location in Lafayette, and the governmental entities guaranteed payment of the Clinic's rent for three years. On October 4, 2018, the Landlord and the Clinic entered into a five-year Lease Agreement for commercial space located in Lafayette. The Lease was set to expire on December 31, 2023, and the monthly rent varied from $4,000 to $4,500.

[4] The Clinic, however, repeatedly had issues with the Landlord's maintenance of the property. In July 2020, the Clinic sent the Landlord a letter regarding roof leaks, exterior window leaks, and unsightly common areas. In June 2021, the Landlord complained to the Clinic regarding the Clinic's deliveries in front of the building, failure to submit payments electronically, failure to pay common area maintenance costs, failure to properly maintain the HVAC system, and failure to pay rent.

[5] In June 2021, the Clinic filed a complaint against the Landlord and alleged breach of contract due to the Landlord's failure to make or pay for necessary repairs. The Landlord filed an answer and counterclaim and alleged that the Clinic breached the Lease and was in default. The Landlord sought to terminate the Lease. A bench trial was held in the matter in November 2021. In January 2022, the trial court issued its order on the bench trial and found minor breaches by the Clinic and breaches by the Landlord. The trial court ordered that the Lease remain valid and that the Clinic was entitled to possession of the premises. The Landlord then appealed the trial court's order and requested that this Court order the Lease terminated.

[6] While the matter was pending on appeal, additional maintenance issues arose. In March 2022, the Clinic notified the Landlord of chronic water leaks in the roof and walls; high concentrations of mold in the director's office and lobby; a defective window in the director's office; and a defective entry door. The facility had damages to the ceiling, drywall, and baseboards; large bubbles of water in the drywall paper; and tubs to catch rain coming from the ceiling. A moldy smell was also present in the building. The Clinic received no response from the Landlord. The Landlord performed some roof repairs in March 2022, but according to the Clinic, the roof continued to leak. The Landlord did not repair any of the interior damage or perform any mold remediation.

[7] The Clinic closed on August 30, 2022. On the same day, the Clinic's counsel notified the Landlord's counsel that the Clinic would be vacating the premises. In September 2022, the Clinic filed a complaint against the Landlord for breach of contract and termination of the Lease. The Clinic alleged that:

The condition of the Leased Premises has further deteriorated as a result of chronic water leakage in the roof and walls causing damage to the interior roof panels, drywall damage, wallpaper damage, and water spotting. The chronic water leakage has caused high concentrations of mold in the director's office and lobby. The window in the director's office has still not been sufficiently repaired or replaced, and is a likely source of mold infestation.

Appellant's App. Vol. II p. 11. The Clinic alleged that the Landlord refused to respond to its communication attempts and that the building is “no longer suitable as a veterinary clinic and is not safe or sanitary for the employees, customers, or patients.” Id. at 12. The Clinic sought “termination of the Lease, plus damages to compensate the Clinic for the costs to relocate, plus attorney fees.” Id.

[8] The Clinic paid rent to the Landlord through November 2022, and vacated the premises in November 2022. The Clinic patched the drywall, painted, and fully cleaned the facility. The Landlord did not object to the Clinic leaving the property and did not bill the Clinic for any further rent. The Clinic continued paying the utilities so that the pipes would not freeze and cause further damage.

[9] On March 27, 2023, this Court issued its opinion regarding the Landlord's first appeal. We affirmed in part, reversed in part, and remanded as follows:

The trial court did not err in finding the Clinic was not in default for failure to pay rent in July 2022. Moreover, the trial court did not err in concluding [the Landlord] was responsible for maintenance and/or replacement of the exterior portions of the HVAC system because the lease agreement defined the Leased Premises as 6,000 square feet of interior space. However, the trial court did abuse its discretion in failing to award the Clinic attorney fees and in awarding [the Landlord] attorney fees. Pursuant to the terms of the lease agreement, the Clinic was entitled to attorney fees as the “prevailing party” because it was successful on the main issue of the litigation.

Lafayette Rentals, Inc. v. Low Cost Spay-Neuter Clinic, Inc., 207 N.E.3d 1222, 1233 (Ind. Ct. App. 2023).

[10] A bench trial was held regarding the second litigation on May 9, 2023. The Clinic requested that the Lease be terminated as of November 30, 2022; that the Landlord return its security deposit; and that the Landlord pay the Clinic's attorney fees. The Landlord argued that it did not accept the Clinic's surrender of the property and requested that the Lease not be terminated. During the hearing, the Clinic returned the keys to the Landlord; although the Landlord, admittedly, had already accessed the property. At the Landlord's request, the trial court inspected the premises on May 15, 2023, with the attorneys for the parties.

[11] In July 2023, the trial court entered findings of fact and conclusions thereon terminating the Lease as of April 2023. The Landlord filed a motion to correct error. After a hearing, the trial court issued amended findings of fact and conclusions thereon and an order on the motion to correct error. The amended findings of fact and conclusions thereon provided:

8. The Parties engaged in a prior litigation regarding the same property and the same lease under Cause Number 79D07-2106-PL-68. Hearing was had on that case on November 30, 2021. In that litigation the parties adopted the opposite positions, with respect to termination of the lease, they now hold in this litigation. At the time of the prior hearing, the landlord sought to terminate the lease for breach by the tenant and the [Clinic] sought, successfully, to have the lease remain in effect. Landlord maintained his position that the lease should have been previously terminated as a result of [the Clinic's] prior breach (and prosecuted the same on appeal) throughout the pendency of this case. The Court of Appeals issued its order maintaining the lease shortly before the final hearing in this case, but said order was not certified until after the final hearing.

9. [The Clinic]’s attorney indicated the only substantial relief which [the Clinic] was requesting was an order finding that [the Landlord] had breached the lease and that the lease between the parties should be terminated. [The Clinic] requested the return of $2,000 in a security deposit and an award of attorney fees.

10. [The Landlord] has made no counterclaim or request for attorney fees. [The Landlord] has only sought to deny [the Clinic]’s claim of breach.

* * * * *

1. The [Landlord] is responsible for all damage caused by the roof leak including the internal damage. ․ [The Landlord]’s failure to make such repairs was a breach of its obligations under the lease.

2. The water damage occasioned by said breach, however, was largely cosmetic. The evidence introduced at the hearing showed only isolated areas of damage that, while unsightly, did not appear to result in any structural concerns or substantially interfere with [the Clinic's] ability to use the property for its intended purposes under the lease. Further, during the walk-through of the property by the Court the cosmetic issues of the property appeared to be largely remedied by the move-out cleaning and repairs performed by [the Clinic]. The Court's walk-through was more than five months after [the Clinic's] surrender of the property.

3. [The Clinic] failed in its burden of showing that [the Landlord] failed to address the roof leak which caused the water damage. ․

4. [The Clinic] failed in its burden of establishing a mold issue with the property. ․

5. The [Landlord]’s breach with respect to the water damage was not sufficiently material to require termination or re[s]cission of the lease between the parties. [The Clinic] could still use the property for its intended purpose (or has failed to prove otherwise). [The Clinic] may have been damaged by the cost of remedying the cosmetic condition of the property, but the Court does not find re[s]cission of the lease or termination of the same to be the appropriate remedy for said damage. Further, [the Clinic] has specifically disavowed any request for damages other than termination of the lease, security deposit return, and court costs in this litigation.

6. [The Landlord] has possession of the property as of April of 2023. [The Landlord] was aware that [the Clinic] intended to vacate the property as of August of 2022 both as a result of [the Clinic]’s letter to [the Landlord] and [the Landlord]’s observance of the property and knowledge of the letter [the Clinic] placed on the door to the property. [The Landlord] knew or reasonably should have known that [the Clinic] had stopped paying rent as of December of 2022. [The Landlord] has a history of actively observing this property and the Court does not find any suggestion that [the Landlord] was unaware of the [Clinic]’s vacating of the property credible. As of April of 2023, the [Landlord] has accepted [the Clinic]’s surrender of the property as indicated by [the Landlord]’s admission to physically re-entering the property, taking pictures of the property, inviting the Court to inspect the property, and providing the Court physical access to the property. Furthermore, [the Landlord] had, throughout the pendency of this litigation, consistently adopted and sought to advance the position in the prior litigation that the lease should be terminated as a result of [the Clinic]’s prior breaches.

7. [The Clinic]’s rights and obligation to possess the property; pursuant to the lease are terminated as of April of 2023 and [the Landlord] is awarded possession of the property as of that date.

8. [The Clinic] is in breach of its lease obligations for its failure to pay rent after November 2022. [The Clinic]’s failure is a material breach of the lease terms resulting in termination of [the Clinic]’s right to possess the property.

9. [The Landlord] has not requested any damages, not filed any counterclaims in this litigation related to any breaches of the [Clinic]; and has not presented any evidence or argument by which the Court could determine the amount of [the Landlord]’s potential damages. [The Landlord] has further not requested attorney fees in this litigation or presented any evidence on the same.

* * * * *

12. [The Clinic]’s counsel noted at the hearing that [the Landlord] had made no claims against [the Clinic] including any claims for unpaid rent. Defense counsel acknowledged the same and implied that said claims may be part of a future litigation. The Court does not, at this time, take any position on the preclusive impact this order or this litigation may have on potential future litigation between these parties regarding this lease (including [the Landlord]’s potential claims for rent and physical damages) as the same was not placed in issue before the Court. Further, the Court need not reach the same to address the issues raised by the parties by their pleadings and the evidence introduced at the hearing.

The Court Orders that Possession of the Leased Premises is set over to [the Landlord] as of April of 2023 and that the parties’ rights and obligations with respect to the leased premises are terminated as of that date. The Court finds [the Clinic] in breach for failure to pay rent but awards no damages for said breach. The Court finds [the Landlord] in breach for failure to repair water damage caused by the roof leak but awards no damages for the same. [The Landlord] may retain the security deposit. [The Clinic]’s request for attorney fees is denied. [The Clinic] is responsible for the costs of this action.

Appellant's App. Vol. II p. 121-26.

[12] The trial court's order on the motion to correct error provided, in part:

3. The Court Denies [the Landlord]’s argument that the Court was without authority to consider issues raised by the evidence but not specifically addressed in the pleadings pursuant to Rule 15(B) of the Indiana Rules of Trial Procedure. Specifically, the Court notes that [the Clinic]’s complaint asked for termination of the lease. Further, the evidence and argument of the parties specifically raised [the Clinic]’s surrender of the property and failure to pay rent. Thus, the issue of the continued viability of the lease, [the Clinic]’s Occupancy, [the Clinic]’s breach of nonpayment, and date of [the Clinic]’s abandonment and surrender of the property where squarely before the Court both as a result of the Complaint filed and evidence presented. The Court was not obligated to determine [whether] the lease [was] breached based only on the allegation raised by [the Clinic]. The financial costs to the [Landlord] of [the Clinic]’s breach, however, were not raised by any pleading or by any of the evidence or argument put forward on the record because [the Landlord] had elected not to proceed on those issues. Specially, the Court rejects [the Landlord]’s argument that it could not terminate the lease based on [the Clinic]’s breach simply because [the Clinic] had not asked to have the lease terminated as a result of [the Clinic]’s own breach. The parties put forth evidence which showed a clear, material, and continuing breach combined with abandonment of the leased premises by the [Clinic] and acceptance of said surrender by [the Landlord].

4. The Court Denies [the Landlord]’s Motion to Correct Error with respect to the Court's determination of the date of [the Landlord]’s acceptance of surrender. In addition to the factors noted originally in the order, the Court notes that [the Landlord]’s Motion to Correct Error further indicates that [the Landlord] entered the property to take pictures and show the property to another prospective tenant. This is a further factual circumstance indicating [the Landlord]’s acceptance of surrender. Moreover, throughout the majority of the litigation in this case, [the Landlord] was actively seeking to have the lease terminated in a separate litigation. [The Landlord] had sought to have the [Clinic]’s lease terminated in 79D07-2106-Pl-68 and was actively appealing the Court's decision disallowing the same throughout the bulk of the litigation in this case. [The Landlord] even sought to have this case dismissed primarily as a result of that pending appeal. Further, the Court of Appeals Decision affirming the Court's decision not to terminate the lease at that time wasn't certified until after the final hearing in this case. The [Landlord]’s continuing and ongoing assertions in the prior case that he wished the [Clinic]’s lease terminated at a prior date is inconsistent with his position in this case that he is unwilling to accept their surrender and wished them to occupy the property until the conclusion of their lease. While [the Clinic]’s positions between the two litigations are also inconsistent they are not subject to the same temporal irrationality as the [the Landlord]’s, or at least not to the same extent. In other words, it is at least rational to say; “I don't want the lease to be terminated in 2021 but also do want it to terminate in 2022.” However, it is not rational to say, “I want the lease to terminate in 2021 but also want it to be in effect through 2023.” The Court Denies the [Landlord]’s assertions that the evidence does not support the Court's finding that [the Landlord] had accepted the [Clinic]’s surrender by April 2023.

Id. at 115-17. The Landlord now appeals.

Discussion and Decision

[13] The trial court here issued sua sponte findings of fact and conclusions thereon. Because neither party filed a written request for findings of fact and conclusions thereon, the trial court's findings of fact are controlling only as to issues they cover. In re Adoption of I.B., 32 N.E.3d 1164, 1169 (Ind. 2015). “We limit our review of those matters to whether the evidence supports the findings and then whether the findings support the judgment, reversing the findings only if they are clearly erroneous.” Id. “On all other matters, the general-judgment standard applies, and we will affirm on any legal theory supported by the evidence.” Id. The trial court's conclusions of law and any constitutional challenges are reviewed de novo. Id.

[14] We begin by addressing the Clinic's cross-appeal. The Clinic argues that the trial court's finding that the Landlord's breach was not material is clearly erroneous and that the trial court should have ordered rescission of the Lease as of November 2022. “[I]f a breach of the contract is a material one which goes to the heart of the contract, rescission may be the proper remedy.” Gabriel v. Windsor, Inc., 843 N.E.2d 29, 45 (Ind. Ct. App. 2006). Under the common law, when determining whether a breach is material, Indiana courts generally apply the factors articulated in the Restatement (Second) of Contracts § 241 (1981):

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

State v. Int'l Bus. Machines Corp., 51 N.E.3d 150, 160 (Ind. 2016).

[15] Here, the trial court found that the Landlord breached the Lease by failing to repair the damage from the leaking roof, but the trial court found that the breach was not material.¹ The trial court found that the damage from the leak was largely cosmetic and that the Clinic failed to prove mold issues existed on the premises. On appeal, the Clinic argues that the need for a “clean and sanitary facility” was paramount and, “there can be no serious doubt that potential clients will question the professionalism of a veterinary clinic rife with bubbling wallpaper, stained walls, stained ceilings, pealing baseboards, and Tupperware containers on the floors to catch leaking water.” Appellee's Br. p. 35.

[16] The Clinic presented photographs of stained ceilings and walls, damaged baseboards, walls with large bubbles of water in the wallpaper or drywall, and containers on the floors to catch water. Although Landlord apparently performed a repair to the roof in March 2022, the Landlord refused to respond to the Clinic's concerns and failed to repair any of the damages. The trial court properly found that the Landlord breached the Lease by failing to make these repairs. We also note that, at this time, the Landlord was still actively attempting to terminate the Lease in the first litigation, which was ongoing at that time, and failed to communicate with the Clinic regarding the needed repairs.

[17] The Clinic was a business open to its customers and responsible for performing medical procedures on animals, and we agree that these unresolved damages would have a significant negative impact on the Clinic's business. When the trial court performed an inspection of the Property during this litigation, the Clinic had already vacated the Property, patched drywall, and painted. Thus, the condition of the Property at the time of the trial court's inspection was not comparable to the condition of the Property at the time the Clinic vacated. The damage, accordingly, caused the Clinic to be deprived of the benefit which the Clinic reasonably expected. We conclude that these issues were not “largely cosmetic.” Appellant's App. Vol. II p. 123. Accordingly, we conclude that the trial court's finding that the breach was not material is clearly erroneous.

[18] The Landlord argues, in part, that the Clinic did not vacate the premises within a reasonable time. The Landlord cites cases regarding constructive eviction. Our Courts have held that, “if a landlord commits acts or omissions sufficient to actually evict the tenant, the tenant is no longer obligated to pay rent.” Vill. Commons, LLC v. Marion Cnty. Prosecutor's Off., 882 N.E.2d 210, 217 (Ind. Ct. App. 2008), trans. denied. “And likewise, if a landlord commits acts or omissions sufficient to constructively evict the tenant, and the tenant leaves within a reasonable period, the tenant is no longer obligated to pay rent under the lease.” Id.

[19] Here, the Clinic notified the Landlord of the leaks at issue in March 2022. The Landlord failed to repair any of the interior damage, and the Clinic closed in August 2022. The Clinic paid to move its equipment, paint, and repair the drywall, and vacated the Property in November 2022. We do not consider the length of time that the Clinic waited for responses or repairs from the Landlord to be unreasonable. Cf. Sigsbee v. Swathwood, 419 N.E.2d 789, 795 (Ind. Ct. App. 1981) (holding that the tenants failed to abandon the premises in a reasonable time where the Landlord's breaches occurred eight months, one year, and two and one-half years before the date of abandonment). Accordingly, the Landlord's argument fails.

[20] As a result of the Landlord's material breach, the Clinic was entitled to rescission of the Lease in November 2022. See, e.g., Van Bibber Homes Sales v. Marlow, 778 N.E.2d 852, 858 (Ind. Ct. App. 2002) (holding that purchasers were entitled to rescission of the contract where the seller materially breached the contract), trans. denied; Vill. Commons, LLC, 882 N.E.2d at 218 (concluding that the tenant was constructively evicted when it “was deprived of a material part of the leased premises by [ ] water intrusions and related problems”).

[21] Because the trial court concluded that the Landlord's breach was not material, the trial court denied the Clinic's request for the return of its security deposit and denied the Clinic's request for attorney fees. As we find the trial court's determination of materiality to be clearly erroneous, we remand for the trial court to recalculate the Clinic's damages, if any. Further, because the Clinic was entitled to rescission of the Lease in November 2022, we need not address the Landlord's argument that the trial court erred by terminating the Lease as of April 2023.

Conclusion

[22] The trial court's conclusion that the damages from the leaking roof were not material is clearly erroneous. Accordingly, the Clinic was entitled to rescission of the Lease in November 2022. We reverse and remand for the trial court to determine the Clinic's damages, if any.

[23] Reversed and remanded.

FOOTNOTES

1.   The parties make no arguments regarding any specific Lease provisions.

Tavitas, Judge.

Chief Judge Altice and Judge May concur. Altice, C.J., and May, J., concur.