Landlord's Board Testimony Regarding Damages Was Improper

Q: I defaulted on a lease for space at a small shopping center. The landlord is claiming that damages from the default reach into the hundreds of thousands of dollars. I disagree and have calculated damages that are significantly lower. The landlord and its bookkeeper are planning to testify at trial regarding the losses it suffered. Will the court automatically agree that these charges are correct?

A: No. If the landlord relies on any of its records to try to prove the amount of damages, it would have to establish that these records are, in fact, the records they claim to be. In other words, the landlord couldn’t just produce records stating the amounts it lost due to your default without showing that those records are authentic. A recent New York case demonstrates the ins and outs of testimony regarding damages stemming from breach of a commercial lease.

There, a dry cleaning business subleased space in a shopping center. The business owner was also the guarantor on the sublease. The subtenant prematurely vacated the space. The landlord sued the subtenant. A trial court ruled in favor of the landlord, awarding it $343,000 in damages. The damages represented lost rent over the remainder of the sublease, real estate escalation charges, the cost of a new sign, the costs of preparing the space for re-rental, and the proportional real estate broker’s fee for obtaining a new tenant. The court also awarded reasonable attorney’s fees. The subtenant appealed, arguing that the damages were incorrectly awarded on inadmissible, incompetent evidence.

A New York appeals court modified the damages award and affirmed the rest of the decision. The appeals court noted that the only witnesses who testified at trial were the president and the treasurer of the landlord’s board of directors. The appeals court stated that the subtenant correctly argued that neither witness established that the records on which they relied to prove damages were the landlord’s business records. Nonetheless, the appeals court noted that the trial court was entitled to credit the testimony each witness gave concerning matters about which they had “personal knowledge.”

The president testified that he was personally involved in arranging for new signage at the space. He also testified that after the subtenant vacated the premises he was personally involved in hiring a contractor to make the space suitable for re-renting and a real estate broker to find a new tenant. The sublease requires the subtenant to pay these expenses, and the trial court properly found the testimony on the amounts the landlord actually paid for these items to be credible.

However, the treasurer did not establish any personal knowledge regarding the matters about which he testified. The money he testified was owed in lost rent was based upon an exhibit that was obviously prepared for litigation. The trial court improperly permitted the schedule to come into evidence, the appeals court determined, and then the trial court improperly let the treasurer to testify to its contents.

The trial court also incorrectly concluded that just because the amounts claimed owed were set forth in the landlord’s “verified bill of particulars,” the treasurer could competently testify to those amounts. “The function of a bill of particulars is to amplify a pleading, limit proof, and prevent surprise at trial; it cannot be used to relieve a party of its evidentiary burden to prove the facts asserted therein,” the appeals court stressed.

A new tenant had been found for the space and eventually began to pay rent, but the president’s testimony concerning that date was based on a conversation with the replacement tenant. So it was “inadmissible hearsay and insufficient to prove the underlying fact.” The president did not provide any basis for his knowledge. “The witnesses’ voluntary board positions with the landlord’s corporation, without any information about their duties and/or responsibilities, did not provide the requisite basis for knowledge,” the appeals court concluded.

The appeals court adjusted the damages awarded for new rent based on information that wasn’t provided as testimony by the president and treasurer. It was significantly less.

The landlord also failed to prove that it was entitled to additional rent based upon the real estate escalation provision in the sublease. Although the sublease entitles it to collect “additional rent” for real estate escalations, the calculation is required to be based upon a percentage of real estate taxes imposed on the landlord, over and above a lease base year. No tax bill from any taxing authority or any other document proving the taxes actually imposed on the landlord was ever produced at trial, the appeals court noted. In determining the amount owed for real estate escalations, the court improperly relied on the treasurer’s testimony and the bill of particulars [345 E. 69th St. Owners Corp. v. Platinum First Cleaners, Inc., February 2018].