Landlord/Tenant – Commercial Lease – Appeals – Preservation of Issues – Security Deposit

Atlantic Coast Builders & Contractors, LLC v. Lewis (Lawyers Weekly No. 010-046-12, 9 pp.) (Kaye G. Hearn, J.) (Jean Hoefer Toal, Ch.J., concurring in part & dissenting in part) (Costa M. Pleicones, J., concurring in part & dissenting in part) Appealed from Beaufort County. (Curtis L. Coltrane, Master in Equity) On writ of certiorari to the Court of Appeals. On petition for rehearing. S.C. S. Ct. Click here for the full-text opinion.

Holding: The master in equity found for the plaintiff-tenant on three causes of action – negligent misrepresentation, breach of contract, and unjust enrichment – but the defendant-landlord appealed only the findings of liability for negligent misrepresentation and breach of contract and not the finding of liability for unjust enrichment. Therefore, the unappealed ground is the law of the case, and our consideration of the landlord’s arguments is barred by the two-issue rule.

We affirm the Court of Appeals as to the entry of judgment against the landlord for negligent misrepresentation and unjust enrichment. However, we reverse the Court of Appeals’ conclusion that the landlord’s entitlement to the security deposit is not preserved for review. On the merits of that issue, we reverse the master and reduce the tenant’s award by $3,500 (the amount of the security deposit) to $6,660.79.

In its complaint, the tenant requested a return of its security deposit, which the landlord denied in her answer. Furthermore, the landlord’s property manager testified that the landlord kept the security deposit because the tenant remained on the property for two months after it breached the lease by failing to pay rent.

Accordingly, this issue was raised to the master, and the Court of Appeals erred in finding otherwise. Then, when prompted by the tenant’s Rule 59(e) motion after he candidly forgot to do so, the master ruled on this issue. Our core preservation requirements have been met, and there is no procedural bar to us considering this question.

The master found that the landlord would be unjustly enriched if she kept the security deposit, but we cannot find any evidence to support this finding. While the landlord may have been unjustly enriched by receiving the benefits of the improvements the tenant made to the premises, nothing suggests she was similarly unjustly enriched when she kept the security deposit she was wholly entitled to under the lease because the tenant failed to pay rent.

The tenant’s remaining claims of negligent misrepresentation and breach of contract similarly are not avenues to justify it getting the security deposit back; the tenant lost it not because of any statements the landlord made or her alleged breach of the lease, but rather because it failed to surrender possession and stayed on the premises without paying rent. Accordingly, none of the tenant’s theories of recovery encompasses a return of the security deposit under these facts, and the master erred in including it in his calculation of damages.

Affirmed in part and reversed in part.

Concurrence & Dissent

(Toal, Ch.J.) Where the question of issue preservation is subject to multiple interpretations, any doubt should be resolved in favor of preservation.

Other than the security deposit, the master’s damages award was based only on the tenant’s actual pecuniary loss, which is the appropriate measure of damages for negligent misrepresentation and breach of contract. The proper measure of damages for unjust enrichment is the amount of increase in the value of the subject property due to the improvements made by the plaintiff.

The record contains no evidence that the value of the subject property increased as a result of improvements made by the tenant, and the master based damages only on the improvement costs expended by the tenant. The landlord broadly asked both the Court of Appeals and this court to reverse the master’s award of damages. Therefore, it was unnecessary for the landlord to argue unjust enrichment on appeal because it had no bearing on the award of damages that she prayed to have reversed.

The “two-issue” rule was spotted by neither the Court of Appeals nor the tenant. The existence of this preservation bar is questionable, and I elect to resolve that question in favor of preservation.

On the merits, this lease was an illegal contract and therefore void and wholly unenforceable. As such, the parties were not entitled to relief under any legal theory, and the court must leave the parties as we found them.

The lease states, “Lessee shall use and occupy the premises for Building and Constr. Office. The premises shall be used for no other purpose….”

The premises were not zoned for use as a commercial office; therefore, the lease had no lawful purpose.

A contract to do an act which is prohibited by statute, or which is contrary to public policy, is void and cannot be enforced in a court of justice. This court has never addressed the validity of a lease whose sole purpose is contrary to local zoning regulations. However, I believe where the only contemplated use of a lease is for a purpose prohibited by the applicable zoning regulations, the lease is illegal and wholly unenforceable.

A court’s authority to declare a contract void ab initio is impervious to our issue-preservation rules.

Leaving the parties as they were when litigation ensued, I would not compel the landlord to reimburse the tenant for its improvement costs or return the security deposit. I would vacate and dismiss.

Concurrence & Dissent

(Pleicones, J.) I agree that the two issue rule precludes our review of the landlord’s appeal of the judgment in the tenant’s favor.

However, I disagree that the landlord preserved the issue of the return of the security deposit for our review. I would affirm the Court of Appeals.