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Cuesport Properties, LLC v. Critical Developments

February 27, 2013

CUESPORT PROPERTIES, LLC
v.
CRITICAL DEVELOPMENTS, LLC



The opinion of the court was delivered by: Krauser, C.J.

REPORTED

Krauser, C.J., Meredith, Matricciani, JJ.

Opinion by Krauser, C.J.

Cuesport Properties, LLC, appellant, sold a commercial condominium unit in Anne Arundel County to Critical Developments, LLC, appellee. Under the terms of the agreement of sale, Cuesport Properties, as the seller, was to build a demising wall*fn1 between Critical Developments' unit and an adjacent unit. Cuesport Properties was to complete the wall within thirty days of closing and, if it failed to do so, to pay liquidated damages in the amount of $126 per day until completion. The wall was finished on time, as required by the agreement of sale, but construction was performed without a building permit, and the wall did not comply with the Anne Arundel County code,*fn2 a failing that Critical Developments learned of while it was undertaking further planned interior improvements to the property.

Nearly five months later, Critical Developments arranged for the wall to be modified so as to comport with the code. At least 260 days had elapsed from the date of the contractual deadline for completion of the demising wall to the date that Critical Developments' contractor completed modifications to that wall so as to bring it into compliance with the county code.

Critical Developments thereafter brought an action in the Circuit Court for Anne Arundel County against Cuesport Properties for breach of contract, requesting damages for, among other things, lost rental and loss of use of the property. Following a bench trial, the Anne Arundel circuit court entered judgment in favor of Critical Developments and awarded liquidated damages for the 260 days that had elapsed from the date of the contractual deadline until the date that modification of the wall was completed.

Challenging that decision, Cuesport Properties noted this appeal, raising three issues for our review. Rephrased and redacted of argument, they are:

I. Whether the circuit court erred in construing the per diem damages provision as a lawful liquidated damages clause rather than as an unlawful penalty;

II. Whether the circuit court erred in awarding damages, based on a per diem damages provision in the agreement of sale; and

III. Whether the circuit court erred in failing to take equitable considerations into account when it awarded damages for each of 260 days.

We conclude that the contractual language at issue is a valid liquidated damages provision, that Cuesport Properties breached the agreement of sale by building a demising wall that did not comply with the county code, that the circuit court did take equitable considerations into account in awarding damages, and that it did not err in awarding liquidated damages for each of the 260 days that had elapsed from the date of the contractual deadline until the date that modification of the wall was completed. We therefore affirm.

Background

Cuesport Properties owned a commercial building, known as the "Severn Commerce Center," in Anne Arundel County. It subdivided certain space in the building, which had formerly housed a pool hall, into three separate units, that is, into "Units 3, 4, and 5."

In May 2008, Cuesport Properties and Critical Developments entered into an agreement of sale whereby Critical Developments agreed to purchase "Unit 4" from Cuesport Properties. The agreement provided, among other things, that Cuesport Properties build a demising wall separating Unit 4 from Unit 3 (ownership of the latter Cuesport Properties retained) and that the wall be built "within 30 days from the date of closing of this sale, at [Cuesport's] sole cost and expense." Although the agreement further provided that the property "shall not be in violation of any governmental laws, ordinances, rules, or regulations or the subject of any court action," it mandated, in contravention of the county code, that the wall be "of the same type, materials, and specifications as the demising wall which [Cuesport Properties] recently installed in an adjoining unit previously owned or being sold by [Cuesport Properties]." It appears that neither party knew, at the time of the formation of the contract, that the "recently installed" wall referred to in this provision did not comply with the county code. The agreement further required Cuesport Properties to install a separate electrical improvement (specifically, a 400-ampere service line) for Unit 4 "within 60 days from the date of closing."

After asserting that time was "of the essence," the agreement, in a paragraph labeled "Late Performance," provided that, if Cuesport Properties did "not accomplish and complete the above-described work relating to the installation of the demising wall within 30 days from the date of the completion of the closing, [Cuesport Properties] shall pay a penalty to [Critical Developments] of $126 per day for each day that this work is not completed," payable "within 10 days from the completion of such work." Moreover, in accordance with the terms of the agreement of sale, $20,000 was to be taken from the sale's proceeds and placed in escrow, to be used for payment of the work required to be performed by Cuesport Properties, as well as any damages that might accrue for failure to complete that work on time and "any late performance penalty." Any funds that remained, after these sums were paid, were to be released to Cuesport Properties.

On June 20, 2008, the parties closed on the sale of Unit 4. Within thirty days, the demising wall was completed by a contractor hired by Cuesport Properties, and the wall was built in compliance with the clause of the agreement of sale requiring that the wall be of "the same type, materials, and specifications as the demising wall which [Cuesport Properties had] recently installed" between Units 4 and 5. But, no building permit was obtained by the seller, Cuesport Properties, or its contractor, nor was the wall constructed in conformity with the applicable county code provisions, as required by paragraph 3.7 of the agreement of sale, which provided that the property "shall not be in violation of any governmental laws, ordinances, rules, or regulations or the subject of any court action." Unaware of these violations of county law, the parties accepted the wall as built and approved payment to the contractor from the escrow fund established by their agreement.

In November 2008, well after the thirty-day contractual deadline for completion of the demising wall, Critical Developments, while undertaking further planned interior improvements to Unit 4, learned that no county building permit for construction of the demising wall had ever been obtained and that the wall did not comply with the relevant provisions of the county code. Ordered by the county to bring the wall into compliance with the county code, Critical Developments applied for a permit to rebuild the wall. But that permit, for reasons the record does not disclose, was not issued until February 4, 2009, delaying reconstruction of the wall until at least that date.

Moreover, the electrical work, which Cuesport Properties was required to perform, under the agreement of sale, was not completed in a timely manner. Michael Hanlon, the electrician whose company, M&S Electric Inc., had been hired by Cuesport Properties to perform the electrical work, testified, at the trial of this matter, that he had been asked to provide two 200-ampere service lines and had given Cuesport Properties a price quote for those lines, but that, in November 2008, he was informed by Cuesport's real estate agent that the agreement of sale (to which, of course, neither he nor his company was a party) required a single 400-ampere line. It was not until March 4, 2009, one month after a permit was issued to rebuild the wall, that M&S Electric obtained a permit for installation of the electrical service.

During a three-week period from March 25, 2009, to April 16, 2009, the electrical work was completed, inspected, and approved by the county, and the wall was rebuilt in compliance with the pertinent provisions of the county code. Finally, on August 28, 2009, after all construction had been completed and approved by county building inspectors, an occupancy permit was issued for Unit 4, the unit purchased by Critical Developments.

Well before that date, however, Critical Developments, dissatisfied with the delays, filed, on April 2, 2009, a breach of contract action against Cuesport Properties, in the Anne Arundel circuit court, seeking to recover damages for the loss of use of the property and rental income, and for other fees, dues, and costs caused by the delay in completing the electrical service, as well as attorneys' fees in accordance with the agreement of sale. Cuesport Properties responded with an answer and a counterclaim, asserting that, though it had completed the demising wall and electrical service, Critical Developments had refused to consent to the release of funds from the escrow fund, to pay for that work, in breach of the agreement of sale. It therefore requested that it be paid from those funds as well as be reimbursed for the legal fees and costs it had incurred.*fn3

At the conclusion of the bench trial which ensued, the circuit court found that the demising wall was built in accordance with "the explicit requirements" of the agreement of sale. But, because that wall was built without the required Anne Arundel County permit and did not comply with the county code, "it had to be rebuilt," a task which, the court found, was completed "not sooner than" April 7, 2009. The circuit court further found that electrical service "was substantially completed by April of 2009 and that thereafter any required completion . . . was precluded or not made possible by [Critical Developments'] contractors," and furthermore that Cuesport's "obligations under the contract," as to that service, "were completed not later than March 31st, 2009," that is, a week before the demising wall was brought into compliance with code requirements.

The circuit court concluded that Cuesport's failure to comply with county permit and code requirements in building the demising wall breached an "implied . . . requirement that the construction be completed in a manner consistent with the [law]." Then, declaring the "penalty" provision in the agreement of sale to be a liquidated damages clause, the trial court calculated damages for a period of 260 days, running from July 21, 2008, through April 6, 2009, and accordingly awarded Critical Developments $32,760 in damages, a figure it arrived at by multiplying the $126 per diem rate stipulated in the agreement of sale by 260, the number of days that had elapsed between the contractual deadline and the date that the wall had been brought into compliance with the code. It also awarded Critical Developments $10,443.74 in attorneys' fees.

Although the court below acknowledged that Cuesport Properties had failed to complete the electrical service within the contractual time limits, it nonetheless held that there was "no breach of the electric requirement" to avoid granting Critical Developments a double recovery, as the damages flowing from Cuesport's tardy completion of electrical service, which was primarily loss of rental value, would be, as the court put it, "redundant" if it were to award damages based on that loss in addition to liquidated damages, as well as "speculative" because Critical Developments' expert was unable to state with reasonable certainty that the property would have been rented during the time between the expiration of the sixty-day electrical deadline and the date that Cuesport Properties completed the electrical service. Expressing a desire not to "turn the liquidated damages clause into a penalty" through the imposition of "cumulative" remedies, the court declared that "recovery [would] be limited to ...


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