July 15, 2014 – A Wisconsin Supreme Court majority recently untangled a commercial leasing dispute between a corporate landlord and various corporate tenants with rulings on proper notice and whether a tenant conveyed an assignment or a sublease.
In Anthony Gagliano & Company Inc. v. Openfirst LLC, 2014 WI 65 (July 15, 2014), a 5-2 majority ruled that the commercial landlord gave proper notice to all required tenants in exercising a right to extend leases for additional multiyear terms.
However, six justices agreed that the commercial landlord, Anthony Gagliano & Company (Gagliano), could not hold Quad Graphics Inc. liable for failing to pay rent, concluding that Quad Graphics was a subtenant lacking privity of estate with Gagliano.
Chief Justice Shirley Abrahamson dissented, joined by Justice Ann Walsh Bradley on the notice issue. The dissenting justices said Gagliano’s notice to extend lease terms was not proper if sent to Kraft in an individual rather than corporate capacity.
The Tangled Web
Robert Kraft formed a company called Electronic Printing Systems (EPS), which leased space from building owner Gagliano on North Jefferson Street in downtown Milwaukee.
One lease (first lease) covered 90,000 square feet. One portion of the first lease covered 50,000 square feet and expired after five years. Another portion of the first lease covered an additional 40,000 square feet and expired six years from occupancy.
Importantly, the first lease included a provision that said Gagliano could extend the lease for an additional four-year term if Gagliano provided proper notice to the existing tenant at least 120 days (four months) prior to the expiration of the lease agreement.
Kraft also personally guaranteed the first lease to remain liable in the event of an assignment or sublease. Gagliano had to consent to an assignment or sublease.
A year later, Kraft leased more space from Gagliano for his son’s business, Openfirst LLC. This second lease covered another 2,000 square feet. Kraft did not personally guarantee this lease. Subsequent amendments extended the lease to 2006 and, like the first lease, Gagliano had a right to extend the second lease by an additional four years.
Gagliano would consent to assignments or subleases, but only if the original tenants and guarantors remained liable. In 2005, Gagliano sent Kraft and the corporate tenants notice that he was opting to extend the lease agreements for an additional four years.
Importantly, Gagliano sent the notice to Kraft at the business address, but the notice did address it to Kraft as a corporate representative of the business.
About this time, Quad Graphics was negotiating with Kraft. Ultimately, Kraft’s business agreed to surrender operations to Quad Graphics to pay its debts to Quad Graphics.
To do that, Quad Graphics entered into a sublease with Kraft’s business, now operating as New Electronic Printing Systems. Gagliano never consented to the sublease.
When Gagliano did not receive rent in late 2008, he filed suit against all parties to first and second lease agreements and amendments. He also claimed that Quad Graphics was on the hook for breach of contract, having assumed one lease by assignment.
Notice was Proper
Kraft and New Electronic Printing Systems argued that Gagliano’s notice to extend the lease terms for additional years was not proper and thus the lease extensions were not valid. Kraft also said the extension provisions were fraudulently included in the leases.
Gagliano said those extension provisions were not procured by fraud, an issue that will be resolved on remand, and the notices validly extended the lease agreements.
After trial, Kraft asked for a directed verdict on the ground that Gagliano did not properly provide notice to the tenant, New Electronic Printing Systems. The trial court granted the directed verdict, concluding that notice was sent to Kraft but not as a corporate representative for New Electronic Printing Systems.
The court of appeals reversed on this issue. It said the notice of extension was valid. A 5-2 supreme court majority affirmed the appeals court on this issue. It said Gagliano’s notice to the affiliated tenants was valid, drawing upon the requirements that regulate a tenant’s notice to landlords in such cases.
“Gagliano sent the notice to Kraft, an officer of New Electronic Printing Systems, at New Electronic Printing Systems’ address,” wrote Justice Patience Roggensack.
“That Gagliano addressed the notice to an officer of New Electronic Printing Systems simply ensured that an appropriate individual within the entity received that notice.”
Chief Justice Abrahamson dissented on this point. She said the notice was not proper if it was sent to Kraft individually rather than Kraft in his corporate capacity.
“The majority opinion loses sight of the fact that an individual in his or her personal capacity, an individual in his or her representative capacity, and a corporation are separate and apart under the law,” the chief justice wrote.
Quad Graphics Not Liable to Gagliano
The circuit court granted summary judgment in favor of Quad Graphics, which argued that it was a subtenant and could not be liable for breaches of the original lease agreement. In contrast, Gagliano had argued that Quad Graphics took an assignment and was liable for unpaid rent.
On this issue, the appeals court reversed in favor of Gagliano. The appeals court said Quad Graphics “accepted the benefits” of the lease. But a supreme court majority ruled that Quad Graphics was a subtenant and not liable to Gagliano as the landlord.
“[W]e conclude that Quad/Graphics and New Electronic Printing Systems intended to enter into a sublease and New Electronic Printing Systems did transfer less than its entire remaining leasehold estate,” Justice Roggensack wrote for the majority.
The court rejected Gagliano’s claim that subleasing was not allowed without his consent, and he did not consent to the sublease. However, the majority noted that a sublease without consent does not mean Quad Graphics breached the lease.
“[T]he landlord does not have the right to treat any sublease in violation of the primary lease as an assignment,” Justice Roggensack wrote.
“The landlord’s rights in such a situation are limited to eviction of the subtenant and breach of contract action against the primary tenant.”
Justice Ann Walsh Bradley concurred with this part of the majority’s opinion, agreeing that Quad Graphics was not an assignee and not in privity of estate with Gagliano. The chief did not consider this issue in dissent, saying notice was a “dispositive issue.”