June 21, 2018

Colorado Court of Appeals: Actual and Potential Rental Income Properly Used as Measure of Restitution

The Colorado Court of Appeals issued its opinion in Zeke Coffee, Inc. v. Pappas-Alstad Partnership on Thursday, July 30, 2015.

Commercial Lease—Eviction—Erroneous Judgment—Restitution—Discount Rate.

In March 2004, plaintiffs (collectively, Zeke) entered into afive-year lease agreement with Pappas-Alstad Partnership to operate a coffee shop. In September 2008, Zeke notified Pappas-Alstad of its intent to exercise an option to extend the lease for an additional five years. Pappas-Alstad said Zeke had breached a term of the lease and, after Zeke refused to cure the alleged breach, it notified Zeke that the lease had been terminated and converted into a month-to-month tenancy. In June 2009, Pappas-Alstad served a three-day demand for compliance or possession on Zeke. Zeke filed an action in district court seeking a declaratory judgment that the lease remained in effect and that Pappas-Alstad had breached it. Pappas-Alstad served Zeke a notice to quit and included in its amended answer a counterclaim seeking Zeke’s eviction. The district court issued a writ of eviction restoring possession of the property to Pappas-Alstad. A division of this Court of Appeals reversed, finding that Zeke had properly exercised the option to extend the lease and had been wrongfully evicted. In a written order, the district court determined that restitution was the appropriate remedy. Pappas-Alstad was required to restore everything it gained through the erroneous judgment.

On appeal, Pappas-Alstad contended that the district court erred in using its actual and potential rental income from the premises as a measure of the appropriate restitution. Zeke would have had to pay rent to Pappas-Alstad had the erroneous judgment never been entered. However, Zeke also would have been able to maintain its coffee business and the business income opportunities associated with it. Therefore, the district court did not abuse its discretion in not reducing Pappas-Alstad’s rental income by the rent it would have otherwise received from Zeke. The court also was not required to reduce from the award Pappas-Alstad’s expenses or losses in re-leasing the property.

Pappas-Alstad argued that the court erred in selecting the Treasury Bill rate as the discount rate to determine the present value of its future cash flow. The district court determined that the value of all future rent proceeds through the end of Zeke’s lease (from 2014 to 2019) should be calculated using a discount rate. The Treasury Bill rate has been recognized as a valid method for discounting future cash flows to present value. Therefore, the court’s decision to use the Treasury Bill rate was not an abuse of discretion. The order was affirmed and thecase was remanded to district court to award Zeke a reasonable amount of attorney fees incurred on appeal.

Summary and full case available here, courtesy of The Colorado Lawyer.

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