Pheasant W. v. Univ. of Wis. Med. Found., Inc.

409 Wis.2d 539

2023 WI App 55

Pheasant West, LLC, Plaintiff-Appellant-Cross-Respondent,

v.University of Wisconsin Medical Foundation, Inc., Defendant-Respondent-Cross-Appellant.

Court of Appeals

No. 2021AP2149. Submitted on briefs October 12, 2022.— Decided October 11, 2023.

2023 WI App 55

(Also reported in 998 N.W.2d 600.)

APPEAL and CROSS-APPEAL from an order of the circuit court for Waukesha County: MICHAEL O. BOHREN, Judge. Affirmed in part, reversed in part and cause remanded with directions; cross-appeal reversed and cause remanded with directions.

On behalf of the plaintiff-appellant-cross-respondent, the cause was submitted on the briefs of Cynthia M. Mack of Lichtsinn & Haensel, S.C., Milwaukee.

On behalf of the defendant-respondent-cross-appellant, the cause was submitted on the briefs of Laura E. Callan, Jeffrey A. Mandell and Colin T Roth of Stafford & Rosenbaum, LLP, Madison.

Before Neubauer, Grogan and Lazar, JJ.

¶ 1. LAZAR, J. Pheasant West, LLC appeals the circuit court's summary judgment order interpreting a commercial property lease in favor of its tenant, University of Wisconsin Medical Foundation, Inc., dismissing Pheasant West's amended complaint for declaratory judgment and multiple breaches of contract, and granting in part and denying in part UW Medical Foundation's counterclaims ordering payment for inappropriate insurance premiums together with some attorneys' fees. In addition, UW Medical Foundation cross-appeals with respect to that same order and the denial of its counterclaim for rent abatement and to more fully recover its attorneys' fees.

¶ 2. The UW Medical Foundation (the "Foundation") asserts that the circuit court appropriately concluded that Pheasant West was required to pay for the repairs to the Foundation's improvements, alterations, and additions, that it was entitled to abate all rent until all of the repairs were completed, and that Pheasant West's specific performance claim was without merit. It further asserts that the court correctly held that Pheasant West had defaulted on the lease by not timely returning an improperly demanded flood insurance premium, but that the court erred by denying its rent abatement counterclaim and request for full attorneys' fees. We agree in part, and affirm the appeal with respect to the denial of two of Pheasant West's breach of contract claims, but, while we conclude that the Foundation is entitled to rent abatement, we reverse and remand for a determination of how much rent should be abated. We next reverse as to the cross-appeal because, as noted above, the Foundation is entitled to the return of some rent payments and that means it may also be entitled to additional attorneys' fees. We further remand to the circuit court to determine the appropriate award, if any, of attorneys' fees related to damages on the issue of the landlord's default (on whether the failure to refund money for the rent overpayment was a breach).

BACKGROUND

¶ 3. The Foundation has leased a 200,000 square foot, four-story administrative office building (the "Building") in Middleton, Wisconsin, since 2008. Pheasant West acquired the Building and surrounding real property (the "Premises")¹ from Discovery Springs, LLC and took over the lease by assignment after the lease was signed but before the Foundation moved into the Building. Thus, Pheasant West is the Foundation's landlord.

¶ 4. The lease includes several provisions relevant to the dispute between landlord and tenant in this appeal. Landlord Pheasant West was required to complete certain construction work and landscaping under § 6.1 to prepare the Premises for occupancy. But § 6.4 provides that the Foundation was responsible for other work in preparation of occupancy and the supply of certain fixtures, furnishings, and equipment, some of which the landlord could require the Foundation to remove at the Foundation's expense upon expiration or termination of the lease, but all of which would become the landlord's property. Similarly, § 12.4 gives the Foundation the right to make certain additions and alterations with the landlord's approval which would become the landlord's property—except for "fixtures, customized cabinetry, office furniture and equipment, … other personal property of Tenant," and the items the landlord could require the Foundation to remove at the end of the lease.

¶ 5. Under § 4.4, the Foundation would pay invoices for "Operating Expenses" prepared by Pheasant West each month. Sections 13.5 and 13.6 explain that each party must maintain certain forms of property insurance. The landlord's policy insuring the "full replacement cost value of the Building" is the landlord's expense "subject to reimbursement to the extent provided in Section 4."

¶ 6. Finally, § 14 deals with damage and destruction. Section 14.1 provides that the landlord must undertake repair for "minor damage" (defined as "less than twenty-five percent… of the cost of replacement of the Premises") at the landlord's expense. Section 14.3 provides that if damage, or repairs and rebuilding resulting from damage, renders the Premises "untenantable, in whole or in part, for any period of time," tenant "shall be entitled to abatement of Rent in an amount proportionate to the area within the Premises rendered untenantable by the damage" until repairs or rebuilding are complete. It also states that, if the landlord elects to make repairs, "Tenant shall repair or replace its stock-in-trade, trade fixtures, furniture, furnishings, equipment and personal property in a manner and to at least a condition equal to that prior to its damage or destruction."

¶ 7. On August 20-21, 2018, Middleton experienced a historic storm that resulted in approximately eighteen inches of standing water in the Building. The floodwater (from both rainfall and sewer backups) damaged furniture, drywall, flooring, cabinets, and equipment, as well as building systems including plumbing, electricity, and HVAC. The Foundation moved its operations and its 600 employees who normally worked in the Building to other locations. It had already paid its August rent in full, but it made no further rent payments until it moved back into the Building after remediation was complete.

¶ 8. Pheasant West undertook clean-up of the Building and remediation of the damage at an asserted cost of $2.8 million. It requested that the City of Middleton Building Inspector issue a new certificate of occupancy for the Building on September 7, 2018. That same day, the inspector issued a partial certificate that covered the upper floors, the lobby, and some stairwells, but not the first floor. He issued a final, full occupancy approval on October 29, 2018, at which point the Foundation moved back in and paid rent for the final two days of October and for November 2018.

Pheasant West requested contribution from the Foundation for the costs of damage remediation, but the Foundation refused to pay.

¶ 9. Almost seven weeks after the flood, on October 8, 2018, Pheasant West obtained flood insurance on the Building. Pheasant West passed along the premium for this insurance to the Foundation in its February 6, 2019 invoice for operating expenses. The Foundation paid this expense, but approximately eighteen months after payment, requested that it be refunded. Pheasant West issued a credit to the Foundation for this expense fifty days after the Foundation demanded the refund.

¶ 10. On October 18, 2018, even before it received an authorization for full use of the Building, Pheasant West filed a complaint (amended on October 2, 2019) asserting breach of contract claims against the Foundation for the Foundation's refusal to make certain repairs, pay for repairs, pay for rent for September and October of 2018, and maintain insurance on tenant improvements. The Foundation asserted counterclaims, alleging that Pheasant West breached the lease by disclaiming responsibility for flood damage and refusing to refund the rent for the ten days in August 2018 that the Premises was untenantable.

¶ 11. On cross-motions for summary judgment in October 2020, the circuit court dismissed Pheasant West's claims and issued six declarations, including interpreting the lease to say that: (1) Under § 14.1 of the lease, Pheasant West was responsible for flood damage repair (except for repair of "tenant's trade fixtures, customized cabinetry, office furniture and equipment, and personal property"); (2) Under § 14.3 of the lease, the Foundation was entitled to rent abatement from August 21–October 29, 2018; and (3) Under the same section, the Foundation was not required to put in "exact replacement[s]" of furniture, equipment, and personal property so long as it did not "diminish the value of the building." The court did side with Pheasant West in holding that under § 13.6 of the lease, the landlord had no obligation to maintain a flood insurance policy on the improvements and personal property in the Premises.

¶ 12. In a second summary judgment decision, in November 2021, the circuit court addressed the Foundation's counterclaims. It determined that, although "abatement is a tenant right," it does not "create an obligation on the landlord." Therefore, the court held, Pheasant West's failure to return the Foundation's rent paid for August 21–31, 2019, did not constitute a default under the lease. Regarding flood insurance, however, the court found that Pheasant West was in default under the lease for failing to refund the Foundation's payment for that insurance within thirty days of the Foundation's request. In view of this split decision, the circuit court awarded the Foundation only those attorneys' fees related to the issue of the flood insurance payment and reimbursement.

¶ 13. Both parties appeal. Pheasant West seeks reversal of the circuit court's ruling that it is responsible for replacing the Foundation's flood-damaged property incorporated into the Premises under §§ 6.4 and 12.4 of the lease, which, it alleges, is the...