F. Enterprises, Inc. v. Kentucky Fried Chicken Corp.
47 Ohio St. 2d 154, 351 N.E.2d 121, 1 Ohio Op. 3d 90 (1976)
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Rule of Law:
The measure of damages for an anticipatory breach of a contract to make a lease is the difference between the agreed-upon rent and the fair market rental value of the property as it was to be improved, discounted to present value. The breaching party is not entitled to a further reduction for interest on funds the lessor saved by not having to perform, as such savings are already accounted for in the fair market rental value.
Facts:
- On January 20, 1968, the appellees (prospective lessors) entered into an option to purchase a parcel of real estate from the H. Corporation for $85,000.
- Shortly thereafter, appellees and appellant (prospective lessee) negotiated a contract for a 20-year lease on approximately half of this parcel for a monthly rental of $1,100.
- The contract required that the appellees construct a building on the leased premises at a cost not to exceed $40,000.
- On August 12, 1968, appellant notified appellees by letter that it would not enter into the lease.
- On November 18, 1968, after receiving the notice of breach, appellees exercised their option and purchased the entire tract of land.
- The agreed-upon rental was $13,200 per year.
- The fair market rental value of the property with the proposed building was determined to be $9,025 per year, while the value of the land unimproved was $3,825 per year.
Procedural Posture:
- Appellees (lessors) sued appellant (lessee) for breach of contract in an Ohio trial court.
- The issue of the contract's validity was litigated and settled in favor of the appellees after a second appeal to the Court of Appeals.
- The trial court, following a formula from the Court of Appeals, entered a judgment awarding damages of $28,508.89 to the appellees.
- The appellant appealed the damage award to the Ohio Court of Appeals, which affirmed the trial court's judgment.
- The appellant then sought and was granted review by the Supreme Court of Ohio on the issue of the measure of damages.
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Issue:
In an action for an anticipatory breach of a contract to make a lease, where the prospective lessor did not yet own the land or construct the required building, is the proper measure of damages the difference between the agreed rent and the fair market rental value, and should this amount be further reduced by the interest income the lessor could earn on the money not spent on purchasing the land or constructing the building?
Opinions:
Majority - Stephenson, J.
No, the damages should not be further reduced by interest income on funds saved from purchasing the land or constructing the building. The proper measure of damages is the difference between the rent stipulated in the contract and the fair market rental value of the premises for the term, discounted to present value. The court reasoned that the general rule of damages already gives the defaulting lessee the benefit of the lessor's required expenditures (like erecting a building) by reflecting them in the higher fair market rental obtainable for the improved property. To then also deduct interest income on the unspent construction cost would be to give the breaching party a double credit, as the money could not be both invested in the building to generate market rent and simultaneously invested elsewhere to earn interest. Furthermore, the court rejected the appellant's argument for a deduction based on savings from not purchasing the land, finding that the appellees' decision to exercise their option was a reasonable step to mitigate damages, as it resulted in a smaller overall loss than not exercising the option would have.
Analysis:
This case clarifies the application of damage calculation principles in the specific context of an anticipatory breach of a contract to make a lease where the lessor has not yet performed. It reinforces the standard 'contract-market differential' rule but crucially explains how to apply the concept of 'savings' resulting from non-performance. The decision prevents a breaching party from 'double-dipping' by claiming deductions for costs that are already implicitly accounted for in the market value used to calculate damages. It also illustrates that actions taken by the non-breaching party to mitigate damages, even if they involve expenditure, do not create a 'savings' for the benefit of the breaching party if those actions actually reduce the total damages.
