Tenant’s Failure to Surrender Possession of Premises Allows Lessor to Retain Security Deposit

Atlantic Coast Builders & Contractors, LLC v. Lewis, No. 27044.

Atlantic entered into a commercial lease for property owned by Lewis.  After taking possession of the property and making improvements to it, Atlantic discovered that zoning restriction prohibited commercial use on the property. Atlantic continued possession of the premises but stopped paying rent.  The lease provided for a security deposit in the event of Atlantic’s default of its obligations. Atlantic filed suit against Lewis for negligent misrepresentation, unjust enrichment, breach of the lease, and breach of the covenant of quiet enjoyment. The master found for Atlantic and required Lewis to return the $3,500 security deposit.  The court of appeals affirmed the master’s findings and Atlantic petitioned the supreme court for writ of certiorari. The court affirmed the court of appeals, and then substituted this opinion after a petition for rehearing.

“[W]here a decision is based on more than one ground, the appellate court will affirm unless the appellant appeals all grounds because the unappealed ground will become law of the case.” Based on this rule, the majority determined that considerations of Lewis’s arguments were barred. Lewis appealed only the master’s findings of negligent misrepresentation and breach of contract, not unjust enrichment.

The court reversed the court of appeals on the issue of Atlantic’s entitlement to return of the security deposit. This issue was preserved on appeal since it was set out in Atlantic’s complaint, denied in Lewis’s answer, and presented through witness testimony before the master. Lewis was entitled to retain the security deposit based on the clear language of the lease and Atlantic’s failure to surrender possession of the premises. Further, the supreme court held that Lewis would not be unjustly enriched by retaining the deposit.

Chief Justice Toal disagreed with the court’s determination of the Two-Issue Rule in her separate opinion.  The Chief Justice did not believe this rule would preclude the court from considering Lewis’s arguments because “where the question of preservation is subject to multiple interpretation, any doubt should be resolved in favor of preservation.”  The Chief Justice likened this stringent application of the Two-Issue Rule to a game of “gotcha” where mistakes of attorneys are showcased.  The Chief Justice would have held that this was an unenforceable and illegal contract because the contemplated purpose of the lease was contrary to zoning restrictions.

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