Hypothetical situation: A commercial building owner in Virginia with a single tenant determines that its building is in need of a new roof. Under its lease with the tenant, the owner is made responsible for repairs to the roof. The owner meets with several contractors who make presentations and submit bid proposals. The company, Shady Roofers, submits the lowest bid ($25,000) with the most impressive presentation. The presentation includes a slide show with hundreds of photos of projects that Shady Roofers did not actually work on. When asked why its bid is lower than everyone else’s bid, the Shady Roofers sales agent falsely states to the owner: we use “Grade A” roofing materials, and we have a special relationship with Best Supply Company for “Grade A” roofing materials. The owner decides to hire Shady Roofers and signs the standard Shady Roofers customer contract.

The contract is silent as to source and quality of the roofing materials. The contract is silent as to the roofer’s responsibility to construct the roof in accordance with industry standards. The contract includes a long list of boilerplate clauses, including the following: (1) that owner is not relying on any statements, promises or representations not specifically set out in the contract (a “No-Reliance Clause”), and (2) that owner’s damages in the event of default by Shady Roofers are limited to the amount of money actually paid by owner to Shady Roofers (a “Limitation of Damages Clause”).

Shady Roofers proceeds to construct the roof using “Grade F” materials that are not purchased from Best Supply Company. Unknown to the owner, Shady Roofers fails to follow customary industry building standards, cuts corners, and does not properly support the roof. A few months after completion and final payment, a portion of the roof collapses, causing property damage to the owner’s tenant in the amount of $15,000. The cost of repairing the collapsed roof is estimated to be $50,000. In addition, the owner’s tenant is forced to shut down its business and is entitled under its lease to free rent in the amount of $10,000. All told, the landlord’s losses resulting from the roof collapse will be $75,000 (ignore, for the sake of this hypothetical, the existence of insurance).

Question: Can the owner file suit against Shady Roofers for breach of contract? Fraud? Negligence? All three? Why does it matter?

First – Why it matters. The actual losses incurred by owner as a result of the roof collapse are $75,000. The Limitation of Damages Clause in the contract limits the amount of the owner’s damages to the $25,000 paid to Shady Roofers, and such clauses are enforceable in Virginia. If only a suit for breach of contract is available to the owner, the owner will not be able to recover its actual losses. A lawsuit for fraud or negligence, however, could allow recovery of all losses such that the owner is made whole. In addition, owner may be able to recover an additional award of consequential or punitive damages against Shady Roofers with a negligence or fraud claim.

We are frequently presented with situations like the above, in which a client has signed a contract, the other party has been dishonest or has negligently performed, and the client wants to be made whole. The scenario on its face screams of fraud and negligence. But, is the owner stuck with only a breach of contract claim?

The Source of Duty Rule controls.

To understand the remedies available to the owner, it is first important to distinguish between a contract claim and a tort claim. A contract claim arises from the violation of a verbal or written agreement between two parties. A tort claim arises when one party violates a duty owed to the other party by virtue of the “common law” of the applicable jurisdiction (i.e. the laws and rules created by the courts through decisions in prior cases in order to protect society, generally).

In Virginia, the Supreme Court has adopted the “Source of Duty Rule” to address situations where an aggrieved party asserts both contract claims and tort claims. The Source of Duty Rule was recently explained in the Virginia Supreme Court’s December 20, 2018 decision in Crosby v. ALG Trustee, LLC. Citing a decision in a prior case, the Supreme Court stated: “To determine whether a claim sounds in contract or tort, the Court employs the source of duty rule. … Under this rule, the distinction between a tort claim and a contract claim is ascertained by looking to the source of the duty that was allegedly breached”. The Virginia Supreme Court has stated that “[i]n certain circumstances, a single act or occurrence can support causes of action for both breach of contract and a breach of a duty arising in tort”. However, the opinion further stated: “To avoid turning every breach of contract into a tort…we have consistently adhered to the rule that, in order to recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.” In Dunn Constr. Co. v. Cloney, the Supreme Court also cautioned, that “we cannot permit ‘turning every breach of contract into an actionable claim for fraud’.”

In layman’s terms, what this means is that if the failure to perform on the contract is the sole source of the aggrieved party’s claim, then the aggrieved party has no basis to assert a tort claim (for instance, negligence or fraud).

The aggrieved party can only assert additional tort claims if the breaching party engaged in conduct that violated other duties created under the common law, separate from the duty to perform on the contract.

The lesson learned from this hypothetical and other reported cases in Virginia is simple: when entering into a contract of performance in Virginia, make sure the contract specifically details the standards of performance and does not limit damages to the amounts paid for the performance. If the owner wanted to be sure that Shady Roofers used top quality materials, the owner should have included this in the contract. If the owner wanted to make sure that Shady Roofers complied with industry standards, the owner should have included this in the contract. If the owner wanted to make sure that Shady Roofers would be responsible for all losses resulting from the breach of contract, the owner should have included this in the contract.

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In February of 2019, the Governor of Virginia signed emergency legislation to immediately eliminate the unrest created by the opinion of the Virginia Supreme Court in The Game Place, LLC, et al. v. Fredericksburg 35, LLC, 295 Va. 396 (2018). In the Court’s May 10, 2018 opinion, the Court strictly interpreted Virginia Code § 55-2 (the Statute of Conveyances) to reach the conclusion that any lease agreement having a term of longer than five (5) years must be made by a “deed” or otherwise be executed under seal. The Court further concluded that a long-term lease agreement lacking these formalities is unenforceable as a matter of law, and (in the case of a tenant that pays rent monthly) creates only a month-to-month tenancy that can be terminated by either party on 30 days notice. The Court applied its reasoning to reverse a circuit court opinion which enforced a 15 year lease against a tenant that had vacated the premises prior to the expiration of the lease term.

The decision in Game Place sent shockwaves through the commercial leasing world, as many landlords do not style their leases as deeds and/or do not execute leases with the formality of a seal. The decision opened the door for both landlords and tenants to potentially get out of long-term leases. Many landlords scrambled to audit their lease files and rectify leases that did not meet the mark. Many tenants used the decision as an opportunity to terminate leases and/or negotiate better terms.

As a result of the unrest and uncertainty created by the decision, as well as the sizeable number of leases affected by the Court’s decision, the Virginia legislature passed the emergency legislation to eliminate the requirement that a lease agreement having a term of longer than five (5) years be made by a deed. The new law closes the chapter on a period of unrest during which many landlords and tenants lost, or stood to lose, the benefit of the bargains they had struck in signing seemingly enforceable commercial leases.

Residential Security Deposits in Virginia: Recent Changes in the Law

Recently, the Virginia legislature has enacted changes to the Virginia Code with respect to the laws relating to security deposits maintained by residential landlords in Virginia. It is important that all landlords review their practices with respect to security deposits in light of the changes in the law. This article will provide a brief outline of some of the changes.

By way of background, since 2017, the Virginia Residential Landlord and Tenant Act (the “VRLTA”) applies to all residential tenancies in Virginia, by default. However, a landlord that owns no more than two (2) dwelling units subject to a rental agreement can “opt out” of the VRLTA by expressly stating so in the rental agreement with the tenant. If the “opt out” language is missing from the rental agreement, then the VRLTA will control.

Prior to 2017, the express “opt out” clause was not required, and tenancies for landlords owning only one or two rental properties were, by default, not subject to the VRLTA. Many landlords are unaware of this “opt out” requirement, and as a result, subject themselves to the VRLTA. It is generally accepted that the VRLTA is more favorable to tenants than the pre-existing laws governing the relationship between landlords and tenants (the “pre-existing laws”). The pre-existing laws, as amended, continue to govern residential tenancies that are not subject to the VRLTA.

That said, the legislature has recently adopted amendments to the pre-existing laws that are intended to eliminate discrepancies between the VRLTA and the pre-existing laws. For example, in 2017, the Virginia legislature enacted Virginia Code § 55-225.19, which governs security deposits for residential tenancies not subject to the VRLTA. This statute largely mirrors the statute governing security deposits for residential tenancies that are subject to the VRLTA (Virginia Code § 55-248.15-1). As such, when it comes to security deposits, the landlord will have the same limitations and obligations regardless of whether the VRLTA is applicable to the tenancy. This is a significant shift from the pre-2017 framework, which allowed landlords significantly more discretion with respect to security deposits for tenancies not governed by the VRLTA.

Below is a summary of the landlord’s obligations with respect to security deposits for residential tenancies, which obligations cannot be modified in the rental agreement:

• A landlord may not demand or receive a security deposit in an amount or value in excess of two months’ periodic rent.
• Upon termination of the tenancy, the security deposit may be applied solely by the landlord to the following items: (i) the payment of accrued rent and reasonable charges for late payment of rent specified in the rental agreement; (ii) the payment of the amount of damages that the landlord has suffered by reason of the tenant’s noncompliance with the requirements of the Virginia Code pertaining to maintenance of the dwelling unit; (iii) other damages or charges as provided in the rental agreement; or (iv) actual damages for breach of the rental agreement as set forth in Virginia Code § 55-248.35 (for tenancies subject to the VRLTA) and Virginia Code § 55-225.48 (for tenancies not subject to the VRLTA).
• The security deposit and any deductions, damages and charges shall be itemized by the landlord in a written notice given to the tenant, together with any amount due, within 45 days after the termination date of the tenancy. If the tenant improperly terminates the tenancy and vacates the dwelling unit prior to the expiration of the rental agreement, the 45-day notice requirement is still applicable from the date the tenant vacates (but the landlord may retain the security deposit to apply against the tenant’s financial obligations under the rental agreement).
• Where there is more than one tenant subject to a rental agreement, unless otherwise agreed to in writing by each of the tenants, disposition of the security deposit shall be made with one check being payable to all such tenants and sent to a forwarding address provided by one of the tenants. The landlord shall make the security deposit disposition within the 45-day time period, but if no forwarding address is provided to the landlord, the landlord may continue to hold such security deposit in escrow.
• The landlord shall notify the tenant in writing of any deductions made from the tenant’s security deposit during the course of the tenancy. Such notification shall be made within 30 days of the date of the determination of the deduction and shall itemize the reasons.
• The landlord shall maintain and itemize records for each tenant of all deductions from security deposits during the preceding two years, and permit a tenant or his authorized agent or attorney to inspect such tenant’s records of deductions at any time during normal business hours.
• Upon request by the landlord to a tenant to vacate, or within 5 days after receipt of notice by the landlord of the tenant’s intent to vacate, the landlord shall provide written notice to the tenant of the tenant’s right to be present at the landlord’s inspection of the dwelling unit for the purpose of determining the amount of security deposit to be returned.
• Failure to provide notices and to return security deposit as required by statute may result in the landlord being ordered to return the security deposit, together with actual damages and reasonable attorney’s fees.

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