A restaurant tenant located in a mall brought a claim for lost profits against a landlord for breach of a lease agreement in connection with the redevelopment of the mall. The restaurant claimed that the way in which the redevelopment was conducted negatively affected its quiet enjoyment of the property and caused lower sales revenues and profits than it would otherwise have realized had the redevelopment been carried out in a proper manner.

NERA Director Bradley A. Heys provided a responding expert report in which he explained why the calculation of lost profits set out by the plaintiff’s expert significantly overstated the impact, if any, of the redevelopment of the mall on the business of the restaurant tenant.

The plaintiff’s expert provided a report setting out a calculation of both the past and future lost profits of the restaurant that it claimed could be attributed to the allegedly wrongful actions of the landlord.

The plaintiff’s expert estimated lost sales revenue of the restaurant as the difference between actual sales revenue for the period from the start of the redevelopment work and an estimate of the sales revenue that the tenant would otherwise have generated over this period but for the alleged wrongdoing of the landlord. The plaintiff’s expert’s estimate of the “but for” sales revenues was, in turn, calculated based on the level of sales revenue for the last fiscal year prior to the start of the redevelopment and assumed to grow at a constant annual growth rate drawn from the publicly available results of a survey of executives of other companies in the restaurant industry regarding expectations for industry sales growth for the year in which the redevelopment started. The plaintiff’s expert then calculated the plaintiff’s lost profits based on its estimate of lost sales revenue and an assumption that gross profit margins on these “but for” sales would have been equal to the actual gross profit margin the restaurant realized in the year prior to the start of the redevelopment.

Mr. Heys provided an expert report responding to the report of the plaintiff’s expert in which he identified errors in that expert’s calculations and explained that the calculated lost profits overstated any actual lost profits as a result of several incorrect and untested assumptions regarding the causal connection between the redevelopment and the impact on sales revenue.

First, the plaintiff’s expert report included as damages lost profits for a time period that was after the start of the redevelopment work, but before the start of the specific work that the plaintiff claimed had a negative impact on its business. In his report, Mr. Heys identified the portion of the calculated profits that was attributable to periods prior to the actions complained of, and which, as a result, were not properly included in the claimed damages.

Mr. Heys also demonstrated using statistical analysis of historical sales data that at least two factors unrelated to the redevelopment of the mall had accounted for almost all of the claimed diminution of sales. First, after accounting for the seasonality of the restaurant’s sales, there was a significant downward trend in sales revenue for the plaintiff’s business that began well before the start of the redevelopment. Second, the timing of the entry of new restaurants in the mall was highly correlated with a decline in seasonally adjusted sales revenue of the plaintiff. As such, all but about 10% of the decline in sales revenue complained of by the plaintiff restaurant could not reasonably be attributed to the alleged wrongful conduct of the landlord.

Furthermore, Mr. Heys pointed out that the plaintiff appeared to have taken no steps to mitigate any negative impact on its business of the redevelopment, including additional signage and/or advertising that would likely have cost significantly less than the amount of the claimed lost profits (in fact, the landlord had offered to provide additional signage free of charge, but the tenant declined). In addition, in calculating future lost profits, the plaintiff’s expert also gave no consideration to the positive impacts on the plaintiff’s business that would reasonably be expected from the completed redevelopment of the mall and resulting increase in customer traffic.

The case settled following the filing of NERA’s expert report. The amount of the claim is confidential.