## Facts

- F. Enterprises, Inc. held an option to purchase a parcel of land and negotiated with Kentucky Fried Chicken Corp. (KFC) to lease one-half of the parcel after purchase.
- The parties executed a binding contract to make a 20-year lease at \$1,100 per month.
- The contract contemplated construction of a building costing about \$40,000 on the leased portion, to be built by F. Enterprises or built by KFC with reimbursement up to \$40,000.
- Before F. Enterprises exercised the option and before any construction, KFC notified F. Enterprises it would not proceed with the lease.
- After KFC’s repudiation, F. Enterprises exercised its option and purchased the property but did not lease it to KFC.
- Trial evidence indicated fair market rental value was \$9,025 per year if improved with the contemplated building, and \$3,825 per year without the building.
- The trial court awarded about \$28,500, calculating the rent differential (using value as improved), subtracting interest on the unspent \$40,000, and discounting to present value.
- The court of appeals left the judgment for F. Enterprises intact; KFC appealed to the Supreme Court of Ohio.

## Issues

1. What is the proper measure of damages for anticipatory breach of a contract to make a lease brought by a prospective lessor?
2. May damages be reduced by the interest the lessor could earn on construction funds not spent because the building was not constructed?
3. If the lessor held only an option to buy the land at breach and later exercised it on favorable terms, must that benefit reduce damages?
4. How does the prospective lessor’s duty to mitigate limit recoverable damages?

## Decision

- The Supreme Court of Ohio reversed in part and remanded for recalculation of damages.
- The proper measure is the difference between the agreed rent and the fair market rental value of the premises as improved per the contract, discounted to present value, plus any special damages.
- The trial court erred by deducting interest income on the \$40,000 construction cost that was never incurred due to KFC’s breach.
- No deduction is permitted based on a pecuniary benefit the lessor obtained from exercising its purchase option, even if that benefit minimized the breach-related harm.
- Recovery remains limited to losses that could not have been averted or reduced by reasonable efforts by the prospective lessor.

## Legal Principles

- An anticipatory repudiation of a contract to make a lease permits the non-breaching party to sue immediately for expectation damages.
- For anticipatory breach by a prospective lessee, damages are: (contract rent − fair market rent of the premises as improved under the contract) over the term, discounted to present value, plus provable special damages.
- A breaching lessee is not entitled to an offset for interest on construction funds the lessor did not expend because performance was excused by the breach.
- A favorable economic result from the lessor’s exercise of an option to purchase the property does not reduce damages for the lost lease bargain.
- Mitigation limits recovery to damages that could not have been avoided or reduced through reasonable efforts.

## Conclusion

The court required damages to be based on the rent differential measured against the premises as contractually improved (discounted to present value), barred offsets for interest on unspent construction costs and for favorable option-related gains, and reaffirmed mitigation limits on recoverable losses.


F. Enters., Inc. v. Ky. Fried Chicken Corp., 47 Ohio St. 2d 154 (1976)