THE LEASING HOTLINE

Mortgage Management Inc. v. Eller Media Co., No. E2001-3099-COA-R3-CV, Tenn. Ct.App., Feb. 3, 2003. For Appellant: Arvin Reingold, Chattanooga, TN For Appellee: Hugh Moore, Chattanooga, TN

CONTRACTS

Owner is liable for damages for failure to lease premises. Two principals negotiated to lease a vacant building to open a Kenny Rogers Roasters franchise. The owner assured them that the property would be leased to them and led them to believe they were the only prospective tenants. The principals expended sums to create a business plan and purchase equipment and services in anticipation of opening the restaurant. The parties met to sign the lease and the principles did so, but the owner did not sign and said he would mail them a copy. Subsequently, the owner informed the principals he was not going to lease them the premises, but had decided to sell the building. He had wanted to use the signed lease to negotiate a better deal to sell the property.

The principals sued the owner for breach of contract and a jury awarded them out-of-pocket expenses and lost profits. Both parties appealed and the appellate court ruled that: evidence of equipment costs were properly excluded because the principals did not submit it during discovery; one of the principals could provide expert testimony regarding lost profits and the business plan; the conduct of the owner rose to the level of misfeasance, supporting a claim of civil fraud; and the statute of frauds was not a bar to the action. Parties may enter an oral contract to later enter a written contract for the sale of real property. The Pennsylvania Supreme Court has held that 'the mere formality of reducing an agreement to a writing when not accomplished will not destroy the agreement, if the agreement does not fall within the Statute of Frauds.' In this case, the appellate court held, the conduct of the parties indicated 'a definite oral agreement that [the owners] would rent' the property. The appellate court thus held that the facts of this case were within the state supreme court's 'mere formality' and affirmed the trial court's denial of the owner's motion for summary judgment based on the statute of frauds.

Jahanshahi v. Centura Development Co., No. 1723 MDA 2001, No. 1771 MDA 2001, Pa. Super. Ct., Feb. 4, 2003. Opinion by Judge Olszewski.

GUARANTORS

A default occurs only if it remains uncured for the period allowed in the lease. Roswell and APG entered into a five-year lease for space in a shopping center. Two guarantees were executed separately, one corporate and one individual, that would 'terminate on the 42nd month of said Lease in the event that no default exists.' Neither the lease nor the guarantee defined 'default.' APG paid the rent late several times during the first 42 months, but Roswell agreed nevertheless to extend the lease for five more years. The parties executed an amendment to the lease but made no reference to the guarantees. About a year later, APG defaulted on the lease and Roswell obtained a writ of possession. Roswell sued APG, the corporate and the individual guarantors. The guarantors claimed they were not liable because the guarantee had terminated after the 42nd month. The trial court granted summary judgment to the guarantors, and Roswell appealed.

The record showed that APG was late with rent payments, incurred late fees and cured the defaults. Roswell never instituted collection actions and extended the lease even though APG had the right to renew the lease only if it was not in default. Roswell argued that because APG had cured the defaults, preventing them from becoming 'Events of Default' under the lease, it had nevertheless defaulted. The appellate court sought a definition of 'default.' It looked to the lease, which defined only an 'Event of Default': 'It shall constitute an Event of Default … if … Tenant fails to pay any Rental when due … and such default is not remedied within ten (10) days after notice from landlord.' The appellate court agreed with the trial court's conclusion that a default occurred when the tenant failed to cure, not when it failed to pay rent. Otherwise, if APG paid the rent late in the 42nd month, the guarantee would continue indefinitely. Other evidence supported this interpretation: Roswell accepted rent after the last late payment; the monthly statement following that late payment established a zero balance for that month; the amendment extending the lease another five years did not refer to the guarantees, and if they were so important, it is not likely they would have been omitted. The appellate court thus affirmed the trial court's finding that the guarantees had expired.

Roswell Festival, LLP v. Athens International, Inc., A02A2032, Ga. Ct. App., Feb. 5, 2003. Opinion by Presiding Judge Andrews.

INSURANCE

Where there is not identity of insureds, interest and loss, there may be no contribution by one insurance company to another. A tenant operated a restaurant and obtained property damage insurance for the property as well as business owner's property and liability insurance from Society Insurance Co. One of the policies was amended to name the landlord as 'additional insured' pursuant to an attached schedule. The landlord also obtained insurance from Capitol Insurance Corp., under a policy that named only the landlord as insured, and contained the business description, 'Lessor's Risk.' After a fire, the tenant made a claim to Society as compensation for property damage. Society then sought contribution from Capitol, but Capitol denied that it owed Society any contribution. The landlord did not file a claim for the loss with Capitol, and had cancelled his policy retroactive to the day before the fire. Society filed an action for a declaratory judgment that the Capitol policy applied to the loss. The trial court granted Society's motion for summary judgment, finding that retroactive cancellation after a loss violates public policy. The court also found that the policies covered the same interest, the same insured and the same loss. It thus ordered Capitol to pay Society a pro rata share of the proceeds paid to the tenant.

On appeal, the appellate court noted it was a case of first impression. Captiol argued that the insurance policy had been cancelled and was therefore not in effect at the time of the fire, and that the two policies covered neither the same interest nor the same insured. The appellate court agreed with the trial court's finding that retroactive cancellation is against public policy. However, it found that the landlord was added to Society's policy only as 'additional insured' for his interest in the property as a lessor. It accepted Capitol's argument that the endorsement insured the landlord only as to liability and not for property damage. Capitol's policy provided coverage only to the landlord; Society's policy provided property damage coverage only to the tenant and liability coverage to both the landlord and the tenant. The claim was for property damage under Society's policy. Therefore, concluded the appellate court, there was no identity of insureds.

With regard to insurable interest, the appellate court reasoned that the trial court confused risk with interest. The policies both provided coverage for the same risk ' fire loss. However, the coverage was for separate insurable interests ' lessee and owner. The owner and lessee benefit in different ways: rental income and value of real estate versus business income, good will and other business related benefits. The appellate court found the insurable interests were not the same and reversed summary judgment in favor of Society with directions to enter judgment in favor of Capitol.

Insurance v. Capitol Indemnity Corp., Appeal No. 02-1856, Wis. Ct. App., Feb. 4, 2003. Opinion by Judge Wedemeyer.

OPTIONS

A lease renewal requires a formal written document. A lease contained a clause prohibiting the tenant from holding over without the written consent of the landlord and provided that holding over would not operate as a renewal. It also contained several options to renew, and the tenant exercised the first by an amendment that contained the rental payments for each of the five years. When he attempted to exercise the second option, the landlord refused and sent the tenant a notice to quit the premises four days after the lease expired. The tenant remained in possession of the premises and the next month the landlord filed an action seeking possession. The tenant answered with special defenses, including equitable forfeiture, laches and promissory estoppel.

The trial court granted the landlord's summary judgment motion on the grounds that the tenant did not demonstrate it had title in the premises at the time the notice to quit was served. The lease required the landlord's written consent if the tenant held over or the negotiation of the rent due for the renewal term. The lease had expired and there was no new lease and no written permission to hold over. In addition, the trial court concluded that the tenant's special defenses did not apply. The tenant appealed and the appellate court affirmed. It discussed the distinction between a renewal and extension, deciding that the instant lease called for a renewal, which requires 'a new lease, a formal extension of the existing lease ….' The appellate court majority distinguished the cases cited by the dissent, which argued that the intent of the parties created a question of fact for the jury. It then affirmed the trial court's findings that the special defenses were inapplicable. The landlord had not delayed in notifying the tenant that the lease would not be renewed, so there was no unreasonable delay to the tenant's detriment and, therefore, no laches. The defenses of equitable forfeiture and equitable estoppel were inapplicable because the tenant had no right to possession.

Tinaco Plaza, LLC v. Freebob's Inc., (AC 21992) Conn.App. Ct., Feb. 4, 2003. For Appellant: Lloyd L. Langhammer. For Appellee: Kevin J. Burns.

TENANT'S RIGHTS

A tenant's right to purchase property may be severable from his rights as a lessee. A landlord and tenant signed an agreement captioned 'Lease Option to Buy,' which specified a purchase price, down payment and note with interest and monthly lease payments. The lease payments were to be applied to the purchase price, but the note was never executed. The tenant fell behind in his lease payments and the landlord notified him that he was terminating the lease, and advised him to vacate the premises. After a second notice, the landlord filed an action. Two months later, the tenant filed for bankruptcy and was protected from eviction by the automatic stay. The landlord moved to lift the stay and the tenant obtained property insurance on the building. Subsequently, the building was destroyed by fire. The tenant filed a claim with the insurer, but the insurer refused to pay based on the absence of a binding insurance contract and fraud. The tenant sued the insurer for breach of contract and bad faith refusal to pay the proceeds. The trial court granted summary judgment in favor of the insurer, ruling that the tenant had no insurable interest in the building either at the time of the contract or at the time of the fire.

The tenant appealed. The appellate court found that even if the lease had been effectively terminated, the option to purchase might not be terminated. Because both parties admitted that the option to purchase remained extant, the court found that a factual issue remained as to whether the right to purchase the property under the option was severable from the right to lease. It also found that an option to purchase is an insurable interest, but declined to make a determination regarding the extent of the tenant's insurable interest. With one opinion dissenting on the grounds that an unexercised option to purchase real estate is not an insurable interest, the court reversed and remanded the case.

Belton v. Cincinnati Insurance Co., Opinion No. 3598, S.C.Ct.App., Feb. 3, 2003. For Appellant: Frank Anthony Barton, West Columbia, SC. For Respondent: Russell Ghent, Greenville, SC.

FORECLOSURE

Purchaser of land at foreclosure needs proof of ownership to be entitled to rent. Mortgage Management purchased land with two billboards on it at a foreclosure sale. It received a Substitute Trustee's Deed at foreclosure that conveyed all the 'improvements, buildings … appurtenances thereon.” Mortgage Management sued Eller Media for the rental revenue it had received for its continued use of the billboards after Mortgage Management purchased the land. Eller claimed it owned the billboards: Eller Media's predecessor had constructed the two billboards on the property and the attorney representing Eller stated the billboards were the personal property of Eller and under a ground lease with the Ramada Inn. Evidence at trial included the lease and correspondence between the attorneys for Eller and Mortgage Management. One letter from Mortgage Management's attorney gave the other attorney the option of selling the billboards or removing them ' several months after Mortgage Management claimed to have bought them at foreclosure. The trial court granted Mortgage Management's motion for partial summary judgment, finding that Mortgage Management owned the billboards. Eller appealed both the finding and the damages.

The appellate court reviewed the record and concluded that Mortgage Management did not offer any proof that the entity that owned the foreclosed land had title to the billboards or that they were properly included in the conveyance. If the land owner did not own the billboards, they could not be sold at foreclosure and would not be included in the Substitute Trustee's Deed. Eller had produced evidence to establish the existence of questions of fact for trial regarding ownership of the billboards. Thus the appellate court vacated the summary judgment and remanded for trial.

Mortgage Management Inc. v. Eller Media Co., No. E2001-3099-COA-R3-CV, Tenn. Ct.App., Feb. 3, 2003. For Appellant: Arvin Reingold, Chattanooga, TN For Appellee: Hugh Moore, Chattanooga, TN

CONTRACTS

Owner is liable for damages for failure to lease premises. Two principals negotiated to lease a vacant building to open a Kenny Rogers Roasters franchise. The owner assured them that the property would be leased to them and led them to believe they were the only prospective tenants. The principals expended sums to create a business plan and purchase equipment and services in anticipation of opening the restaurant. The parties met to sign the lease and the principles did so, but the owner did not sign and said he would mail them a copy. Subsequently, the owner informed the principals he was not going to lease them the premises, but had decided to sell the building. He had wanted to use the signed lease to negotiate a better deal to sell the property.

The principals sued the owner for breach of contract and a jury awarded them out-of-pocket expenses and lost profits. Both parties appealed and the appellate court ruled that: evidence of equipment costs were properly excluded because the principals did not submit it during discovery; one of the principals could provide expert testimony regarding lost profits and the business plan; the conduct of the owner rose to the level of misfeasance, supporting a claim of civil fraud; and the statute of frauds was not a bar to the action. Parties may enter an oral contract to later enter a written contract for the sale of real property. The Pennsylvania Supreme Court has held that 'the mere formality of reducing an agreement to a writing when not accomplished will not destroy the agreement, if the agreement does not fall within the Statute of Frauds.' In this case, the appellate court held, the conduct of the parties indicated 'a definite oral agreement that [the owners] would rent' the property. The appellate court thus held that the facts of this case were within the state supreme court's 'mere formality' and affirmed the trial court's denial of the owner's motion for summary judgment based on the statute of frauds.

Jahanshahi v. Centura Development Co., No. 1723 MDA 2001, No. 1771 MDA 2001, Pa. Super. Ct., Feb. 4, 2003. Opinion by Judge Olszewski.

GUARANTORS

A default occurs only if it remains uncured for the period allowed in the lease. Roswell and APG entered into a five-year lease for space in a shopping center. Two guarantees were executed separately, one corporate and one individual, that would 'terminate on the 42nd month of said Lease in the event that no default exists.' Neither the lease nor the guarantee defined 'default.' APG paid the rent late several times during the first 42 months, but Roswell agreed nevertheless to extend the lease for five more years. The parties executed an amendment to the lease but made no reference to the guarantees. About a year later, APG defaulted on the lease and Roswell obtained a writ of possession. Roswell sued APG, the corporate and the individual guarantors. The guarantors claimed they were not liable because the guarantee had terminated after the 42nd month. The trial court granted summary judgment to the guarantors, and Roswell appealed.

The record showed that APG was late with rent payments, incurred late fees and cured the defaults. Roswell never instituted collection actions and extended the lease even though APG had the right to renew the lease only if it was not in default. Roswell argued that because APG had cured the defaults, preventing them from becoming 'Events of Default' under the lease, it had nevertheless defaulted. The appellate court sought a definition of 'default.' It looked to the lease, which defined only an 'Event of Default': 'It shall constitute an Event of Default … if … Tenant fails to pay any Rental when due … and such default is not remedied within ten (10) days after notice from landlord.' The appellate court agreed with the trial court's conclusion that a default occurred when the tenant failed to cure, not when it failed to pay rent. Otherwise, if APG paid the rent late in the 42nd month, the guarantee would continue indefinitely. Other evidence supported this interpretation: Roswell accepted rent after the last late payment; the monthly statement following that late payment established a zero balance for that month; the amendment extending the lease another five years did not refer to the guarantees, and if they were so important, it is not likely they would have been omitted. The appellate court thus affirmed the trial court's finding that the guarantees had expired.

Roswell Festival, LLP v. Athens International, Inc., A02A2032, Ga. Ct. App., Feb. 5, 2003. Opinion by Presiding Judge Andrews.

INSURANCE

Where there is not identity of insureds, interest and loss, there may be no contribution by one insurance company to another. A tenant operated a restaurant and obtained property damage insurance for the property as well as business owner's property and liability insurance from Society Insurance Co. One of the policies was amended to name the landlord as 'additional insured' pursuant to an attached schedule. The landlord also obtained insurance from Capitol Insurance Corp., under a policy that named only the landlord as insured, and contained the business description, 'Lessor's Risk.' After a fire, the tenant made a claim to Society as compensation for property damage. Society then sought contribution from Capitol, but Capitol denied that it owed Society any contribution. The landlord did not file a claim for the loss with Capitol, and had cancelled his policy retroactive to the day before the fire. Society filed an action for a declaratory judgment that the Capitol policy applied to the loss. The trial court granted Society's motion for summary judgment, finding that retroactive cancellation after a loss violates public policy. The court also found that the policies covered the same interest, the same insured and the same loss. It thus ordered Capitol to pay Society a pro rata share of the proceeds paid to the tenant.

On appeal, the appellate court noted it was a case of first impression. Captiol argued that the insurance policy had been cancelled and was therefore not in effect at the time of the fire, and that the two policies covered neither the same interest nor the same insured. The appellate court agreed with the trial court's finding that retroactive cancellation is against public policy. However, it found that the landlord was added to Society's policy only as 'additional insured' for his interest in the property as a lessor. It accepted Capitol's argument that the endorsement insured the landlord only as to liability and not for property damage. Capitol's policy provided coverage only to the landlord; Society's policy provided property damage coverage only to the tenant and liability coverage to both the landlord and the tenant. The claim was for property damage under Society's policy. Therefore, concluded the appellate court, there was no identity of insureds.

With regard to insurable interest, the appellate court reasoned that the trial court confused risk with interest. The policies both provided coverage for the same risk ' fire loss. However, the coverage was for separate insurable interests ' lessee and owner. The owner and lessee benefit in different ways: rental income and value of real estate versus business income, good will and other business related benefits. The appellate court found the insurable interests were not the same and reversed summary judgment in favor of Society with directions to enter judgment in favor of Capitol.

Insurance v. Capitol Indemnity Corp., Appeal No. 02-1856, Wis. Ct. App., Feb. 4, 2003. Opinion by Judge Wedemeyer.

OPTIONS

A lease renewal requires a formal written document. A lease contained a clause prohibiting the tenant from holding over without the written consent of the landlord and provided that holding over would not operate as a renewal. It also contained several options to renew, and the tenant exercised the first by an amendment that contained the rental payments for each of the five years. When he attempted to exercise the second option, the landlord refused and sent the tenant a notice to quit the premises four days after the lease expired. The tenant remained in possession of the premises and the next month the landlord filed an action seeking possession. The tenant answered with special defenses, including equitable forfeiture, laches and promissory estoppel.

The trial court granted the landlord's summary judgment motion on the grounds that the tenant did not demonstrate it had title in the premises at the time the notice to quit was served. The lease required the landlord's written consent if the tenant held over or the negotiation of the rent due for the renewal term. The lease had expired and there was no new lease and no written permission to hold over. In addition, the trial court concluded that the tenant's special defenses did not apply. The tenant appealed and the appellate court affirmed. It discussed the distinction between a renewal and extension, deciding that the instant lease called for a renewal, which requires 'a new lease, a formal extension of the existing lease ….' The appellate court majority distinguished the cases cited by the dissent, which argued that the intent of the parties created a question of fact for the jury. It then affirmed the trial court's findings that the special defenses were inapplicable. The landlord had not delayed in notifying the tenant that the lease would not be renewed, so there was no unreasonable delay to the tenant's detriment and, therefore, no laches. The defenses of equitable forfeiture and equitable estoppel were inapplicable because the tenant had no right to possession.

Tinaco Plaza, LLC v. Freebob's Inc., (AC 21992) Conn.App. Ct., Feb. 4, 2003. For Appellant: Lloyd L. Langhammer. For Appellee: Kevin J. Burns.

TENANT'S RIGHTS

A tenant's right to purchase property may be severable from his rights as a lessee. A landlord and tenant signed an agreement captioned 'Lease Option to Buy,' which specified a purchase price, down payment and note with interest and monthly lease payments. The lease payments were to be applied to the purchase price, but the note was never executed. The tenant fell behind in his lease payments and the landlord notified him that he was terminating the lease, and advised him to vacate the premises. After a second notice, the landlord filed an action. Two months later, the tenant filed for bankruptcy and was protected from eviction by the automatic stay. The landlord moved to lift the stay and the tenant obtained property insurance on the building. Subsequently, the building was destroyed by fire. The tenant filed a claim with the insurer, but the insurer refused to pay based on the absence of a binding insurance contract and fraud. The tenant sued the insurer for breach of contract and bad faith refusal to pay the proceeds. The trial court granted summary judgment in favor of the insurer, ruling that the tenant had no insurable interest in the building either at the time of the contract or at the time of the fire.

The tenant appealed. The appellate court found that even if the lease had been effectively terminated, the option to purchase might not be terminated. Because both parties admitted that the option to purchase remained extant, the court found that a factual issue remained as to whether the right to purchase the property under the option was severable from the right to lease. It also found that an option to purchase is an insurable interest, but declined to make a determination regarding the extent of the tenant's insurable interest. With one opinion dissenting on the grounds that an unexercised option to purchase real estate is not an insurable interest, the court reversed and remanded the case.

Belton v. Cincinnati Insurance Co., Opinion No. 3598, S.C.Ct.App., Feb. 3, 2003. For Appellant: Frank Anthony Barton, West Columbia, SC. For Respondent: Russell Ghent, Greenville, SC.