Case Notes

The contract also contained a provision stating that original tenant First State Bank would be considered to be in default of the lease if it was "dissolved or otherwise fail[ed] to maintain its legal existence," or upon "any assignment, subleasing or other transfer of Tenant's interest … except as otherwise permitted in [the] Lease."

First State Bank exercised its first extension option in May of 2011, extending the lease term to Aug. 17, 2016.

In September of 2015, during this first extension period, First State Bank merged into Simmons Bank. Thereafter, Simmons Bank continued to pay rent to the landlord.

In January of 2016, successor tenant Simmons Bank informed landlord Vastland in writing that it intended to exercise a second extension of the lease. Vastland responded that because the right to extend the lease was granted in the contract addendum only to original tenant First State Bank, Simmons Bank, as the successor tenant, had no contractual right to demand extension of the lease term.

Simmons Bank filed for injunctive relief and a declaratory judgment in Chancery Court on Aug. 5, 2016, seeking the court's determination that it was entitled to exercise the second renewal option under the lease. To make its case, Simmons Bank relied on Tenn. Code Ann. Section 48-21-108(a), which provides in pertinent part that when a merger goes into effect:

1. The corporation or eligible entity that is designated in the plan of merger as an entity surviving the merger shall survive, and the separate existence of every other corporation or eligible entity that is a party to the merger shall cease;
2. All property owned by, and every contract right possessed by, each corporation or eligible entity that is merged into the survivor shall be vested in the survivor without reversion or impairment[.]

Based on this statute, Simmons Bank claimed it had acquired the contract rights of First State Bank "without reversion or impairment" when the two banks merged, and Simmons Bank thereby became the "original tenant" named in the lease. Simmons Bank also contended that, while First State Bank lost its "separate existence" following the merger, it continued to exist as a part of Simmons Bank, so that the "legal existence" default provision of the lease did not apply in this situation.

Landlord Vastland countered that Simmons Bank was not entitled to exercise the renewal option because Simmons Bank was not the original tenant named in the lease and the lease extended the option only to the original tenant. Alternatively, should the court find that Simmons Bank met the "original tenant" condition for renewal, Vastland argued that Simmons Bank could not exercise the renewal option because two tenant defaults of the lease terms (failure to remain in legal existence, and transference of the tenant's rights under the lease) occurred prior to renewal, extinguishing the renewal option.

The trial court sided with the successor tenant Simmons Bank, concluding that it had the better argument. The trial court explained: "When the merger occurred, all of First State Bank's contract rights under the Lease were automatically, by operation of law, vested in the surviving corporation, Simmons Bank. First State Bank did not cease to exist, even though its separate legal existence ceased. First State Bank continues to exist, not separately, but as part of Simmons Bank. Consequently, there is no breach under the 'legal existence' default provision in the Lease. Consequently, Simmons Bank, by operation of the Tennessee merger statute, as amended in 2013, is the automatically vested Tenant originally named in the Lease."

As to the fact that the merger effected a transfer of the leasehold that, under the terms of the lease, nullified any tenant's ability to compel an extension, the trial court determined that Tennessee's general law providing that successor companies take the rights and responsibilities of their predecessors expressed the legislature's public policy intentions — intentions the court said should not be superseded and "rendered surplusage by the general language of the lease." In other words, it did not matter to the trial court that the lease itself limited the option to extend the lease's term to the signing tenant, because the state's legislature had, for public policy reasons, declared that successor entities take on the contract rights and responsibilities of their predecessors — period. Because under Tennessee law Simmons Bank stood in the shoes of the predecessor tenant First State Bank, it could exercise the option to extend the lease term despite language in the original parties' contract to the contrary. Therefore, the trial court granted Simmons Bank's motion for summary judgment, granting it the right to exercise the contractual option to extend the term of the lease. Vastland appealed.

Reviewing the evidence de novo, the appellate court noted at the outset that, as a rule of construction, applicable statutes that "subsist at the time and place of the making of a contract and where it is to be performed become part of the contract—even where silent on this point—as fully as though expressly referred to or incorporated into the instrument." 21 Steven W. Feldman, Tennessee Practice Series Contract Law and Practice § 8:23, Westlaw (database updated May 2019); 11 Richard A. Lord, Williston on Contracts, § 30:19 (4th ed. 1999). However, also as stated in Feldman, such statutes generally are not applied to construe the contract when the parties to the contract express a contrary intention. Stated the court: "the cardinal rule of contract construction is that the court must give effect to 'the intent of the contracting parties at the time of executing the agreement.' Planters Gin Co. v. Fed. Comprss & Warehouse Co., 78 S.W.3d (Tenn. 2002). To ascertain that intent, we look to the plain and ordinary meaning of the contractual language. Id. at 889-90. '[O]ne of the bedrocks of Tennessee law is that our courts are without power to make another and different contract from the one executed by the parties themselves.' Eberbach v. Eberbach, 535 S.W.3d 467 (Tenn. 2017). And, '[i]n the absence of fraud or mistake, a contract must be interpreted and enforced as written.' St. Paul Surplus Lines Ins. Co. v. Bishops Gate Ins. Co., 725 S.W.2d 948, 951 (Tenn. Ct. App. 1986)." Because of these principles, the appeals court concluded that the trial court erred in siding with tenant Simmons Bank based only on general legislative principles. "The Lease does not state that 'Tenant' may renew the Lease," it stated in reversing the trial court's grant of summary judgment. "To the contrary, the Lease contains a restrictive provision that expressly restricts the right of renewal to the 'Tenant originally named herein,' which is a clear contractual declaration that the right of renewal was restricted to 'First State Bank,' not its successors or assigns."

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Court May Rely on Parole Evidence to Show Illegal Purpose of Sublease

Although a commercial property sublease was not illegal on its face, parole evidence of its illegal purpose was properly credited by the trial court in granting the sublessor a preliminary injunction to prevent the sublessee from enforcing the contract pending trial on the merits. Sunset Hills Car Wash v. Barricade, 2019 Cal. App. Unpub. LEXIS 5004 (7/26/19).

Sunset Hills Carwash, Inc. (Sunset), is the lessee of a commercial property. The lease is for a term of 30 years. In April of 2016, Sunset entered into a 10-year contract with General Barricade, LLC (General), allowing General it to build a 9-foot fence along the perimeter of the property. Under the terms of the contract, General would build, maintain and manage the fence, and Sunset would be forbidden to do anything with the fence. For this, General agreed to pay Sunset $9,000 per month.

The City of Los Angeles has in place height and sign laws pertaining to fences. No permit is required to build a fence of up to 10 feet in height. Signs that pertain to free-speech rights, such as political signs, may be displayed on such fences without limitation. However, other types of signs require a permit unless the fence or wall in question is a temporary one that has been erected around a construction site, in which case signs may be attached to it as long as the associated building permit for construction is active, or for two years, whichever is shorter. Los Angeles Municipal Code section 14.4.17, subd. (C).

General obtained a permit to build an awning on Sunset's leased property, but only did a portion of this job. It did, however, build the entire fence and then set about to contract to affix advertising signs to it that would be visible to passers-by. General obtained extensions to its building permit, but the permit lapsed in August of 2017. Soon thereafter, Sunset began receiving citations from the City for violation of its sign laws. Sunset paid the fine, but was also put on notice by the City that any continuing violation of the sign laws would subject Sunset to further fines and other punishments. Meanwhile, Sunset's landlord notified it that it was in breach of its lease for building the offending fence and displaying signs upon it. The landlord demanded that the fence be removed. Sunset therefore finished building the awning itself and tore down the fence, just as General was entering into contracts with Spotify and Ray Ban to place their advertisements on the fence.

The parties ended up in court, where Sunset sought and was granted a preliminary injunction preventing General from rebuilding the fence and placing advertisements on it. The trial court explained that it was likely the agreement was void as illegal — because its purpose was to circumvent Los Angeles' sign laws — and that the balance of hardships weighed in Sunset's favor, as it risked eviction and further trouble from the City should the fence be permitted to be replaced.

On appeal, General asserted that the contract was "simply to sublease land for a fence in exchange for rent — a very standard commercial lease," and contended that the lease should be enforced based on the maxim that a contract must be construed to be legal wherever possible. See, e.g., Kashani v. Tsann Kuen China Enterprise Co., 118 Cal.App.4^th 531(2004). General explained that it was not required by the parties' contract to place advertisements on the fence, so the contract did not compel any illegal action, and there was thus no basis for voiding the contract.

The appeals court noted that, even where a contract is legal on its face, the introduction of parole evidence to prove otherwise is permitted. Homami v. Iranzadi, 211 Cal.App.3d 1104 (1989). It found that the trial court had not abused its discretion in granting Sunset's request for preliminary injunction because it was implausible that a third party would simply desire to build a fence on someone else's leased property, and to pay that lessee $9,000 per month, for 10 years, for the privilege. The court explained: "[T]here was substantial evidence to suggest Sunset and General intended to profit by General placing the Fence on the Premises for 10 years for the purpose of displaying advertisements, and engaging in seriatim purported 'construction' projects to falsely suggest the barrier was only a temporary construction fence subject to section 14.4.17, subd. (C) of the Municipal Code rather than a more permanent fence displaying advertising subject to different and more onerous requirements in section 14.4.16, including separate permitting, size restrictions and time limitations on display."