Cain Partnership Ltd. v. Pioneer Inv. Services Co.

• Decision Date: 22 January 1996
• Citation: 914 S.W.2d 452
• Parties: The CAIN PARTNERSHIP, LTD., Plaintiff-Appellant, v. PIONEER INVESTMENT SERVICES COMPANY, Defendant-Appellee. and First National Bank of Louisville, Intervenor.
• Court: Tennessee Supreme Court

Page 452

914 S.W.2d 452

The CAIN PARTNERSHIP, LTD., Plaintiff-Appellant, v. PIONEER INVESTMENT SERVICES COMPANY, Defendant-Appellee and First National Bank of Louisville, Intervenor.

Supreme Court of Tennessee,

at Knoxville.

Jan. 22, 1996.

Dean B. Farmer, Hodges, Doughty & Carson, Knoxville and Larry E. Parrish, Larry E. Parrish, P.C., Memphis, for Plaintiff-Appellant.

G. Wendell Thomas, Jr., Kennerly, Montgomery & Finley, P.C., Knoxville, for Defendant-Appellee.

Richard B. Gossett, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Chattanooga and R. Thomas Stinnett, Stone & Hinds, P.C., Knoxville, for Intervenor.

OPINION

REID, Justice.

This case presents for review the decision of the trial court granting summary judgment to the defendant/lessee in an unlawful detainer action to recover possession of certain commercial property leased to the defendant by the plaintiff. The award of summary judgment is reversed, and the case is remanded to the trial court.

I

The facts and circumstances which form the context for the questions of law presented are not disputed. In 1974, the Cain Partnership LTD (Cain), a limited partnership, leased a tract of commercial real property located in Knox County for a term of 20 years and granted the lessee the right to extend the lease for three terms of 20 years each and an additional term of 15 years. In 1987, the lease was assigned to a subsidiary of the defendant, Pioneer Investment Services Co. (Pioneer), and later transferred to Pioneer.

The provisions of the lease relevant to the issues are:

In consideration of the lease aforesaid the Lessee contracts and agrees to pay for the aforesaid premises an annual rental of $18,000.00, payable at the rate of $1,500.00 per month in advance, the first said monthly payment to be due on the 1st day of January, 1975. The rental shall be paid at the office of the general partner of Lessor in Knoxville, Tennessee, promptly when due and without demand either upon the premises or elsewhere.

As further consideration for said lease, and in addition to the monthly payment provided for herein, the Lessee shall pay all real property taxes assessed against said property by taxing authorities during the term of this lease and any renewal thereof. Said taxes shall be paid promptly when due during the entire term.

The lease contains no language regarding defaults in payment or performance, forfeiture, or remedies for breach of the terms of the lease, except for a provision allowing the recovery of attorneys' fees in the event Cain should be required to take legal action to enforce the terms of the lease.

In 1984, in order to facilitate an arrangement between Pioneer and First National Bank of Louisville (the Bank) for a development loan from the Bank to Pioneer to be secured by a deed of trust on the lessee's leasehold interest in the property, Cain executed a "Landlord's Estoppel Certificate" for the benefit of the Bank and Pioneer, whereby Cain agreed that it would give notice to the Bank of any default by Pioneer in the performance of the lease and would give the Bank 30 days from the date of its receipt of the notice within which to cure the default. In return, the Bank agreed to give Cain notice of any default in Pioneer's obligation to the Bank.

The lease which is the subject of this litigation has been the subject of extensive legal proceedings, including a case decided by the Sixth Circuit Court of Appeals. ¹ Though not controlling the determination of the issues in this case, those proceedings provide relevant circumstances and put the issues in focus.

On April 12, 1989, Pioneer filed a voluntary petition in bankruptcy and became a debtor-in-possession. On May 25, 1989, Cain filed a motion to lift the automatic stay so that Cain could repossess the leased property, on the ground that the lease had "automatically" terminated because the lessee had failed to pay the property taxes when due. The bankruptcy court refused to lift the stay, holding that in the absence of a specific forfeiture provision, a non-residential lease does not terminate automatically upon default in payment or performance by the lessee. On appeal, the district judge affirmed the holding by the bankruptcy judge and, in addition, found that because the lease contained no forfeiture or termination provision, no default by the defendant would constitute grounds for termination of the lease. The Sixth Circuit Court of Appeals affirmed the decision of the district court, but limited its approval to the first ground. That court's interpretation of Tennessee law on the subject was stated as follows:

[T]he bankruptcy court and the district court determined that Tennessee law requires affirmative conduct by a lessor in order to terminate a nonresidential lease which lacks a termination or forfeiture clause on the ground of breach. Accordingly, the courts below concluded that the Colonial Lease, which lacks a termination or forfeiture clause, was not terminated prior to the filing of Pioneer's bankruptcy petition because the Partnership took no action to terminate the lease. We think that the District Court properly interpreted and applied Tennessee law in reaching this conclusion.

In re Pioneer Inv. Serv. Co., 946 F.2d at 450.

On November 12, 1991, subsequent to the termination of the proceedings in federal court, this suit was commenced. The complaint alleges unlawful detainer (Tenn.Code Ann. § 29-18-104 (1980)) and seeks possession of the leased premises, incidental damages, and attorney's fees. The plaintiff contends that the lease automatically terminated upon the defendant's failure to pay the taxes when due, and, in the alternative, that the defendant persisted in its failure to comply with the provisions of the lease for the payment of taxes after the receipt of adequate notice and an opportunity to cure the default.

The Bank, which was allowed to intervene, filed a motion to dismiss the complaint, contending that pursuant to the estoppel certificate, Cain was obligated to give the Bank notice of and an opportunity to cure any default prior to the initiation of any action to have the lease terminated.

The trial court accepted Pioneer's argument that the lease could not be judicially terminated because it contains no provision for termination, declared the issue raised by the Bank moot, and dismissed the complaint.

The Court of Appeals held that the Bank had not been given an opportunity to cure the default before the suit was filed, as required by the estoppel certificate, and affirmed the trial court's dismissal of the suit. ²

For the purposes of this appeal, the record supports the trial court's finding that the lessee failed to pay the taxes assessed against the property, and that failure was a breach of a material provision of the lease.

II

The only issue before the Court is the relief available to the lessor. Consequently, the issue presented is a question of law. Questions of law are reviewed de novo with no presumption of correctness. See Tenn.R.App.P. 13(d); Union Carbide Corp. v. Huddleston, 854 S.W.2d 87, 91 (Tenn.1993).

III

The principles defining the rights and obligations of the parties to a lease of real property developed as part of the common law and arise from both property and contract law. A short review regarding the evolvement of these principles is helpful in determining the rights and obligations of the parties in this case.

The Nature of a Lease

A lease for a definite term originally served as a moneylending device, used to avoid the ecclesiastical ban on usury ³, and consequently, a lease was deemed to be a personal and contractual interest. 2 Richard R. Powell, Real Property § 16.02[a] (1994). Gradually, the lease became used instead, to allow landowners to contract for the farming of their lands by the landless; again "the tenant was by definition 'one who had no right in the land, but merely the benefit of a contract.' " Id (quoting 2 F. Pollock & F. Maitland, History of English Law 36 (1895)). Between 1200 and 1500, the lessee became recognized as the owner of an interest in land, and the lease as a "conveyance" of an estate in land.

The reasons why this change was made were partly legal and partly economic. We have seen that the machinery of a term of years had ceased for technical legal reasons to be employed in the creation of a mortgage. Therefore the beneficial lease for this purpose went out of use. We have seen that the decay of the labour-service system was the cause of a great extension in the practice of letting the land to lessees for years for longer or shorter terms. It is quite clear that such lessees, if ejected, would not have been compensated adequately if they had only been given damages. We have seen, too, that the government desired to stop the depopulation of the country caused by the conversion of arable land into pasture for sheep. It is obvious that a rule that the ejected lessee could not recover the land would have facilitated the operations of the landlords, who were pursuing this undesirable policy.

3 William Holdsworth A History of English Law, 216-17 (5th ed. reprinted 1991).

More recently, the utility of a lease has been its provision of shelter, and the maintenance of habitable conditions for a growing population: "The urbanization of the population resulting from the growth of cities has shifted the focus of the lease transaction from land to shelter, and has produced an inequality of bargaining power between landlord and tenant, factors that have been cited prominently in recent judicial decisions expanding the rights of residential tenants." 2 Richard R. Powell, Powell on Real Property at § 16.02[a]. The historical background and practical services that a lease provides have culminated into the present status of a lease which has been summarized as follows:

A lease of land creates rights and duties based on two independent grounds. First, the lease represents a conveyance...