La Casa Nino, Inc. v. Plaza Esteban

• Decision Date: 11 October 1988
• Docket Number: No. 87SC160,87SC160
• Citation: 762 P.2d 669
• Parties: LA CASA NINO, INC., a Colorado corporation; Donald Goldman, Max Baer, and La Pompe de Ville, Inc., a Colorado corporation, Petitioners, v. PLAZA ESTEBAN, a general partnership, Respondent.
• Court: Colorado Supreme Court

Page 669

762 P.2d 669

LA CASA NINO, INC., a Colorado corporation; Donald Goldman Max Baer, and La Pompe de Ville, Inc., a Colorado corporation, Petitioners, v. PLAZA ESTEBAN, a general partnership, Respondent.

No. 87SC160.

Supreme Court of Colorado En Banc.

Oct. 11, 1988.

Zerobnick & Sather, P.C., Martin Zerobnick, Gwen Jarahian Young, Joseph A. Margoshes, Popham, Haik, Schnobrich & Kaufman, Richard G. Sander, Denver, for petitioners.

Inman, Erickson & Flynn, P.C., Richard P. Brentlinger, Denver, for respondent.

QUINN, Chief Justice.

This case raises the question whether a lessee is entitled to setoff against arrearages owed to the lessor the amount of an "entry premium" which the lessor received from a subsequent lessee as consideration for the lessor's reletting of the premises to the subsequent lessee following the original lessee's default but before the expiration of the term of the original lessee's lease. In Plaza Esteban v. La Casa Nino, Inc., 738 P.2d 410 (Colo.App.1987), the court of appeals held that the entry premium could not be set off against the arrearages owed by the prior lessee. We reverse the judgment and remand the case for entry of a new judgment.

I.

Plaza Esteban, a general partnership, is the owner of real property which is used as a shopping center in Denver. On July 1, 1974, Plaza Esteban (lessor) entered into a ten year commercial lease with La Casa Nino, Inc. (La Casa Nino) for 5,402 square feet of improved premises in the shopping center. The lease provided that the premises would be used to operate a restaurant-bar and obligated the lessee to pay a minimum monthly rent of $1,845.68, plus increased taxes and insurance costs, and a monthly maintenance fee of $698.33. ¹ Donald Goldman and Max Baer, who are principals in La Casa Nino, personally guaranteed the lessee's performance of the lease obligations. In the event of the lessee's default in rental payments, the lease granted the lessor the option to cancel the lease and expressly stated that such cancellation would not operate as a waiver or satisfaction of any claim or demand arising out of the lessee's violation of the lease. The lease authorized the lessor, upon the lessee's default, to relet the premises, without, however, relieving the lessee of its obligation to pay any deficiency that might arise by reason of such reletting. The lease further provided that any loss or damage suffered by the lessor by reason of the lessee's termination of the lease or as the result of any reletting of the premises shall include "the minimum guaranteed rental herein provided for the period from the date of an event of default until the end of the term of this lease, plus a sum equal to the average annual percentage rental required to be paid herein by Lessee during the twelve-month period immediately preceding the date of such termination or reletting."

La Casa Nino opened a restaurant and a bar on the premises, but the business soon failed. Shortly thereafter La Casa Nino sold its business and, with the lessor's consent, entered into a sublease with a corporate entity which subsequently defaulted on its obligations. La Casa Nino retook possession of the premises and, again with the lessor's consent, subleased the premises to another corporate entity which similarly defaulted on its sublease obligations.

La Casa Nino was experiencing serious financial difficulties throughout this time, and in 1979 all interested parties agreed that La Pompe deVille, Inc. (La Pompe deVille), a corporation owned by the guarantors, could be substituted as successor in interest to La Casa Nino's rights under the lease and that the guarantors would continue to guarantee the lessee's performance. La Pompe deVille operated the restaurant and bar on the premises until 1982, when it assigned its rights under the lease to another corporation, which ultimately failed and defaulted on its obligations under the lease. La Pompe deVille did not secure another tenant for the leased premises, nor did it make any of its monthly payments to the lessor after June 1, 1983.

On November 21, 1983, approximately six months before the expiration of the ten year lease term in the original lease, the lessor leased the premises to JaJal, Inc. (JaJal) for a two year term commencing on March 1, 1984. This subsequent lease obligated JaJal to pay monthly rent of $3,600 the first year and $3,800 the second year, plus a fixed maintenance fee of $225 per month, and contained options to renew for additional terms at increased rental rates. By separate agreement, JaJal agreed to pay the lessor $130,000 as an "entry premium" for the lease.

On December 1, 1983, the lessor made a demand upon Goldman and Baer, the guarantors of the lessee's performance, for $37,878.21 in arrearages under the original lease. The guarantors did not respond to the demand, and the lessor filed this suit against La Casa Nino and La Pompe deVille (hereinafter collectively referred to as the original lessee), ² and the guarantors. The lessor alleged that the original lessee and the guarantors were in default of the lease and sought past due rent from the time of default, June 1, 1983, until November 1, 1983, when the subsequent lease with JaJal was executed. The original lessee and the guarantors denied any liability under the lease and alleged that the lessor had received rent arrearages and other moneys as the result of its subsequent lease with JaJal. ³

The case was tried to the court in June 1985. The lessor conceded that the original lessee and the guarantors were entitled to set off against any amounts due and owing under the original lease the difference between the monthly payments received from JaJal from March to May 1984 ($3,600 monthly rent plus $225 maintenance fee) and the monthly payment it should have received from the original lessee during the same period of time ($2,158.69 monthly rent plus $698.33 maintenance fee). ⁴ The original lessee and the guarantors contended, however, that they were also entitled to set off the $130,000 "entry premium" received by the lessor from JaJal as consideration for the subsequent lease executed on November 21, 1983, prior to the expiration of the original lease. The trial court found that the original lessee and the guarantors were in default of their obligations under the lease and owed the lessor past due rent, maintenance fees, and other expenses amounting to $19,341.04. Against this amount the trial court set off $4,749.62, which represented the security deposit of $1,845.68 retained by the lessor and the additional amount of $2,903.94, which was the difference between the monthly payments received by the lessor under its subsequent lease with JaJal and the amount which the lessor would have received from the original lessee if the original lessee had not defaulted on its lease. The trial court, however, refused to allow a setoff for the $130,000 "entry premium" received by the lessor, ruling that the right "to charge an entry premium is an exclusive right of the party in lawful possession of the premises." The trial court accordingly entered judgment in favor of the lessor for $14,591.42.

The original lessee and the guarantors appealed to the court of appeals, which in a split decision affirmed the judgment. Citing this court's decision in Schneiker v. Gordon, 732 P.2d 603 (Colo.1987), the court of appeals characterized the entry premium as "independent consideration for an option or contract for a new lease," rather than rent due and owing under the original lease, and held that the entry premium could "not be applied in mitigation of damages under the prior lease." Plaza Esteban, 738 P.2d at 412. We thereafter granted the petition of the original lessee and the guarantors to review the propriety of the court of appeals' decision.

In urging reversal of the court of appeals' decision, the original lessee and the guarantors claim that they are entitled to a setoff for the entry premium received by the lessor from the subsequent lessee upon reletting the premises before the expiration of the term of the original lease. This claim, in our view, finds support in our decision in Schneiker v. Gordon, 732 P.2d 603, and reversal of the judgment is accordingly required.

II.

We acknowledged in Schneiker the dual nature of a commercial lease as both a contract and a conveyance, but recognized the necessity of applying contract principles to determine the correct measure of damages due to a lessor upon default by a lessee. 732 P.2d at 608-09. We described a commercial lease as "predominantly an exchange of promises," and characterized a covenant to pay rent as representing "one such promise."...