Cruzan v. Franklin Stores Corp.

Decision Date26 March 1963
Docket NumberNo. 7032,7032
Citation380 P.2d 190,72 N.M. 42,1963 NMSC 56
PartiesEaster CRUZAN and Claude M. Allison, Plaintiffs-Appellants, v. FRANKLIN STORES CORPORATION, a corporation, Karl's Shoe Stores, Ltd., a corporation, and Pauline U. Petchesky, Individually and as Executrix of the Estate of Barney W. Petchesky, Eugene U. Petchesky and Marian P. Silver, Defendants-Appellees.
CourtNew Mexico Supreme Court

Hervey, Dow & Hinkle, W. E. Bondurant, Jr., S. B. Christy IV, Harold L. Hensley, Jr., Roswell, for appellants.

Seth, Montgomery, Federici & Andrews, Santa Fe, for appellees Pauline U. Petchesky, executrix of the estate of Barney W. Petchesky, Eugene Petchesky and Marian Silver.

Atwood & Malone, Roswell, for appellee Karl's Shoe Stores, Ltd.

NOBLE, Justice.

Plaintiffs, Easter Cruzan and Claude M. Allison, appeal from a judgment of the district court denying damages for an alleged breach of covenants in a ten-year building lease for failure to (1) make repairs, and (2) return the premises in as good order and condition as when entered upon, ordinary wear excepted.

Plaintiff Cruzan leased a two-story building in down town Roswell, New Mexico to Franklin Stores Corporation (hereafter called Franklin) for a term of ten years from January 1, 1947. Before entering into possession, Franklin subleased to Petchesky who assumed all of the terms and conditions to be performed by the tenant. On December 1, 1948, Petchesky subleased the lower floor to Karl's Shoe Stores, Ltd. (hereafter called Karl's) who assumed and agreed to perform lessee's conditions as to the first floor. The trial court found that the first floor was returned in as good condition as when entered upon. The second floor was never occupied.

The principal issue is raised by two points dealing with facts and conclusions found or refused by the trial court. The attack is directed to whether, as a matter of law, the court applied the correct measure of damages for breach of covenants to repair and surrender the leased premises in good condition. Without discussing the findings or conclusions in detail, we think it may fairly be said that the specific question is whether a tenant may set off improvements made by it to escape its obligation to restore the building.

Generally, the measure of damages for breach of a covenant to repair or surrender in a prescribed condition is the cost of putting the premises in repair or the prescribed condition. Snider v. Town of Silver City, 56 N.M. 603, 247 P.2d 178; 80 A.L.R.2d 983, 987, 1001; Reinherimer v. Mays, 75 Okl. 131, 182 P. 230; Braem v. Washington Piece Dye Works, 100 N.J.L. 209, 126 A. 461 (S.Ct.1924); Delano v. Tennent, 138 Wash. 39, 244 P. 273, 45 A.L.R. 766; Storr v. Keljik, 178 Minn. 391, 227 N.W. 211. But, defendants argue that where improvements have been made which enhance the value of the premises, the lessee's liability for failure to surrender in the prescribed condition is limited to diminution in market value of the property. The trial court applied the diminution test as the measure of damages in this case.

In support of diminution in value of the premises as a whole, as the measure of damages, defendants rely largely upon Realty Associates, Inc. v. United States, 138 F.Supp. 875, 134 Ct.Cl. 167 and United States v. Flood Building, 157 F.Supp. 438 (D.C.Cal.1957). Both decisions are distinguishable upon their facts. The court characterized the improvements and the added value in Realty Associates as a 'rags to riches' story. There, very extensive improvements were made by the government which greatly increased the value, and the property was returned in such improved condition that it leased for a very substantial amount where before it had been vacant and largely in an untenantable condition. That decision turned upon the fact that no damage had been caused to any part of the building by any act or neglect of the tenant. The court remarked that tearing out the improvements made by the tenant and restoring the property to its former condition would be the last thing the landlord would want. He was held not entitled to recover the cost of tearing out improvements which he did not want removed, and which would have left the premises in much less valuable condition. The alterations in the Flood Building case gave the structure, in down town San Francisco, a higher general use for rental purposes than before the improvements. The court there distinguished that case from the general rule when it said:

'* * * But the important feature of this case is that the government alterations did not impair the utility of these premises as an office building.'

Improvements made by a tenant may not be set off against damages caused by the breach of covenants to repair and to surrender in good condition. Willoughby v. Atkinson Furnishing Co., 93 Me. 185, 44 A. 612; Reinheimer v. Mays, supra; Atlantic Coastline Railroad Co. v. United States, 129 Ct.Cl. 137 (1954). Particularly is this true where title to improvements made by the tenant become the landlord's property by virtue of the terms of the lease. The trial court found:

'7. The defendant Petchesky installed a new store front in said building and made other improvements to the lower floor and some improvements to the second floor of the building. Under the express terms of paragraph 3 of said lease, title to said improvements automatically vested in Plaintiffs upon termination of said lease or upon failure of Defendants to remove said improvements within a reasonable time after termination of said lease and Defendants did not do so.'

The court likewise found that the lease in this case further provided:

'2. * * * and the Second Party [lessee] covenants that during the term of this lease it will make all of the ordinary and usual repairs on the demised building, at its sole cost and expense, and that at the termination of this lease it will yield up the said premises to the First Parties in as good order and condition as when the same were entered upon by the Second Party, loss by inevitable fire, casualty, accident or ordinary wear excepted; * * *.'

Under the terms of this lease, lessors were entitled to the return of the premises in as good order and condition as when the lease began, and, in addition, to any new store front, windows or partitions installed by the tenant and to any other removable improvements not removed within a reasonable time after termination of the lease. A tenant may not use the value of improvements which he has expressly agreed belong to the landlord as an offset against his liability for breach of his covenant to repair and surrender in good condition. We can only give effect to the agreement made by the parties as expressed by their written instrument. It is not contended that the language is ambiguous or that the words employed should be construed to mean anything other than their plain, ordinary and usual meaning. Defendants may not offset plaintiffs' own property against defendants' obligation. It is contended that the second story of the leased premises was found by the court to have been in good condition at the beginning of the lease and that the evidence is undisputed that the second story was not in rentable condition upon termination of the lease. A covenant to yield up the premises in good order and condition means that the property must be returned in rentable condition, Ginsburg v. Jacobson, 276 Mass. 108, 176 N.E. 918, unless it has become unrentable solely by reason of ordinary wear and without fault or negligence of the lessee. Powell v. John E. Hughes Orphanage, 148 Va. 331, 138 S.E. 637. See Codman v. Hygrade Food Products Corp., 295 Mass. 195, 3 N.E.2d 759, 106 A.L.R. 1354.

Furthermore, it is a general rule that set off will not be allowed unless defendant has the right to assert the set off against ...

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