Fassett v. Deschutes Enterprises, Inc.

• Decision Date: 12 October 1984
• Citation: 686 P.2d 1034,69 Or.App. 426
• Parties: Leroy FASSETT and Donna Fassett Reynolds, Respondents, v. DESCHUTES ENTERPRISES, INC., and Ole J. Lilleoren, Appellants. DESCHUTES ENTERPRISES, INC., an Oregon Corporation, Appellant--Cross-Respondent, v. Leroy FASSETT and Donna Fassett Reynolds, Respondents-Cross-Appellants. CA 31441; CA A27234; CA 31434; CA A27235.
• Court: Oregon Court of Appeals

Page 1034

686 P.2d 1034

69 Or.App. 426

Leroy FASSETT and Donna Fassett Reynolds, Respondents, v. DESCHUTES ENTERPRISES, INC., and Ole J. Lilleoren, Appellants.

DESCHUTES ENTERPRISES, INC., an Oregon Corporation, Appellant--Cross-Respondent, v. Leroy FASSETT and Donna Fassett Reynolds,

Respondents-Cross-Appellants.

CA 31441; CA A27234; CA 31434; CA A27235.

Court of Appeals of Oregon.

Argued and Submitted Jan. 11, 1984.

Decided Aug. 8, 1984.

Reconsideration Denied Oct. 12, 1984.

John R. Faust, Jr., Portland, argued the cause for appellants and appellant-cross-respondent. With him on the briefs was Schwabe, Williamson, Wyatt, Moore & Roberts, Portland.

R.L. Marceau, Bend, argued the cause and filed the brief for respondents and respondents-cross-appellants.

Before RICHARDSON, P.J., and WARDEN and NEWMAN, JJ.

WARDEN, Judge.

Defendants Ole J. Lilleoren (Lilleoren) and his solely owned corporation, Deschutes Enterprises, Inc. (Deschutes), appeal a judgment in case No. CA A27234 awarding plaintiffs, Leroy Fassett and Donna Fassett Reynolds (Fassetts) the sum of $52,800, plus attorney's fees and costs. Deschutes also appeals a judgment entered in case No. CA 27235 awarding damages of $32,000 to the Fassetts, who cross-appeal in that case. We reverse the judgment in case No. CA A27234 and affirm the judgment in case No. CA A27235.

The complicated set of facts in this case began in 1968, when the Fassetts sold the Skyline Steak House and Sage Room Lounge business and equipment in Bend to Gerald Corrigan and Ray Thomas. As part of that transaction, the Fassetts leased the business premises to Corrigan and Thomas. Lilleoren acquired a 40% interest in the restaurant business after Corrigan and Thomas purchased it. He guaranteed one-third of the Corrigan and Thomas contract with the Fassetts.

In 1971, Deschutes acquired the remaining Corrigan and Thomas interests. The lease was assigned to Deschutes, and Lilleoren personally guaranteed payment of the contract and the lease. Simultaneously, the Fassetts agreed to release Corrigan and Thomas from liability. Deschutes operated the business on the leased premises until 1975.

In 1975 Deschutes sold the restaurant business and equipment to Gerald and Carol Huston (Hustons) for $170,000. Three years remained of the original term of the lease, which Deschutes also assigned to the Hustons. The Fassetts consented to the assignment, and Lilleoren personally guaranteed the Hustons' obligation to the Fassetts under the lease.

On May 1, 1978, the Fassetts and the Hustons renewed the lease for five years. The rent, which had been $1050 per month, was raised to $1,600 per month. Lilleoren was not involved in the negotiations, nor was he notified of the increased monthly rent.

The Hustons paid the $1,600 monthly rent from May, 1978, through January, 1980, when they stopped paying. The Fassetts informed Lilleoren that the Hustons had stopped. On May 20, 1980, the Hustons turned the keys to the leased premises over to the Fassetts, who put locks on the doors to secure it. The Hustons did not remove any of the restaurant equipment purchased from Deschutes that remained in the premises.

On June 16, 1980, the Hustons filed for bankruptcy. They still owed Deschutes $82,957.53. The trustee in bankruptcy advised the Fassetts that he hoped to sell the restaurant business as a going concern. He asked the Fassetts whether they would be willing to continue to lease the business premises, and they indicated that they would.

In the first part of December, the trustee advised both the Fassetts and Lilleoren that he was abandoning his efforts to find a buyer. Even though the Hustons had delivered possession of the premises, the Fassetts could not reopen the lounge, because the Oregon Liquor Control Commission required a bill of sale evidencing ownership of the equipment before it would issue a license.

Also in December, 1980, the Fassetts' attorney wrote Lilleoren that he was personally liable for the rent that the Fassetts were losing and requested a meeting with Lilleoren and his attorney to resolve the situation. The parties met in February, 1981. At that meeting, Lilleoren's lawyer told the Fassetts that Lilleoren would relinquish his interest in the equipment remaining on the premises for $40,000. The Fassetts counteroffered $10,000 to "remove the cloud on the title" to the equipment that had been created when Lilleoren filed a financing statement perfecting his security interest. The parties were unable to agree. On April 17, 1981, the Fassetts' attorney wrote to Lilleoren, demanding that the equipment be removed from the leased premises by May 1, 1981. Lilleoren arrived in Bend on April 29, claiming that he was prepared to remove the equipment. Mr. Fassett claims to have gone to the premises at the appointed time and that Lilleoren was not there. Each party had witnesses to his version of the events.

On February 9, 1982, Deschutes sued to recover the equipment. The Fassetts counterclaimed for their costs incurred in storing and preserving the equipment and for damages incurred by reason of their being unable to rent the premises housing it. On December 10, 1982, the Fassetts sued Lilleoren on his guarantee for the Huston's unpaid rent and, in a separate claim for relief, sued both Deschutes and Lilleoren for interference with a prospective re-leasing of the premises. The two cases were consolidated for trial.

The court found in case No. CA A27235 that Deschutes was entitled to the return of its equipment and that the Fassetts were entitled to judgment of $32,000 on their counterclaim as damages for their being unable to lease the premises while Deschutes' equipment remained there. In case No. CA A27234 the court entered judgment for the Fassetts on Lilleoren's guarantee of the Hustons' rent in the sum of $52,800, plus interest of $6,557.43, and attorney fees and costs, less any sums recovered from Deschutes on the judgment in case No. CA A27235. Lilleoren and Deschutes appeal both judgments, and the Fassetts cross-appeal that portion of the judgment in case No. CA A27235 awarding Deschutes possession of the fixtures.

Lilleoren first argues that the trial court erred when it concluded that he was not discharged from his personal guarantee when the Fassetts and the Hustons renegotiated the monthly rental for the premises. He predicates his argument on the rule that a guarantor is discharged from his obligation when a modification of the agreement he has guaranteed materially increases the risk he initially incurred. The Fassetts counter by pointing out that Lilleoren was intimately familiar with the terms of the restaurant lease, which contains renewal option and rent escalation clauses:

"Renewal Option. If this lease is not then in default, Tenant shall have the option to renew this lease as follows:

"(a) The renewal term shall commence on the day following the date of termination of the preceding term and shall be for a period of five years.

"(b) This option can only be exercised by written notice to Landlord, prior to the expiration of the original term, of not less than 60 days.

"(c) The terms and conditions of the lease for each renewal term shall be the same as the original term except for this renewal option and rent.

" * * *

"Rent Escalation. The basic rent provided in this lease shall be increased or decreased, by a percentage equal to the percentage increase or decrease of the total property taxes levied on account of the leased premises and payable to Landlord for the fiscal year commencing with the last year of the term as compared with the property taxes paid for the tax year commencing July 1, 1967. Any adjustment of rent under this paragraph shall be revised on account of any adjustment in taxes after the adjustment in rent is initially determined." (Emphasis partly supplied.)

At the time of the lease renewal, the property taxes had increased from $2,401 to $3,271, an increase of 36.2%. A proportionate 36.2% increase in the monthly rental price of the property should have resulted in a monthly rental increase from $1,050 to $1,430. However, the renegotiated monthly rental payments were $1,600, an increase of over 50%.

The Fassetts contend that the emphasized language in the rent escalation clause must be interpreted as providing that the percentage difference in taxes would only provide a starting point for negotiations between the parties as to the rent when the tenants exercised an option to renew. We disagree. The first sentence of the rent escalation clause states plainly that the monthly rent shall be increased by a percentage equal to the percentage increase of property taxes imposed. According to those terms, the percentage of change in the taxes did not...