Jedco Development Co., Inc. v. Bertsch, 890036

• Decision Date: 06 June 1989
• Docket Number: No. 890036,890036
• Citation: 441 N.W.2d 664
• Parties: JEDCO DEVELOPMENT CO., INC., a North Dakota Corporation, Plaintiff and Appellant, v. Joe BERTSCH, Defendant, Appellee, Third-party Plaintiff, and Cross-plaintiff, v. Vern OWAN, Charles Owan, Jr., and Roger DeVries, Defendants and Cross-defendants, v. Chuck HAMERS and Leo H. Dobler, Third-party Defendants. Civ.
• Court: North Dakota Supreme Court

Page 664

441 N.W.2d 664

JEDCO DEVELOPMENT CO., INC., a North Dakota Corporation, Plaintiff and Appellant, v. Joe BERTSCH, Defendant, Appellee, Third-party Plaintiff, and Cross-plaintiff, v. Vern OWAN, Charles Owan, Jr., and Roger DeVries, Defendants and Cross-defendants, v. Chuck HAMERS and Leo H. Dobler, Third-party Defendants.

Civ. No. 890036.

Supreme Court of North Dakota.

June 6, 1989.

Lolita G. Hartl Romanick (argued) and Russel G. Robinson, of McGee, Hankla, Backes & Wheeler, P.C., Minot, for plaintiff and appellant.

Charles L. Neff, of Bjella Neff Rathert Wahl & Eiken, Williston, for defendant, appellee, third-party plaintiff and cross-plaintiff.

VANDE WALLE, Justice.

This is an appeal from a summary judgment of the district court for Williams County dismissing the claim of Jedco Development Co. that Bertsch remained liable under a lease agreement entered between the two parties after Bertsch assigned the lease to another party. We reverse and remand for further proceedings.

In 1982, Bertsch, Roger DeVries, Charles Owan, Jr., and Vernon Owan (hereinafter referred to as Bertsch), signed a lease with Jedco, agreeing to lease for five years a building owned by Jedco. The lease agreement incorporated a handwritten memorandum which specified numerous details the parties agreed to. Jedco was to remodel the building at an estimated cost of $35,000. Rental payments were $2,475 per month with a three percent increase in the fourth year and an additional three percent increase in the fifth year. In the event remodeling costs exceeded $35,000, rent was to be adjusted to $2,475 plus 17 1/2 percent of the amount by which the remodeling costs exceeded $35,000. Bertsch also had the right under the lease agreement to purchase the property.

The original lease between Jedco and Bertsch required Jedco's written consent to any assignment of the lease. In 1983 Jedco agreed in writing to an assignment of the lease wherein Chuck Hamers and Leo Dobler agreed to "accept and assume all of the terms, covenants and conditions in said Lease contained to be kept and performed by the Lessees, from and after the date of this Agreement." As a condition of its consent to the assignment, however, Jedco required that the following changes in the lease be made:

"(1) The provision in the hand written agreement to add rent at 17 1/2% of any additional costs over $35,000 is to be applied.

"(2) The figure used is calculated as follows: $11,177.00 X .17 1/2/12 = $163.00 per month or added to $2,475.00 per month for rent of $2,638.00 per month. The option to purchase at a fixed price is deleted. All other conditions remain the same."

Bertsch assigned their interest in the lease to Hamers and Dobler. Hamers and Dobler subsequently defaulted on the lease payments. Jedco brought this action against Bertsch, asserting that although Bertsch had assigned the lease to another party, Bertsch remained liable under the lease to make the rental payments for the remainder of the five years.

The trial court determined that there were no material facts in dispute. It held that the undisputed facts establish there had been a novation and Jedco and Bertsch agreed that Hamers and Dobler would be substituted for Bertsch in the lease agreement. It therefore concluded that summary judgment in favor of Bertsch was appropriate.

On appeal, Jedco argues that summary judgment was inappropriate because, viewing all evidence in the light most favorable to Jedco, there are triable issues of fact, i.e., whether there was a novation and whether Bertsch was released from liability when they assigned the lease to Hamers and Dobler. ¹ Jedco claims that where a lessee has expressly agreed to pay rent, he remains liable to pay the rent even if he assigns the lease to another party.

Bertsch argues that when an assignee is required by the lessor to incur additional obligations not part of the original lease, the lessee is released from his obligation to pay rent. In this case, Bertsch counters, because the lease agreement was changed materially and Jedco consented to the changes, as a matter of law there was a substitution of parties and a novation. The material changes, they assert, include the increase in rent and the deletion of the option to buy the property.

Summary judgment is a procedural device available for disposing of a controversy without a trial if there is no dispute as to the material facts or the inferences to be drawn from the undisputed facts or whenever only a question of law is involved. Benjamin v. Benjamin, 439 N.W.2d 527 (N.D.1989). On appeal, the judgment of the trial court will stand only if there is solely a question of law or if, viewing the evidence in a light most favorable to the party against whom summary judgment was granted, there is no dispute over the material facts or inferences to be drawn from the undisputed facts. Id.

"Novation" is defined in the North Dakota Century Code as "the substitution of a new obligation for an existing one." Sec. 9-13-08, N.D.C.C. Section 9-13-10 provides:

"Novation is made by the substitution of:

"1. A new obligation between the same parties with intent to extinguish the old obligation "2. A new debtor in the place of the old one with intent to release the latter; or

"3. A new creditor in place of the old one with intent to transfer the rights of the latter to the former."

Novation is created by contract and is therefore subject to all rules governing contracts in general. Sec. 9-13-09, N.D.C.C. The basic rule for interpreting a contract is set forth in Section 9-07-03 which provides that "[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting ..." If the contract has been reduced to writing, the intent of the parties must be determined from the writing alone if possible. Sec. 9-07-04, N.D.C.C. If the intent of the parties cannot be ascertained from the writing alone, however, "the court may look at the subsequent conduct of the parties to help determine the intention of the parties and the construction the parties put upon the agreement." Holman v. State, 438 N.W.2d 534, 538 (N.D.1989).

It appears that ordinarily a lessee is not relieved of his obligation to pay rent merely because he has assigned the lease with the lessor's consent. See, e.g., Bayou Acceptance Corp. v. Superior Hydraulics, Inc., 446 So.2d 558 (La.Ct.App.1984); Cane River Shopping Center v. Monsour, 443 So.2d 602 (La.Ct.App.1983); Shooman v. McAughan, 404 S.W.2d 665 (Tex.Ct.App.1966); rather, the lessor must intend to release the lessee:

"The intention of the obligor that the existing debt should be discharged by the new obligation must be concurred in by both debtor and creditor. The point in every case, then, is, whether the parties intend by their arrangement to extinguish the old debt or obligation and rely entirely on the new, or whether they intend to keep the old alive and merely accept the new as further security, and this question of intention must be decided from all the circumstances." 58 Am.Jur.2d Novation Sec. 20. [Footnotes omitted.]

See also Tony and Leo, Inc. v. United States Fidelity and Guaranty Co., 281 N.W.2d 862, 865 (Minn.1979) ["Where an assignor principal seeks to prove a novation in order to be discharged from a binding contract to indemnify its surety, a clearly defined expression of consent by the surety to release the assignor principal must be shown" (citing 6 A. Corbin, Corbin on Contracts Sec. 1301) ].

The intent to create a novation may be shown not only by the terms of the agreement itself, but also by the character of the transaction and by the facts and circumstances surrounding the transaction. Cane River Shopping Center v. Monsour, supra. Here, there are only two arguable changes that resulted from the assignment. The first is that Bertsch was to pay $2,475 per month and Hamers and Dobler were to pay $2,638 per month. The second change was that the right to purchase the property was deleted.

It is obvious that Hamers and Dobler were required to pay more rent. It is not so obvious, however, that the increase was due to a change in the lease terms. In the original lease, the $2,475 per month rental payment was subject to adjustment if Jedco incurred expenses of more than $35,000 in preparing the building for Bertsch's occupancy. Ruvold Jacobsen, president of Jedco, filed an affidavit in which he stated:

"Before the time of the assignment all the work on the property had not...