Signal Management Corp. v. Lamb

• Decision Date: 29 December 1995
• Docket Number: 950070,Nos. 950069,s. 950069
• Citation: 541 N.W.2d 449
• Parties: SIGNAL MANAGEMENT CORPORATION, Plaintiff and Appellant, v. Raymond A. LAMB, Defendant and Appellee. SIGNAL MANAGEMENT CORPORATION, Plaintiff and Appellant, v. FIRST BANK SYSTEMS, INC., a Delaware Corporation, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 449

541 N.W.2d 449

SIGNAL MANAGEMENT CORPORATION, Plaintiff and Appellant, v. Raymond A. LAMB, Defendant and Appellee.

SIGNAL MANAGEMENT CORPORATION, Plaintiff and Appellant, v. FIRST BANK SYSTEMS, INC., a Delaware Corporation, Defendant

and Appellee.

Civ. Nos. 950069, 950070.

Supreme Court of North Dakota.

Dec. 29, 1995.

Orlin W. Backes, of McGee, Hankla, Backes & Wheeler, Ltd., Minot, for plaintiff and appellant. Appearance by Shane C. Goettle.

David J. Hauff, of McNair, Larson & Carlson, Ltd., Fargo, for defendant and appellee Raymond A. Lamb.

Todd E. Zimmerman, of Dorsey & Whitney, Fargo, for defendant and appellee First Bank Systems, Inc.

VANDE WALLE, Chief Justice.

Signal Management Corporation [Signal] appealed from a judgment dismissing its consolidated actions against Raymond A. Lamb and against First Bank Systems, Inc. [collectively referred to as First Bank] for breach of a lease agreement. We conclude the acceptance of a breach must be viewed in terms of a breach of contract and we reverse and remand for further proceedings applying that view.

On November 20, 1987, Dakota Financial Services [Dakota], whose parent corporation later merged with First Bank, leased office space from Signal in Minot. The lease was signed by William Kuzas, then vice president of Dakota, and James Jensen, the president of Signal. The lease ran from December 1, 1987 through December 1, 1990, and included the following option for Dakota to extend the lease:

"17. OPTION TO EXTEND: THIS LEASE MAY BE EXTENDED FOR ONE ADDITION [sic] THREE (3) YEAR PERIOD BEGINNING WITH THE TERMINATION DATE OF THE ORIGINAL TERM OF THIS LEASE UPON THE SAME TERMS AND CONDITIONS AS IN THE ORIGINAL TERM OF THIS LEASE; PROVIDED, HOWEVER, THAT THE TENANT SHALL GIVE WRITTEN NOTICE TO THE LANDLORD SIXTY (60) DAYS PRIOR TO THE END OF THE ORIGINAL

TERM THAT IT DOES DESIRE TO EXTEND THE LEASE."

On November 13, 1990, less than 60 days prior to the end of the original lease term, Signal contacted William Plessinger, Dakota's office manager, and asked whether Dakota intended to extend the lease. Plessinger had an employee hand deliver a letter from Plessinger to Signal on November 15, 1990, stating that Dakota "would like to exercise the option to continue the lease for an additional 3 years, under the same terms as the original lease." Jensen's handwritten notation on the Plessinger letter states "accepted as per phone (with Mr. Plessinger) conversation 11/14/90 10:40 a m"

After Jensen heard in late December 1990 that Dakota had been sold, Signal's attorney sent a letter to Dakota's president, William Spyker, contending that the lease had been extended by Plessinger. After discussing the matter with Dakota's attorney, Spyker wrote to Signal stating that Dakota would terminate the lease and vacate the premises on February 1, 1991. Dakota's attorney wrote to Signal's attorney in January 1991 explaining its position that Plessinger had no authority to extend the lease and that "[w]hether you agree or not, I trust you have alerted your client in respect to his duties to mitigate any damages and relet the premises, if you continue to maintain that the lease extension is valid." Dakota vacated the premises on February 1, 1991, and the corporation was dissolved in April 1991.

After Dakota vacated the premises, Signal reentered, rekeyed the locks, and advertised the space for rent. Signal later transferred title to the property to its sole shareholder, Jensen. On November 4, 1992, Jensen leased the space to a new tenant for a term beginning September 15, 1992 and ending August 31, 1995. Signal separately sued First Bank and Lamb, a former Dakota corporate officer and shareholder, seeking more than $37,000 in unpaid rent. The court consolidated the actions.

First Bank raised numerous defenses, including that no valid lease extension occurred because Plessinger did not have actual or ostensible authority to extend the lease agreement for Dakota, that the extension was void under the statute of frauds, and that Signal had accepted Dakota's surrender of the premises, thereby precluding the claim for unpaid rent.

Following a bench trial, the court ruled that Dakota was not liable for unpaid rent because Signal and Jensen held the premises for their own benefit and accepted Dakota's surrender on February 1, 1991. In support of its decision, the court noted that Signal did not respond or otherwise communicate with Dakota or its counsel after the January 1991 letter setting forth Dakota's position on the lease extension until it brought suit almost two years later. The trial court also found that Signal did nothing to notify Dakota of its intention to claim damages under the lease, provided no periodic billing statements, no accounting for rents received, and no notification of the change of ownership from Signal to Jensen. The trial court also observed that the terms of the new lease reletting the premises to another tenant extended beyond the expiration of the extended lease term with Dakota. Because of its ruling on the surrender and acceptance issue, the trial court did not resolve the other issues raised by the parties and dismissed Signal's actions.

On appeal, Signal asserts the trial court erred in ruling that Signal accepted surrender of the leased premises from Dakota.

Whether a surrender and acceptance occurred is a question of fact which will not be reversed on appeal unless it is clearly erroneous under N.D.R.Civ.P. 52(a). See Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896 (Utah 1989); Development Enterprises, Inc. v. Miyamoto, 461 P.2d 419 (Wyo.1969). A finding of fact is clearly erroneous if it is induced by an erroneous view of the law. Matter of Guardianship of Nelson, 519 N.W.2d 15 (N.D.1994). Because we believe the trial court's finding was induced by an erroneous view of the applicable law, we agree the trial court's finding that Signal accepted surrender of the premises is clearly erroneous.

I

A brief review of the origins of modern landlord-tenant law is helpful in resolving the issue. The early common law recognized a distinction between leases of real property and other contracts and, by 1500, a lease was characterized as a conveyance of an estate in real property and the landlord and tenant were viewed as being in privity of estate rather than merely in privity of contract. See Sun Cal, Inc. v. United States, 25 Cl.Ct. 426 (1992); 2 R. Powell, The Law of Real Property Sec. 16.02 (1994); 1 American Law of Property Sec. 3.1 (1952). Because of the common law focus on estate and property concepts rather than on the contractual nature of the lease, lessors had no duty to mitigate damages after a breach by the lessee. See Sun Cal; Schneiker v. Gordon, 732 P.2d 603 (Colo.1987). Under the common law view of a lease as a conveyance, so long as the tenant owned the leasehold estate the rental obligation continued until the leasehold was extinguished in some manner. See Schneiker.

Surrender and acceptance is a recognized method of extinguishing the leasehold. See 4 H. Tiffany, The Law of Real Property Sec. 960 (3d ed.1975). Under that doctrine, if the landlord elected to accept the surrender of the premises upon abandonment by the lessee, the lease was terminated and there was no continuing obligation for rent. See Schneiker; 4 H. Tiffany, at Secs. 961, 962 and 963. But the landlord could also decline to accept the offer of a surrender that was implicit in abandonment and could continue to hold the tenant liable for rent as it became due. See Schneiker. A surrender may be either "express" or "by operation of law." 4 H. Tiffany, at Sec. 961. We have recognized that a surrender by operation of law results "from acts of the parties to the lease which imply mutual consent to the termination." Sanden v. Hanson, 201 N.W.2d 404, 409 (N.D.1972).

The pure common law approach which interpreted a lease essentially as the grant of an estate in real property engendered sharp criticism from courts and commentators alike because it tended to encourage economic and physical waste and ignored that a modern lease is more like a continuing contractual obligation than the purchase of an estate. See, e.g., 1 American Law of Property, at Sec. 3.11; Annot., Landlord's Duty On Tenant's Failure to Occupy, or Abandonment of, Premises, to Mitigate Damages by Accepting or Procuring Another Tenant, 21 A.L.R.3d 534 (1968).

In 1977, this court rejected the pure common law approach and joined the modern trend, holding:

"[T]he landlord has a duty to mitigate the damages which arise out of his tenant's default. While we agree that the general welfare is served more by the use of property than by its idleness, we are persuaded that the contract qualities of a five-year lease are sufficient to require the use of contract remedies and limitations to those remedies."

MAR-SON, Inc. v. Terwaho Enterprises, Inc., 259 N.W.2d 289, 291 (N.D.1977). See also N.D.C.C. Sec. 47-16-13.5 (imposing duty to mitigate damages in residential lease situations). The dual nature of a lease as both a contract and a conveyance of an interest in land has important implications for resolving disputes between landlords and tenants. These implications were overlooked by the trial court in this case.

There is an obvious tension between the common law doctrine of surrender by operation of law and the lessor's obligation to mitigate damages. One court has explained:

"[C]ommon law courts have sometimes found a surrender by operation of law in certain situations where a lessor responds to the lessee's abandonment of the property, for example, by reletting or selling the property to a third party. The courts concluded that such a relet or sale was inconsistent with the original lessee's estate in the property and, therefore, based on an implied agreement or estoppel theory, constituted a binding recognition by the lessor that the estate no longer existed. The recognition of the end of the estate...