U.S. Nat. Bank of Oregon v. Homeland, Inc.

• Decision Date: 21 July 1981
• Docket Number: No. 393-568,393-568
• Citation: 631 P.2d 761,291 Or. 374
• Parties: UNITED STATES NATIONAL BANK OF OREGON, a National Banking Association, Plaintiff, v. HOMELAND, INC., an Oregon corporation, and its Receiver, Paul C. Diegel, Respondents, and Ralph D. Schlesinger and Bernice W. Schlesinger, Petitioners. ; CA 15523; SC 27245.
• Court: Oregon Supreme Court

Page 761

631 P.2d 761

291 Or. 374

UNITED STATES NATIONAL BANK OF OREGON, a National Banking

Association, Plaintiff, v. HOMELAND, INC., an Oregon corporation, and its Receiver, Paul C. Diegel, Respondents, and Ralph D. Schlesinger and Bernice W. Schlesinger, Petitioners.

No. 393-568; CA 15523; SC 27245.

Supreme Court of Oregon.

Argued and Submitted January 5, 1981.

Decided July 21, 1981.

[291 Or. 375-A] John M. Berman, Portland, argued the cause for petitioners. With him on the briefs were Spears, Lubersky, Campbell & Bledsoe, Portland.

Kevin D. Padrick, Portland, argued the cause for respondents. With him on the brief were Peter C. Richter, and Miller, Anderson, Nash, Yerke & Wiener, Portland.

Before TONGUE, P. J., and LENT, LINDE and PETERSON, JJ.

PETERSON, Justice.

Homeland, Inc., leased office space from Ralph D. Schlesinger and Bernice W. Schlesinger (hereinafter referred to as "lessor"). Prior to the expiration of the lease, Homeland abandoned the premises, after which lessor relet the premises to a new tenant for a longer term and at a higher rental. The new tenant also defaulted on the second lease. Two issues are presented:

1. When a leasehold tenant of commercial premises ¹ abandons the premises prior to the expiration of the lease, and the lessor relets the premises for a term extending beyond the expiration of the original lease and at a higher rent, does such reletting constitute a termination of the lease, as a matter of law, thus freeing the tenant from any claim for damages accruing subsequent to the reletting?

2. When a lease of commercial premises provides that if a receiver is appointed, the lessor may, without notice, terminate the lease, does the lessor's reletting of the premises terminate the tenant's obligation to pay damages arising subsequent to the reletting?

I

The facts

Lessor owns an office building in downtown Portland. Homeland leased 3,000 square feet of office space from lessor for a five-year term, April 1, 1971 to March 31, 1976. The monthly rental for the first six months was $1,175 per month; for the second six months, $1,275 per month; and for the remaining 48 months, $1,415 per month. Homeland vacated the premises on July 31, 1973, with 32 months remaining on the lease and thereafter paid no more rent. In due course, a receiver, Paul C. Diegel, was appointed for Homeland. This case involves a claim by lessor against the Homeland receiver for unpaid rent accruing following Homeland's abandonment of the premises in July, 1973.

Between the Homeland default in July of 1973 and the reletting to Sebastian's International, Inc., in February of 1974, lessor attempted to lease the premises to other tenants on the same terms and conditions as other premises in the lessor's office building. At all times, the rental terms were competitive with those offered for similar office premises in Portland, Oregon. At the time in question, there was an excess of office space of this type in downtown Portland, Oregon, with the vacancy factor being between 10 percent and 12 percent. There were other vacancies in the lessor's building.

On February 1, 1974, lessor leased the premises to Sebastian's for a term commencing February 1, 1974, and ending January 31, 1977. The term of this lease extended 10 months longer than the Homeland lease, and the rent was $1,500 per month, $85 per month more than under the Homeland lease. Sebastian's subsequently defaulted and vacated the premises on July 14, 1974, after having paid a total rent of $7,500.

After the Sebastian's default, lessor continued to attempt to lease the premises but was unable to do so until August 1, 1975. Lessor relet the office space to another party effective August 1, 1975. Lessor's claim against the receiver is for the period August 1, 1973, though July 31, 1975, 24 months at a monthly rate of $1,415, less the rent paid by Sebastian's in the amount of $7,500, lessor's net claim being $26,460.

The receiver urged the trial court to limit the claim to the period from the date that Homeland vacated until February 1, 1974, when the premises were leased to Sebastian's. Without explanation or opinion, the trial court so limited the claim and denied the remainder of lessor's claim. The Court of Appeals affirmed. 47 Or.App. 745, 615 P.2d 380 (1980).

II

Discussion of recent Oregon cases

The receiver asserts (1) that the reletting to Sebastian's for a longer term and at a higher rent than that provided in the original lease terminated the Homeland lease as a matter of law, and (2) that the reletting operated to terminate Homeland's lease in accordance with one of the terms of that lease. The resolution of this case turns, in part, upon rules of law enunciated in three recent Oregon cases. We will first discuss the legal framework within which this case arose and then turn to the specific issues.

Prior to Wright v. Baumann, 239 Or. 410, 398 P.2d 119 (1965), Oregon subscribed to the view that a lessor is not required to mitigate damages when the tenant abandons the leasehold premises. The theory was that a lease was a conveyance of an interest in real property, that the tenant "becomes the owner of the premises for a term and therefore the lessor need not concern himself with lessee's abandonment of his own property." 239 Or. at 413, 398 P.2d 119.

In Wright v. Baumann, however, this view was rejected. We held that such a transaction is essentially a contract rather than a conveyance. Justice O'Connell, speaking for the court, observed that

" * * * covenants in a modern business lease, particularly where only a part of the space in a building is leased, relate for the most part to the use of the space. The lessor's duties do not end with the execution of the lease. The case of Whitaker v. Hawley, 25 Kan. 674, 687 (1881) expresses this view as follows: ' * * * a lease is in one sense a running rather than a completed contract. It is an agreement for a continuous interchange of values between landlord and tenant, rather than a purchase single and completed of a term or estate in lands.' " 239 Or. at 413-414, 398 P.2d 119.

In reference to the landlord's duty to mitigate damages, the court stated:

" * * * Writing in 1925, McCormick predicted that eventually 'the logic, inescapable according to the standards of a "jurisprudence of conceptions" which permits the landlord to stand idly by the vacant, abandoned premises and treat them as the property of the tenant and recover full rent, will yield to the more realistic notions of social advantage which in other fields of the law have forbidden a recovery for damages which the plaintiff by reasonable efforts could have avoided.' We believe that it is time for McCormick's prediction to become a reality." (Footnote omitted.) 239 Or. at 415, 398 P.2d 119. ²

The discussion of the issue concluded with this statement:

" * * * And whether they are regarded as arising out of contract or conveyance, a court of equity should require the plaintiff seeking equity to do equity by making a reasonable effort to avoid damages." 239 Or. at 417, 398 P.2d 119.

Two years later, Kulm v. Coast-to-Coast Stores, 248 Or. 436, 432 P.2d 1006 (1967), held that the landlord has the duty to mitigate damages. By analogy to claims for breach of contract for the sale of goods, we adopted the rule that in the event of the tenant's abandonment, the lessor's measure of damages was " * * * not the full amount of the stipulated rent but an amount which represents the difference between the stipulated rent and the rent which (landlord) would receive upon leasing the premises to others." 248 Or. at 442, 432 P.2d 1006.

The result of this rule of damages was to give the landlord the benefit of the bargain, on the theory that if the fair rental value was less than the agreed rent, the landlord could relet the premises at fair rental value, and the landlord would be made whole by receiving the fair rental value from the new tenant, plus the difference between the fair rental value and the abandoning tenant's agreed rental.

Kulm also held that if, after a reasonable effort, the landlord was unable to relet the premises, the landlord would be entitled to receive the entire amount of the rent reserved for the period during which the premises could not be rented. ³

The holdings of Wright v. Baumann, supra, and Kulm v. Coast-to-Coast Stores, supra, were affirmed in Foggia v. Dix, 265 Or. 315, 509 P.2d 412 (1973). In Foggia, the landlord was unable to relet the premises (a dental clinic) at the same rental that the abandoning tenant had agreed to pay. The tenant claimed that the landlord had an obligation to mitigate damages by reletting at less than the fair rental value and for a use other than as a dental clinic. The court stated:

"In order to mitigate the damages occasioned by a lessee's breach of a lease, the landlord should not be required to substantially alter his obligations as established in the pre-existing lease. Thus in the present case plaintiff was not required to rent the premises to persons not working in dentistry or related fields, since the offices were part of a dental clinic occupied by two other dentists and were designed for that special use. Nor should plaintiff be required to rent the premises below their fair rental value. Defendant did not produce any evidence that $375 per month was not the fair rental value of the dental offices. Under all these circumstances we are of the opinion that plaintiff fulfilled his obligation to mitigate the damages." 265 Or. at 321, 509 P.2d 412.

The resolution of this case turns upon the application of rules of law derived from the cases discussed above, a consideration of the nature of the tenant's interest in the property following abandonment, and the determination of the landlord's responsibility following the tenant's abandonment.

III

After a tenant abandons the premises, a commercial lease is

not terminated as a matter of law by the landlord's

...