Warnert v. MGM Properties, CX-84-1519
| Citation | 362 N.W.2d 364 |
| Decision Date | 12 February 1985 |
| Docket Number | No. CX-84-1519,CX-84-1519 |
| Parties | Harold WARNERT, Respondent, v. MGM PROPERTIES, Defendant, Richard Schmidt, etc., Appellants. |
| Court | Court of Appeals of Minnesota |
Syllabus by the Court
Tenant-sublessor's surrender of its leasehold interest after a default of its duty to pay rent did not entitle landlord to possession of the property because the surrender did not extinguish subtenant's interest under the permitted sublease.
Brian F. Kidwell, Hall, Byers, Hanson, Steil & Weinberger, P.A., St. Cloud, for respondent.
Stanley J. Mosio, St. Paul, John R. Koch, Reichert, Wenner, Koch & Provinzino, P.A., St. Cloud, for appellants.
Considered and decided by FORSBERG, P.J., and PARKER and LANSING, JJ., with oral argument waived.
Harold Warnert began this unlawful detainer proceeding against his tenant, MGM Properties, and against MGM Properties' subtenant, Richard Schmidt, alleging MGM Properties' failure to pay rent. The day before trial MGM Properties and Warnert entered into a stipulation of settlement that included MGM Properties' surrender of the premises to Warnert. Warnert and Schmidt proceeded to hearing, with Schmidt defending by depositing the claimed arrearages with the court. The trial court concluded that Warnert was entitled to possession of the property as a matter of law and ordered a writ of restitution to issue against Schmidt.
Schmidt filed notice of appeal and a $60,000 bond requesting that the trial court allow him to retain possession of the premises pending appeal. Warnert also filed a $60,000 bond and requested immediate possession of the premises. On August 29, 1984, the trial court determined Warnert was entitled to possession pending appeal and ordered the writ of restitution to issue. Schmidt then petitioned this court for a writ of prohibition forbidding execution of the writ of restitution. This court denied the petition in an order dated September 4, 1984, and set the matter for full briefing. We now reverse the trial court's order granting Warnert judgment on his complaint.
In 1982 defendant Richard Schmidt purchased a retail liquor sales franchise from MGM Liquor Warehouse International, Inc., a corporation affiliated with MGM Properties. A short time later Schmidt and representatives from MGM Properties met with respondent Harold Warnert to negotiate a lease for space in Warnert's shopping center known as the Midtown Square development in St. Cloud, Minnesota.
On August 26, 1982, MGM Properties and Warnert executed a lease for a term of seven and one-half years. The lease is a complex ten-page commercial lease form with a two-page addendum of specific terms and a four-page addendum dealing with construction of the premises. Rent is based on the gross sales of the business occupying the building, subject to a minimum annual rent of $7 per square foot. The minimum rent clause does not apply until Midtown Square reaches 60 percent occupancy. The lease provided that MGM Properties could assign or sublet the leased premises to an MGM Liquor Warehouse International franchisee without obtaining Warnert's consent, for termination by the landlord at the expiration of the term, and for termination at the option of the landlord if there is a default in any covenant or payment due under the lease.
On October 1, 1982, MGM Properties and Schmidt executed a five-page document entitled "Sublease," which incorporated by reference the prime lease of August 26, 1982. The term of the sublease is defined as follows:
The term of this Sublease shall commence on the date determined in accordance with Section 3 of the Prime Lease and shall terminate one day prior to termination of the Prime Lease term [the Term].
The sublease also provides:
If the Prime Lease is terminated * * * for any reason other than due to breach thereof by sublessor, this Sublease shall automatically cease and terminate * * *.
Warnert maintains that soon after MGM Properties assumed control of the premises, it defaulted on rental payments. By the time of the hearing on August 15, 1984, Warnert claimed $27,025.13 was due on the prime lease. Although the issue was not litigated, the trial court did find that the allegations in the complaint were true, and Schmidt does not dispute that MGM Properties breached the prime lease.
Schmidt and Warnert do dispute whether Schmidt breached the terms of the sublease by failing to pay rent, and that issue was also not litigated. Schmidt has occupied the premises since November 1983 and claims he began paying rent directly to Warnert in May 1984.
On August 7, 1984, Warnert began an unlawful detainer action against both MGM Properties and Schmidt, alleging MGM Properties had breached the prime lease. On August 14, 1984, the day before the hearing, MGM Properties entered a "Stipulation of Settlement" with Warnert and agreed to surrender its rights under the lease to Warnert. The next day at the unlawful detainer hearing Schmidt was advised of the settlement and the "termination" of the prime lease.
At the hearing Schmidt requested a jury trial but offered to pay the rent MGM Properties allegedly owed on the prime lease provided he could continue occupancy of the premises. When Warnert refused the tender Schmidt deposited $27,025.13 in court pending resolution of his occupancy rights. Warnert claimed that he was not required to accept the tender and that he was entitled to possession as a matter of law because, among other things, MGM Properties had not obtained written permission from Warnert to sublet the property. Both Warnert and Schmidt represented to the trial court that written consent was required under the lease.
On August 22, 1984, the court held that because MGM abandoned the prime lease Schmidt could not succeed to MGM's position, and the court ordered issuance of a writ of restitution against MGM Properties and Schmidt. Schmidt then brought this appeal and requested a writ of prohibition, which this court denied. 1
Is a subtenant entitled to possession after the sublessor surrenders its lease to the lessor?
The lease documents present a number of issues that must be addressed before general principles of landlord-tenant law are applied. First, the prime lease between Warnert and MGM does not require MGM Properties to obtain Warnert's written consent before subletting to Schmidt. Although Article 21 in the main document includes such a requirement, Article 49, contained in the two-page addendum, specifically exempts Schmidt from a written approval requirement:
Notwithstanding Article 21 hereof, Landlord agrees that Tenant may, without Landlord's consent and upon written notice to Landlord, assign or sublet this Lease to a franchisee of MGM Liquor Warehouse International.
Acknowledging that Article 49 was overlooked by both parties before the trial court, Warnert does not now dispute that Schmidt was a permitted subtenant but contends that the trial court's order is still correct because MGM's surrender of the lease terminated Schmidt's subtenancy.
A default in the lease payments under the prime lease clearly provided Warnert with an option to terminate the prime lease. The lease's termination procedure requires notice, provides a right to cure and is stated as additional to any other remedies available under the law. Warnert did not follow that procedure. He chose instead to initiate an unlawful detainer proceeding. The trial court's order permits the interpretation that a termination took place under the lease as a result of the stipulated surrender, but this is not the case. The surrender stipulation is limited to the release of interests and liabilities created under the lease. By its own language it does not purport to terminate the prime lease. The sublease itself contains two provisions that govern Schmidt's rights under a termination of the prime lease, but no provision for determining Schmidt's rights under a surrender of the prime lease. Because the prime lease has not been terminated, the provisions of the sublease dealing with termination of the prime lease are not activated.
Warnert maintains that even absent a termination under the lease, general principles of landlord-tenant law dictate that Schmidt's right to possession of the property ceased when MGM Properties surrendered its rights under the prime lease.
When a tenant transfers its possessory interest under its lease to another for less than the whole term of that lease, it creates a subtenancy. See Kostakes v. Daly, 246 Minn. 312, 315, 75 N.W.2d 191, 193-94 (1956). The agreement between MGM Properties and Schmidt provided that Schmidt's possessory interest terminated one day before the prime lease terminated. Therefore, Schmidt is a subtenant under his agreement with MGM Properties.
A subtenant contracts with a sublessor for a portion of the sublessor's estate under the prime lease. Neither privity of estate nor privity of contract exist between the subtenant and the lessor. See Williams v. Michigan Central R.R. Co., 133...
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