Duck Creek Tire Service, Inc., an Iowa Corporation, and Midwest Mexican Connection, LTD., an Iowa Corporation v. Goodyear Corners, L.C. , 2011 Iowa Sup. LEXIS 20 ( 2011 )

IN THE SUPREME COURT OF IOWA
No. 09–0999
Filed April 8, 2011
DUCK CREEK TIRE SERVICE, INC.,
An Iowa Corporation, and MIDWEST
MEXICAN CONNECTION, LTD.,
An Iowa Corporation,
Appellants,
vs.
GOODYEAR CORNERS, L.C.,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Scott County, Mark J.
Smith, Judge.
A landlord seeks further review of a court of appeals decision
finding that it breached the covenant of quiet enjoyment contained in the
leases for two of its tenants. DECISION OF COURT OF APPEALS
VACATED; DISTRICT COURT JUDGMENT REVERSED AND CASE
REMANDED.
Michael J. McCarthy of McCarthy, Lammers & Hines, Davenport,
for appellants.
Richard A. Davidson of Lane & Waterman LLP, Davenport, for
appellee.
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WIGGINS, Justice.
This appeal involves an action for damages filed by two shopping
center sub-sublessees against their sub-sublessor based upon a breach
of the covenant of quiet enjoyment. The leased premises involved in this
action were subject to a master lease that had been assigned and
subleased numerous times before the sub-sublessees obtained
possession of their respective premises. The district court found in favor
of the sub-sublessor and dismissed the sub-sublessees’ claim. The court
of appeals reversed the decision of the district court and remanded the
case for a determination of damages. On further review, we find as a
matter of law the sub-sublessor breached the covenant of quiet
enjoyment. Therefore, we vacate the decision of the court of appeals,
reverse the judgment of the district court, and remand the case to the
district court to determine damages based on the record made below.
I. Scope of Review.
A district court’s judgment following a bench trial in a law action is
reviewed by this court for correction of errors at law. NevadaCare, Inc. v.
Dep’t of Human Servs., 783 N.W.2d 459, 465 (Iowa 2010). The district
court’s findings of fact have the effect of a special verdict and are binding
so long as they are supported by substantial evidence. Iowa R. App. P.
6.907; Land O’Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000).
“Evidence is substantial for purposes of sustaining a finding of fact when
a reasonable mind would accept it as adequate to reach a conclusion.”
Falczynski v. Amoco Oil Co., 533 N.W.2d 226, 230 (Iowa 1995). However,
we are not bound by the district court’s legal conclusions and application
of legal principles and must reverse if the district court has applied
erroneous rules of law that materially affected its decision. Land
O’Lakes, Inc., 610 N.W.2d at 522. Finally, we must view the evidence in
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a light most favorable to the district court’s judgment. EnviroGas, L.P. v.
Cedar Rapids/Linn Cnty. Solid Waste Agency, 641 N.W.2d 776, 781 (Iowa
2002).
II. Facts.
The parties submitted a stipulation of facts regarding the liability
issues presented to the district court. The court received testimony
regarding the damage issues. The record shows the following facts,
viewed in the light most favorable to the district court’s ruling.
A. Relationship Between the Leases and the Premises. This
appeal involves an action for damages based upon a breach of the
covenant of quiet enjoyment brought by two shopping center sub-
sublessees, Duck Creek Tire Service, Inc. and Midwest Mexican
Connection, Ltd., against their sub-sublessor, Goodyear Corners, L.C.
To understand how Duck Creek and Midwest obtained possession of
their respective premises, we must establish the history of assignments
and subleases involving the property.
On November 21, 1958, Antonio Corsiglia entered into a master
lease with Summit Center for approximately fifteen acres of property
located in Bettendorf. In 1961 Summit Center assigned its interest in
the lease to Disco Corporation, who in turn assigned this interest to
A. Abner Rosen and Abraham Kamber, doing business as Moday Realty
Co. This series of transactions made Moday, Corsiglia’s master lessee.
In 1986 Moday subleased approximately one acre of the property
to Jose Bucksbaum. In 1988 Bucksbaum assigned his interest in the
sublease to Midkim, Inc. By this time, someone had erected a building
on the one-acre site. Later in 1988, Midkim sub-subleased
approximately 6000 square feet of floor space in the building located on
the acre of subleased property to Goodyear Tire & Rubber Company.
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This sub-sublease contained an express covenant of quiet enjoyment,
which stated: “If [Goodyear Tire & Rubber] shall perform all and singular
the covenants herein imposed upon it, [Midkim] warrants and will defend
[Goodyear Tire & Rubber] in the enjoyment and peaceful possession of
the Demised Premises during the term hereof.”
In 1990 Midkim entered into another sub-sublease with Midwest
for approximately 3000 square feet of floor space in the building located
on the acre of subleased property. This sub-sublease also contained an
express covenant of quiet enjoyment that provided:
[Midkim] covenants that its interest in said premises is by
leasehold interest and that [Midwest] on paying the rent
herein reserved and performing all the agreements by
[Midwest] to be performed as provided in this Lease, shall
and may peaceably have, hold and enjoy the demised
premises for the term of this Lease free from molestation,
eviction or disturbance by [Midkim] or any other persons or
legal entity whatsoever. . . . [Midkim] shall provide [Midwest]
with written evidence of [Midkim’s] valid leasehold interest.
On February 1, 2007, Goodyear Tire & Rubber assigned its interest in its
sub-sublease to Duck Creek.
At some point, Midkim mortgaged its leasehold interest in the one-
acre parcel to Norwest Bank. Subsequently, in 1997 Midkim defaulted
on its mortgage and Norwest Bank foreclosed on the mortgage and
obtained a sheriff’s deed to Midkim’s one-acre leasehold interest. In
1998 Norwest Bank assigned this interest—which was subject to the
sub-subleases of both Duck Creek and Midwest—to Goodyear Corners,
L.C. To better visualize the transactions involved in this case, we have
included a flow chart contained in the court of appeals’ decision that sets
out the various interests of the parties in the two parcels leased by Duck
Creek and Midwest.
5
B. Transactions Causing Duck Creek and Midwest to File this
Appeal. Beginning in 2005, Moday failed to make rental payments to
Corsiglia pursuant to the master lease. On December 6, 2006, Corsiglia
sent a “Notice to Quit, Notice of Nonpayment of Rent, and Notice of
Voiding Rental Agreement” to Moday stating the master lease between
the parties would terminate in fifteen days if Moday failed to cure its
rental delinquency. Moday failed to cure the delinquency, and
accordingly, Corsiglia terminated the master lease. On January 3, 2007,
Corsiglia notified Goodyear Corners that Corsiglia had terminated the
master lease covering the entire property. Goodyear Corners then
notified Duck Creek and Midwest that they no longer had any right to the
possession of the premises under the sub-subleases due to the
termination of the master lease.
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On August 26, 2005, Corsiglia filed a petition at law against
Moday, seeking to recover Moday’s delinquent rental payments as well as
all future rent due under the terms of the master lease. On March 28,
2007, Goodyear Corners joined in this suit and asserted a third-party
claim against Moday alleging it had sustained damages as a proximate
result of Moday’s breach of the master lease. Goodyear Corners filed a
motion for partial summary judgment and alleged Moday’s failure to pay
all the rent and taxes due under the master lease was a breach of the
covenant of quiet enjoyment contained in the sublease between Moday
and Goodyear Corners. 1 The district court ultimately granted Goodyear
Corners motion for partial summary judgment on this claim.
On August 24, 2007, Duck Creek and Midwest filed separate
petitions of intervention against Goodyear Corners alleging Goodyear
Corners breached the covenant of quiet enjoyment in the parties’ sub-
subleases, causing Duck Creek and Midwest damages. In answer to
both petitions of intervention, Goodyear Corners asserted the following
affirmative defenses: (1) when it acquired its leasehold interest by way of
a sheriff’s sale, it did not assume any obligations under the sub-
subleases; (2) Duck Creek and Midwest had knowledge of a paramount
lease and assumed the risk regarding its possible termination; and
(3) Duck Creek and Midwest could have protected their interests by
obtaining a nondisturbance agreement from the owner of the property,
1The sublease between Moday and Goodyear Corners provided:
14. Quiet Enjoyment: [Moday] covenants that upon [Goodyear
Corners] paying the above specified rent and performing and complying
with all the terms, conditions and covenants of this lease, [Goodyear
Corners] shall peaceably have, hold and enjoy the Demised Premises for
the term aforesaid, subject to any mortgage to which this lease shall be
or may become subject.
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Corsiglia, and their failure to do so was the sole proximate cause of any
damages sustained.
After a bench trial, the district court filed its findings of fact,
conclusions of law, and entry of judgment. First, the district court found
Goodyear Corners assumed all the rights and obligations under the sub-
subleases when it purchased an assignment of Midkim’s leasehold
interest from Norwest Bank because it collected rent from Duck Creek
and Midwest and did nothing to indicate it did not assume all the
obligations of the sub-subleases. Alternatively, the court held Goodyear
Corners was estopped from asserting its statute-of-frauds defense
because it collected rent under the sub-subleases and did not notify
Duck Creek and Midwest it did not intend to honor the sub-subleases.
Finally, the court found Duck Creek and Midwest knew they were
entering sub-subleases, which made them subject to superior leases.
Thus, the court reasoned Duck Creek and Midwest had a duty to
ascertain the terms of the superior leases and obtain guarantees from
the superior leaseholders to honor their sub-subleases. Accordingly,
because Duck Creek and Midwest failed to protect their leasehold
interests and Goodyear Corners was not at fault for the termination of
the master lease, the court held Duck Creek and Midwest could not
obtain damages from Goodyear Corners for violation of the covenants of
quiet enjoyment based on the termination of the master lease.
Consequently, the district court dismissed Duck Creek’s and Midwest’s
petitions of intervention for lack of proof of a breach of the sub-subleases
by Goodyear Corners.
Duck Creek and Midwest filed a notice of appeal from the district
court’s judgment and rulings. We transferred the case to the court of
appeals. The court of appeals reversed the district court’s finding that
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Duck Creek’s and Midwest’s claims failed for lack of proof of a breach of
the sub-subleases and remanded the case to the district court to
determine damages resulting from Goodyear Corners’ breach of the
covenants of quiet enjoyment contained in the sub-subleases.
Subsequently, Goodyear Corners filed an application for further review,
which we granted.
III. Issues.
Goodyear Corners raises two issues on appeal. First, we must
decide whether Goodyear Corners assumed Midkim’s obligations under
the sub-subleases’ covenants of quiet enjoyment, when it purchased an
assignment of Midkim’s leasehold interest from Norwest Bank. Second,
we must determine whether Duck Creek and Midwest can enforce the
covenants of quiet enjoyment against Goodyear Corners, when the
breach of the covenants is not caused by any fault of Goodyear Corners,
but rather by the fault of Moday.
IV. Analysis.
A. Whether Goodyear Corners Assumed Any Liabilities or
Obligations of Midkim When it Took the Assignment from Norwest.
At trial, Goodyear Corners argued there was no documentation of any
kind indicating it assumed any liabilities or obligations under the sub-
subleases between Midkim, Goodyear Tire & Rubber, and Duck Creek, or
Midkim and Midwest. Moreover, it argued the statute of frauds barred
any oral evidence of such an assumption. Therefore, Goodyear Corners
claimed it could not be held liable for the breach of the covenants of quiet
enjoyment in the sub-subleases.
The district court rejected these arguments. On appeal, the court
of appeals held Goodyear Corners failed to preserve error on this issue
because it did not file a cross-appeal. In its application for further
9
review, Goodyear Corners claims it was not required to cross-appeal to
preserve this issue and urges us to consider its merits.
1. Preservation of error. Generally, a party must raise an issue
and the district court must decide it for that issue to be properly
preserved for appellate review. Meier v. Senecaut, 641 N.W.2d 532, 537
(Iowa 2002). In its trial brief filed in the district court, Goodyear Corners
raised the issue that it did not assume any liabilities or obligations under
the sub-subleases between Midkim, Goodyear Tire & Rubber, and Duck
Creek, or Midkim and Midwest. Additionally, the district court rejected
this claim in its ruling.
Under this procedural history, Goodyear Corners is not required to
cross-appeal to preserve this issue on appeal. Goodyear Corners was the
prevailing party at the district court. Although it lost on this issue in the
district court, it prevailed on the merits on another ground. On appeal,
Goodyear Corners is simply attempting to save the judgment rendered in
its favor by arguing that an alternative ground for relief raised in the
district court allows us to affirm the district court’s judgment.
It is well-settled law that a prevailing party can raise an alternative
ground for affirmance on appeal without filing a notice of cross-appeal,
as long as the prevailing party raised the alternative ground in the
district court. See, e.g., Jasper v. H. Nizam, Inc., 764 N.W.2d 751, 774–
75 (Iowa 2009); Greene v. Friend of Court, 406 N.W.2d 433, 435 (Iowa
1987); Lowery Invs. Corp. v. Stephens Indus., Inc., 395 N.W.2d 850, 852
(Iowa 1986); Kroblin Refrigerated X Press Inc. v. Ledvina, 256 Iowa 229,
233, 127 N.W.2d 133, 136 (1964). Thus, Goodyear Corners need not file
a cross-appeal to preserve this issue since it constitutes an alternative
ground by which we may affirm the district court’s judgment.
Accordingly, Goodyear Corners has preserved for our review the issue of
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whether it assumed any liabilities or obligations under the sub-
subleases.
2. Merits. The district court found Goodyear Corners assumed all
the rights and obligations under the sub-subleases when it purchased an
assignment of Midkim’s leasehold interest from Norwest Bank. The
district court also found Goodyear Corners was estopped from asserting
its statute-of-frauds defense as contained in Iowa Code section 622.32
(2007). Goodyear Corners admits that when it took its interest in the
property from Norwest Bank, it acquired Midkim’s interest in the
property due to Midkim’s sublease from Moday. However, Goodyear
Corners further claims, when it acquired its interest from Norwest Bank,
it did not assume any liabilities or obligations owed to Midkim’s sub-
sublessees, Duck Creek or Midwest. It bases its argument on the
grounds that the assignment of the sublease from Norwest Bank to
Goodyear Corners made no reference to any sub-subleases. Therefore, it
could not be liable to Duck Creek or Midwest for Moday’s breach of the
covenants of quiet enjoyment.
An assignment of a leasehold interest occurs when the lessee
transfers its entire interest in the premises, for the unexpired term of the
original lease, without retaining any reversionary interest. 49 Am. Jur.
2d Landlord & Tenant § 917, at 847 (2006); 52 C.J.S. Landlord & Tenant
§ 42, at 107–09 (2003); accord Berg v. Ridgway, 258 Iowa 640, 646, 140
N.W.2d 95, 100 (1966). The assignment between Norwest Bank and
Goodyear Corners of Midkim’s leasehold interest provided:
NORWEST BANK IOWA, NATIONAL ASSOCIATION, a
banking organization . . . does hereby convey to GOODYEAR
CORNERS L.C., an Iowa limited liability company, the
lessee’s rights under that certain ground lease dated
October 6, 1986 . . . between Moday Realty Co., as lessor,
and Jose Bucksbaum, as lessee . . . .
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(Emphasis added.)
An assignment of a lease places the assignee in the same
relationship toward the lessor as was occupied by the lessee, meaning
the assignee assumes all the burdens and benefits originally held by the
lessee. Restatement (Second) of Contracts § 328(1), at 44–45 (1981);
accord 52 C.J.S. Landlord & Tenant § 49, at 114; § 51, at 116–17. This
assignment used the general terms of “the lessee’s rights under [the] . . .
ground lease.” Therefore, Goodyear Corners took all the interest Midkim
had in the premises when it purchased the assignment from Norwest
Bank. As we have previously held:
When one accepts the assignment of a lease he not only has
the benefits of the lease but the burdens as well. He stands
in the shoes of the lessee at least for the period of time he
occupies the premises.
Berg, 258 Iowa at 644–45, 140 N.W.2d at 99; accord Pickler v. Mershon,
212 Iowa 447, 452–53, 236 N.W. 382, 385 (1931). Accordingly, by
purchasing the assignment from Norwest Bank, Goodyear Corners
stepped into the shoes of the sublessee, Midkim, and assumed all the
burdens as well as benefits held by Midkim under the sublease.
A sublease reserves a reversionary interest in the lessee, whereas
an assignment is the transfer of the lessee’s entire interest, without
reserving any reversionary interest. Berg, 258 Iowa at 646–47, 140
N.W.2d at 100; accord 1 Milton R. Friedman & Patrick A. Randolph Jr.,
Friedman on Leases § 7:4.1, at 7–82 (5th ed. 2010) [hereinafter Friedman
on Leases]. Consequently, when Midkim entered into the sub-subleases
with Duck Creek and Midwest, it retained a reversionary interest in the
premises, as well as obtained certain rights and duties under the sub-
subleases. However, when Norwest Bank assigned Midkim’s leasehold
interest to Goodyear Corners, Midkim retained no reversionary interest
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in the premises. Essentially, the assignment transferred any and all
interests Midkim had in the premises to Goodyear Corners, including
any reversionary interest Midkim had previously retained via the sub-
subleases as well as its rights and duties under the sub-subleases.
Thus, it was not possible for Midkim to assign its leasehold interest to
Goodyear Corners without also assigning its interests in the Duck Creek
and Midwest sub-subleases.
Our conclusion is supported by a case decided long ago by this
court. In Collamer v. Kelley, 12 Iowa 319, 320 (1861), Russell leased a
piece of land to Wood. Wood then entered into a sublease with Shelley.
Collamer, 12 Iowa at 320. Shelley later assigned his interest to a third
party, Young. Id. at 320–21. Subsequently, Wood assigned his interest
in the master lease to another third party, C. W. Griggs. Id. at 321.
However, Wood never assigned his interest in the sublease. Id. at 323.
The issue decided by the court is what rights Griggs acquired under the
sublease from accepting the assignment of the master lease. Id.
We found that by the assignment of the master lease, Wood
surrendered to Griggs all his rights to control the estate, and by
accepting the assignment Griggs possessed all the same rights Wood had
in the estate. Id. This included the right to demand rent from the
sublessee, Young. Id. Thus, we held by accepting the assignment of the
master lease from Wood, Griggs not only acquired all of Wood’s rights
and duties under the master lease, but also stepped into Wood’s shoes as
the sublessor and acquired all Wood’s rights and duties under the
sublease as well. Id. at 323–25.
The facts of this case require the same result. When Goodyear
Corners purchased the assignment of the sublease from Norwest Bank,
Goodyear Corners stepped into the shoes of the sublessee, Midkim, and
13
assumed all the burdens and benefits under the sublease. Moreover, as
recognized in Collamer, Goodyear Corners also stepped into Midkim’s
shoes and acquired all of Midkim’s rights and duties under its sub-
subleases with Duck Creek and Midwest. Therefore, the district court
correctly held Goodyear Corners assumed all of Midkim’s rights and
obligations under the sub-subleases when it purchased an assignment of
Midkim’s leasehold interest from Norwest Bank.
3. Statute-of-frauds claim. Goodyear Corners claims that the
statute of frauds prevents Duck Creek and Midwest from enforcing the
covenants of quiet enjoyment contained in their sub-subleases. It relies
on section 622.32 of the Iowa Code that provides:
Except when otherwise specially provided, no evidence
of the following enumerated contracts is competent, unless it
be in writing and signed by the party charged or by the
party’s authorized agent:
....
3. Those for the creation or transfer of any interest in
lands, except leases for a term not exceeding one year.
Iowa Code § 622.32.
The statute of frauds is not a rule of substantive law, but rather a
rule of evidence. Sun Valley Iowa Lake Ass’n v. Anderson, 551 N.W.2d
621, 630 (Iowa 1996). The statute of frauds does not render oral
promises creating or transferring an interest in land invalid. Id. The
statute only relates to the manner of proof and renders oral proof of such
promises incompetent. Recker v. Gustafson, 279 N.W.2d 744, 748 (Iowa
1979). The party asserting the statute must raise it by an objection at
trial. Harriott v. Tronvold, 671 N.W.2d 417, 422 (Iowa 2003).
We have decided that when Goodyear Corners purchased an
assignment of Midkim’s leasehold interest from Norwest Bank, it
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assumed all the obligations Midkim owed to Duck Creek and Midwest
under the sub-subleases. Thus, the question becomes is there
competent proof in the record to establish the covenants of quiet
enjoyment in Duck Creek’s and Midwest’s sub-subleases.
The parties submitted this case on a stipulation. The stipulation
introduced into evidence Midkim’s sub-sublease with Goodyear Tire &
Rubber, Goodyear Tire & Rubber’s assignment of that sub-sublease to
Duck Creek, and Midkim’s sub-sublease with Midwest. The stipulation
did not limit the purpose for which the parties admitted these
documents. These documents contain proof of the covenants of quiet
enjoyment that are the subject of this action. Although Goodyear
Corners might have been able to argue that the statute of frauds
prevents the admissibility of the covenants of quiet enjoyment, we need
not decide the issue because Goodyear Corners allowed the documents
containing the covenants of quiet enjoyment to be admitted into evidence
without objection. Therefore, we conclude there was competent evidence
in the record for the district court to find the covenants of quiet
enjoyment were part of the obligations assumed by Goodyear Corners
when it purchased the assignment of Midkim’s leasehold interest from
Norwest Bank, and the statute of frauds did not prohibit such a finding.
B. Whether Duck Creek and Midwest Can Enforce the
Covenants of Quiet Enjoyment Against Goodyear Corners, When the
Breach of the Covenant is Not Caused by Any Fault of Goodyear
Corners, but Rather by the Fault of Moday. The covenant of quiet
enjoyment is a covenant and warranty by the lessor that the tenant shall
have quiet and peaceful possession of the demised premises as against
the lessor, any person claiming title through or under the lessor, or any
person with a title superior to the lessor. Cohen v. Hayden, 180 Iowa
15
232, 249, 163 N.W. 238, 239 (1917) (supplemental opinion on rehearing);
Kane v. Mink, 64 Iowa 84, 86, 19 N.W. 852, 853 (1884); see also 3
Friedman on Leases § 29:2.1, at 29–2 to 29–3, § 29:2.2, at 29–8; 1
Emanuel B. Halper, Shopping Center and Store Leases § 17.07, at 17-14
to 17-15 (rev. ed. 2003); Robert S. Schoshinski, American Law of
Landlord and Tenant § 3:3, at 94–95 (1980); 5 Thompson on Real Property
§ 41.03(c), at 151 (N. Gregory Smith ed., 2d Thomas ed. 1998). When a
tenant is actually evicted from the leased premises, a breach of the
covenant of quiet enjoyment has occurred. Eggers v. Mitchem, 240 Iowa
1199, 1201, 38 N.W.2d 591, 592 (1949); see also Schoshinski, American
Law of Landlord and Tenant § 3:4, at 95–96; 5 Thompson on Real
Property § 41.03(c)(1), at 151.
Duck Creek’s express covenant of quiet enjoyment stated, “Lessor
warrants and will defend Lessee in the enjoyment and peaceful
possession of the Demised Premises during the term hereof.” Midwest’s
express covenant of quiet enjoyment stated, “Tenant . . . shall and may
peaceably have, hold and enjoy the demised premises for the term of this
Lease free from molestation, eviction or disturbance by the Landlord or
any other persons or legal entity whatsoever.” We construe these
provisions as providing Duck Creek and Midwest with the protection
generally available under an implied covenant of quiet enjoyment
because the parties do not claim these express covenants are more
restrictive than the implied covenant of quiet enjoyment. See 3 Friedman
on Leases § 29:2.2, at 29–8 to 29–9. Moreover, because the covenant of
quiet enjoyment runs with the land, Goodyear Corners acquired the
burdens of the express covenants of quiet enjoyment when it purchased
the assignment of Midkim’s leasehold interest from Norwest Bank. Id.
§ 29:2.7, at 29–19 to 29–20.
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Duck Creek and Midwest were evicted from the premises when
Corsiglia asserted his superior title to the premises due to Moday’s
breach of the master lease. Thus, we are dealing with a breach of the
express covenants of quiet enjoyment contained in both Duck Creek’s
and Midwest’s sub-subleases based on the assertion of a paramount
title. A paramount title is
a legal interest in the leased property held by a third party at
the time the lease is made, and not terminable at the will of
the landlord [Goodyear Corners] or by the time the tenant
[Duck Creek or Midwest] is entitled to possession . . . .
Restatement (Second) of Prop.: Landlord & Tenant § 4.1(1), at 121
(1977). Accordingly, we must determine whether Duck Creek and
Midwest can recover from Goodyear Corners for breach of the express
covenants of quiet enjoyment, when their eviction was caused by the
assertion of a paramount title by a paramount titleholder after Duck
Creek and Midwest, as tenants, enter onto the premises.
The Restatement (Second) of Property: Landlord and Tenant, deals
with this situation. It provides:
Except to the extent the parties to a lease validly agree
otherwise, after the tenant enters into possession there is no
breach of the landlord’s obligations because of the existence
of a paramount title, but there is a breach of his obligations
if there is an eviction by a paramount title, if the eviction
deprives the tenant of the use contemplated by the parties.
For that breach the tenant may:
(1) terminate the lease in the manner prescribed in
§ 10.1 and recover damages to the extent
prescribed in § 10.2.
Id. § 4.3, at 140. This rule developed from the common law view, which
held the eviction of a tenant by the holder of a paramount title is
attributable to the tenant’s landlord and constitutes a breach of the
covenant of quiet enjoyment, entitling the tenant to seek damages from
17
its landlord. Id. § 4.3 cmt. b, at 141; see also 5 Thompson on Real
Property § 41.03(c)(6)(iii), at 167 (recognizing where the covenant of quiet
enjoyment is breached by the actions of a paramount titleholder, the
tenant’s remedies are against the landlord rather than the paramount
titleholder).
This rule is also consistent with our case law. In Cohen v. Hayden,
heirs of an estate held the premises in question as tenants in common.
180 Iowa 232, 240, 157 N.W. 217, 219 (1916). At a time when the
property was held as tenants in common, one of the heirs, Hayden,
leased the property to Cohen for a term of years. Id. at 234, 157 N.W. at
217. During the term of the lease, a partition action between the tenants
in common concluded. Id. The referee in the partition action sold the
premises and the purchaser evicted Cohen from the premises. Id. In
Cohen, the heirs of the estate were the paramount titleholders. After the
sale by the referee, the purchaser became the paramount titleholder and
evicted Cohen from the property. Under these facts, we held Hayden, as
landlord, was liable to Cohen for damages by reason of Hayden’s breach
of the covenant of quiet enjoyment even though the eviction was caused
by the assertion of a paramount title held by the subsequent purchaser.
Id. at 244–45, 157 N.W. at 221.
We believe the rule contained in section 4.3 of the Restatement
(Second) of Property: Landlord and Tenant is sound and consistent with
our prior case law. Accordingly, we adopt it as controlling. Even with
the adoption of section 4.3, Goodyear Corners argues Duck Creek’s and
Midwest’s knowledge of the paramount title precludes them from
asserting their claims that Goodyear Corners breached the covenants of
quiet enjoyment.
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Goodyear Corners supports its claim by citing illustration nine to
section 4.3. Illustration nine states:
9. L leases corner commercial property to T for twenty
years. The parties contemplate that T will erect a gasoline
filling station thereon and that T will require financing in the
form of a construction loan. T enters. When he seeks to
obtain his construction loan, he discovers that the leased
property is subject to a mortgage and when requested to do
so, the mortgagee refused to subordinate his mortgage to the
construction loan, with the result that T is unable to obtain
his loan. The assertion by the mortgagee of his rights is an
eviction that prevents the use contemplated by the parties
and L is in default. If T knew of the mortgage at the time he
entered the leased property, the mortgagee’s assertion of his
rights in the manner described above would not be an
eviction.
Restatement (Second) of Prop.: Landlord & Tenant § 4.3 illus. 9, at 143–
44. We disagree with Goodyear Corners’ argument.
First, illustration nine goes to the issue of when the loss of use of a
premises is an eviction. Here, Duck Creek and Midwest were evicted.
Illustration nine is not applicable.
Second, comment f to section 4.3 does provide, “knowledge [of a
paramount title] on the tenant’s part may under certain circumstances
justify the conclusion that the parties intended that the assertion of the
known paramount title would not be a ground for holding the landlord in
default.” Id. § 4.3 cmt. f, at 146. However, mere knowledge of the
paramount title is irrelevant. See id. § 4.3 reporter’s note to cmt. f, at
149 (recognizing knowledge of a paramount title has generally been held
irrelevant). The circumstances of the transaction must indicate the
lessee’s knowledge of the paramount title was a waiver of the lessee’s
rights under the covenant of quiet enjoyment. Under the stipulation
entered into by the parties, there are no circumstances of the transaction
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indicating that Duck Creek or Midwest waived their rights under the
covenants of quiet enjoyment contained in their sub-subleases.
Third, Goodyear Corners’ position is inconsistent with our holding
in Cohen. At the time Cohen entered into the lease, he was not only
aware of the paramount title, but knew a partition action had been filed.
Cohen, 180 Iowa at 236, 157 N.W. at 218. In Cohen, we held the
knowledge of the partition action was immaterial with regard to whether
the landlord breached the covenant of quiet enjoyment. Id. at 243–44,
163 N.W. at 220–21.
Finally, every sublessee has knowledge of a paramount title by the
mere fact that the sublessee is entering into a sublease. Thus, under
Goodyear Corners’ theory that knowledge of a paramount title will defeat
a claim for the breach of the covenant of quiet enjoyment, no sublessee
will ever be able to enforce a covenant of quiet enjoyment. Goodyear
Corners’ position is inconsistent with the Restatement’s position and
existing Iowa law. In situations such as this, if a landlord does not want
to be held responsible for a breach of the covenant of quiet enjoyment
caused by the actions of a paramount titleholder, the landlord should
consider including such a provision in the lease.
Accordingly, applying the law contained in section 4.3 of the
Restatement (Second) of Property: Landlord and Tenant, we find the
district court’s findings were not supported by substantial evidence and,
as a matter of law, Duck Creek and Midwest should have prevailed on
their breach-of-the-covenants-of-quiet-enjoyment claims.
V. Disposition.
We vacate the decision of the court of appeals and reverse the
judgment of the district court because we find, as a matter of law, Duck
Creek and Midwest should prevail on their breach-of-the-covenant-of
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quiet-enjoyment claims. Therefore, we remand the case to the district
court to decide the issue of damages based on the record made below.
DECISION OF COURT OF APPEALS VACATED; DISTRICT
COURT JUDGMENT REVERSED AND CASE REMANDED.
All justices concur except Waterman, Mansfield, and Zager, JJ.,
who take no part.