Telecom Acquisition Corp. I v. Lucic Ents., Inc. , 2012 Ohio 472 ( 2012 )

[Cite as Telecom Acquisition Corp. I v. Lucic Ents., Inc., 2012-Ohio-472.]
Court of Appeals of Ohio
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION
No. 95951
TELECOM ACQUISITION CORP. I, INC.
PLAINTIFF-APPELLANT
vs.
LUCIC ENTERPRISES INC., ET AL.
DEFENDANTS-APPELLEES
JUDGMENT:
AFFIRMED
Civil Appeal from the
Cleveland Municipal Court
Case No. 09-CVG-016833
BEFORE: Sweeney, J., Stewart, P.J., and Rocco, J.
RELEASED AND JOURNALIZED: February 9, 2012
ATTORNEY FOR APPELLANT
Randy J. Hart, Esq.
23600 Commerce Park
Beachwood, Ohio 44122
ATTORNEY FOR APPELLEES
Charles P. Royer, Esq.
McCarthy, Lebit, Crystal & Liffman Co.
101 West Prospect Avenue, Suite 1800
Cleveland, Ohio 44115
JAMES J. SWEENEY, J.:
{¶ 1} Plaintiff-appellant, Telecom Acquisition Corp. I, Inc. (“Telecom”)
appeals the judgment entry and order of the Cleveland Municipal Housing
Court that denied its summary judgment motion and granted
defendant-appellee’s, Lucic Enterprises, Inc. (“Lucic”), motion for summary
judgment on its request for declaratory judgment that it properly exercised a
renewal option contained in a commercial lease agreement relating to these
parties and property located at 1204 Old River Road, Cleveland, Ohio 44113
(the “Property”). Telecom contends that the housing court erred and should
have granted its motion for summary judgment on its complaint to evict Lucic
from the Property on various grounds. For the reasons that follow, we affirm.
{¶ 2} The facts are straight-forward and not in dispute. On September
8, 2004, 1220 Old River Road Company, as “Lessor,” entered into a Lease
Agreement concerning the Property with KAOS, INC. (“KAOS”), as “Lessee,”
and James Gerrick, as the “Guarantor.” James Gerrick executed the Lease
Agreement in his capacity as President of KAOS, the Lessee, and also in his
individual capacity as the Guarantor. On January 17, 2006, Gerrick, again in
his dual capacities, executed an Assignment of Lease, which provided:
The undersigned, Lessee/Assignor, KAOS IN THE FLATS, INC,
an Ohio Corporation, and JAMES S. GERRICK,s [sic] tenants of
the premises located at 1204 Old River Rd., Cleveland, Cuyahoga
County, Ohio 44113 pursuant to a lease executed on or about
September 8, 2004 by and between Assignor/Lessee as Tenants
and 1220 Old River Road Company, an Ohio Partnership, as
Lessor, for value received, hereby assigns all its rights, title and
interests in the foregoing described lease to Lucic Enterprises,
Inc. and [sic] Ohio Corporation; Kaos in the Flats, Inc.
acknowledges that this assignment does not automatically release
it from its obligations pursuant to subject lease until said lease
expiration date, or at such time as 1220 Old River Road Company
and/or its Successor in interest executes a new lease with Lucic
Enterprises, Inc. for subject premises and/or until Lessor and/or
Successors in interests otherwise release Assignor from same.
{¶ 3} At some point, Telecom purchased assets, including the Property,
from the Group Group, an affiliate of 1220 Old River Road Company. Then on
April 14, 2006, Telecom executed its consent to the Assignment of the Lease
by KAOS and Gerrick to Lucic. The consent provided in its entirety as follows:
The undersigned Lessor/Landlord pursuant to the above
described lease, 1220 Old River Road Company, an Ohio
Partnership and or its successors in interests, hereby consents to
the above assignment of subject lease as described herein. See
copy of original lease attached hereto and incorporated herein as
if fully rewritten.
{¶ 4} Lucic and Valentina Lucic executed the same document signifying
acceptance of the assignment of the lease and explicitly assuming “the
responsibilities of tenant/lessee thereto”; the record illustrates that the
Property was operated as a bar and over the years had incurred certain tax
liabilities that became the responsibility of each successive owner of the
Property. This complicated KAOS’ ability to transfer the required liquor
permits to Lucic; however, the parties were able to make arrangements for
the continued lawful sale of liquor on the Property through a Management
Agreement negotiated “pursuant to the purchase by Lucics of the permit
premises business assets from KAOS.” Lucic’s acceptance of the assignment
incorporated this by indicating the contingency of being able to obtain the
necessary permits.
{¶ 5} From 2006 to 2009, Lucic made timely payments to Telecom for
the rental amounts due under the Lease Agreement, which Telecom accepted
without objection. There is no dispute that Lucic occupied the Property and
made significant improvements to it over this time period. The evidence
indicates Lucic expended at least $210,000.00 improving the Property. During
this time period, Lucic made efforts to have the liquor permits transferred to
its name, however, this could not be accomplished until Lucic was able to
resolve the outstanding tax liabilities on the Property. This was accomplished
and documented by correspondence from the Ohio Department of Taxation
dated July 14, 2009, which indicated it had “notified the Division of Liquor
Control that they may proceed with the permit transfer.” The permit transfer
was completed by August 7, 2009.
{¶ 6} Prior to that time, Lucic sent Telecom certified notice on May 5,
2009, of its intent to exercise the renewal option under the Lease Agreement.
The Option to Renew is set forth in Article II of the Lease Agreement and
provides:
Provided that Lessee has fully complied with all terms and
provisions herein contained, Lessor hereby grants Lessee the
right and option to renew this Lease for one additional term of
five (5) years, commencing September 1, 2009, and ending on the
31st day of August, 2014, upon the same terms and provisions set
forth herein, * * * The option granted herein must be exercised by
written notice to Lessor not less than ninety (90) days prior to the
expiration of the initial term hereof. Failure to timely exercise
such option shall result in said option being null and void; time
being of the essence.
{¶ 7} Telecom refused to renew the Lease, giving rise to this action,
which commenced with Telecom’s complaint to evict Lucic from the Property
once the initial term of the Lease Agreement had expired.
{¶ 8} The trial court resolved the matter in favor of Lucic and against
Telecom and it is from this decision that Telecom has appealed. Additional
facts and contractual provisions will be set forth in connection with the
assigned errors to which they are relevant.
Assignment of Error 1
The Trial Court erred in finding that Appellee was a tenant
under the Lease with standing to exercise an option to renew
contained in the Lease, where the undisputed evidence showed
that Appellee had failed to satisfy a condition precedent to its
becoming a tenant under the Lease.
Assignment of Error 2
The Trial Court erred in holding that the condition precedent in
Appellee’s acceptance of the Assignment of the Lease was not for
the benefit of Appellant and that Appellant could not enforce its
terms.
Assignment of Error 3
The Trial Court erred in holding that notice of lease violations
was required under the Lease even where Appellant did not
allege a violation of the Lease and none was required to be
alleged.
{¶ 9} In these assigned errors, Telecom asserts that its eviction
complaint was premised upon the alleged untimely fulfillment of a “condition
precedent” that it deemed necessary to vest Lucic with any rights or interests
as the Lessee under the Lease Agreement. To that end, and in these errors
Telecom asserts that it was and is not claiming that Lucic ever “defaulted”
under the Lease Agreement and therefore, Telecom reasons it did not have to
provide notice of any default before seeking to evict Lucic from the Property
at the expiration of the initial Lease term.
{¶ 10} Appellate review of summary judgment is de novo. Grafton v.
Ohio Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996). The Ohio
Supreme Court stated the appropriate test in Zivich v. Mentor Soccer Club,
82 Ohio St.3d 367, 369-370, 696 N.E.2d 201 (1998), as follows:
Pursuant to Civ.R. 56, summary judgment is appropriate when
(1) there is no genuine issue of material fact, (2) the moving party
is entitled to judgment as a matter of law, and (3) reasonable
minds can come to but one conclusion and that conclusion is
adverse to the nonmoving party, said party being entitled to have
the evidence construed most strongly in his favor. Horton v.
Harwick Chem. Corp. (1995), 73 Ohio St.3d 679, 653 N.E.2d 1196,
paragraph three of the syllabus. The party moving for summary
judgment bears the burden of showing that there is no genuine
issue of material fact and that it is entitled to judgment as a
matter of law. Dresher v. Burt, 75 Ohio St.3d 280, 292-293, 662
N.E.2d 264, 273-274 (1996).
{¶ 11} The “construction of a written contract is a matter of law.”
Saunders v. Mortensen, 101 Ohio St.3d 86, 2004-Ohio-24, 801 N.E.2d 452, ¶9.
Ohio courts “presume that the intent of the parties to a contract is within the
language used in the written instrument. If [courts] are able to determine the
intent of the parties from the plain language of the agreement, then there is
no need to interpret the contract.” Id.{¶ 12} Telecom asserts that Lucic had no standing to renew the Lease
Agreement because in Telecom’s opinion, Lucic did not become the “Lessee”
until the liquor permits were transferred. While Telecom acknowledges this
occurred prior to the expiration of the Lease Agreement, it contends it was
not within the time frame established for exercising the renewal option — 90
days prior to the expiration of the Lease. Essentially, Telecom argues that the
Assignment of the Lease Agreement was invalid until August 7, 2009. This
interpretation is not supported by the plain terms of the Assignment or
Telecom’s consent to it, nor is it supported by the course of dealing of the
parties.
{¶ 13} In this case, it is undisputed that KAOS and Gerrick executed an
Assignment of Lease to transfer all of its “right, title, and interest” in the
Lease to Lucic. Telecom signified its consent to this assignment by executing
the Consent provision on April 14, 2006 and Lucic also accepted the
assignment by signing the Acceptance provision. That particular provision
included that Lucic’s acceptance was contingent upon “Lucics [sic] and or
nominee” obtaining the issuance of liquor permits “pursuant to the purchase
by Lucics [sic] of the permit premises business assets from KAOS, Assignor.”
There is no set time frame nor any provision that said permits must be
obtained prior to the expiration of the Lease term. There is no language that
Telecom’s consent to the Assignment was contingent on anything.
{¶ 14} Coincidentally, Telecom was not a party to the original Lease
Agreement either but that did not prevent it from asserting the rights of the
Lessor contained in it. Telecom did not draft the Assignment of Lease but
only signified its consent to it. The contingency clause in the acceptance
paragraph was solely for the benefit of Lucic, which Telecom readily concedes.
The contingency did not prevent Lucic from being obligated under the Lease
terms upon its execution but instead operated to discharge Lucic of any
continued obligations as the Lessee in the event that the parties were
unsuccessful in transferring the liquor permits. Clearly, Telecom was not a
beneficiary of this contingency, intended or otherwise. Also the contingency
did not leave Telecom without any recourse or tenant in the eventuality that
the liquor permits were not transferred to Lucic. In that case, and by the
terms of the Assignment, KAOS and Gerrick remained obligated under the
Lease Agreement — even into the renewal period if it was exercised by Lucic.
There are no provisions in the Assignment, Consent or Acceptance that would
provide otherwise or lead to an opposite conclusion.
{¶ 15} Telecom accepted lease payments from Lucic even though Lucic
had apparently not been able to obtain liquor permits for the Property until
sometime in August of 2009. It is contrary to the plain terms of the
assignment itself and Telecom’s consent to it to conclude that Lucic needed to
obtain the liquor permits prior to the expiration of the lease term in order to
avail itself of the rights, including the renewal provisions, contained in the
Lease. By virtue of the assignment, Lucic enjoyed all of the rights, title, and
interest of the Lessee under the Lease Agreement, including the renewal
option. Indeed, Telecom made no protest that Lucic had no standing, interest,
or right to make the substantial improvements to Telecom’s rental property
that were completed during its occupancy as the assigned lessee. Contrary to
Telecom’s arguments, Lucic did explicity assume the “responsibilities of the
tenant/lessee thereto”; that there was a contingency upon which the
obligations of the Lessee could revert back to KAOS and Gerrick is not
relevant or detrimental to Telecom’s interests — either way Telecom had a
party liable to it under the terms of the Lease Agreement.
{¶ 16} The facts establish that Lucic complied with the plain terms of
the Assignment and demonstrated its acceptance of the lease terms by
making the lease payments. If the Assignment was invalid or not effective
until transfer of liquor permits, then Telecom had no basis to accept lease
payments from Lucic until Lucic obtained a liquor permit pursuant to the
purchase of KAOS’ business assets. Yet, Telecom did accept rental payments
from Lucic, regularly and without protest about the status of the liquor
permits. Telecom did not object until Lucic sent notice of its intent to renew
the Lease. Telecom continued to accept lease payments from Lucic even
after it had commenced the underlying eviction proceedings and until the
municipal court ordered the payments to be deposited with the Clerk of
Courts.
{¶ 17} By virtue of the unconditional assignment and consent, Lucic had
standing to exercise the option to renew under the Lease Agreement and the
trial court did not err in this regard. The first, second, and third assignments
of error are overruled.
Assignment of Error 4
The Trial Court erred in holding that Appellant’s acceptance of
rent acted as a waiver of its right to seek eviction for
noncompliance with the Lease even where such noncompliance
was unrelated to the payment of rent.
{¶ 18} It is Telecom’s position that its acceptance of rental payments
from Lucic for a three year period did not waive its ability to evict Lucic, the
tenant who was operating in the Property, at the expiration of the Lease
Agreement. This argument would require us to ignore the assignment by
KAOS and Gerrick to Lucic and Telecom’s consent to it.
{¶ 19} Even if we concluded that Lucic was not the “Lessee” under the
Lease Agreement until the successful transfer of the liquor permits, which we
do not, the doctrines of estoppel and waiver preclude Telecom from asserting
this position with respect to the renewal provision under these factual
circumstances.
{¶ 20} Where the evidence establishes that the Lessor is aware of an
alleged invalid or improper assignment of a lease or an alleged breach thereof
but regularly, and without protest, continues to accept rental checks, the
lessor waives their rights to declare forfeiture for breach as a matter of law.
Quinn v. Cardinal Foods Inc., 20 Ohio App.3d 194, 196, 485 N.E.2d 741 (3rd
Dist.1984). Such waiver would extend to the options to renew. Id.; see also,
Finkbeiner v. Lutz, 44 Ohio App.2d 223, 227-228, 337 N.E.2d 655 (1st
Dist.1975) (“by virtue of having received corporate checks from 1964 through
1973 in payment of rent and taxes, the lessors were clearly put on notice that
an assignment had been made of the rights of the leasehold, in contravention
to the specific language in the agreement. We hold that the lessor is now
estopped to object to such assignment after having knowingly permitted it to
continue in existence for nine years.”)
{¶ 21} The fourth assignment of error is overruled.
Assignment of Error 5
The Trial Court erred in holding that the option to renew could be
exercised even where the tenant is not in full compliance with all
provisions of the Lease.
{¶ 22} Alternatively, Telecom maintains that even if Lucic was the
Lessee under the Lease Agreement, it was not entitled to exercise the option
to renew for various alleged defaults. Specifically, Telecom asserts that
Gerrick’s bankruptcy was not in compliance with the terms of the Lease.
However, a review of the applicable provision and the defined terms of the
Lease Agreement reflect that this was not the case. The Lease Agreement
defines the “Lessee” as KAOS INC. and separately defines James Gerrick as
the “Guarantor.” With respect to this issue, the parties refer to the following
provisions:
Article XVI - Default by Lessee
***
B. Any voluntary or involuntary petition or similar pleading
under any section or sections of any bankruptcy act shall be filed
by or against Lessee, or any voluntary or involuntary proceedings
in any court or tribunal shall be instituted to declare Lessee
insolvent or unable to pay Lessee’s debts, and the same shall not
be dismissed or discharged with in thirty (30) days thereafter; or
***
Another provision provides:
Article XXXIX - Guarantor
The undersigned Guarantor hereby personally and
unconditionally guarantees to Lessor, its successors and assigns,
the full and complete performance by Lessee of all obligations of
Lessee under this [sic] terms of this Lease Agreement as if
Guarantor was named as ‘Lessee’ herein.
{¶ 23} The above-quoted default provision applies to explicitly to KAOS,
the only identified “Lessee” in the Lease. The Guarantor clause does not
relate or provide that a personal bankruptcy by the Guarantor will operate as
a default under the Lease. Instead, the clause, by its terms, guarantees
performance of the Lessee’s obligations under the Lease. The Lease could
have, but did not, include the bankruptcy of the guarantor as a default.
Therefore, this was not a valid basis for Telecom to refuse to honor the
renewal provision.
{¶ 24} Next, Telecom asserts that neither KAOS nor Lucic were in
compliance with the insurance and security deposit terms of the Lease
Agreement when Lucic exercised the option to renew. Lucic responds that
Telecom failed to give a written notice of default concerning these issues prior
to the time it exercised the option to extend the Lease, and could not use
them as a basis to deny renewal.
{¶ 25} Article XVI of the Lease provides:
D. Lessee * * * shall fail, neglect or refuse to keep and perform
any of the other covenants, conditions, stipulations or agreements
herein contained, covenanted or agreed to be kept or performed
by Lessee, and if any such default shall continue for a period of
more than thirty (30) days after notice thereof given in writing to
Lessee by Lessor * * *.
2. * * * Lessee shall in no event be charged with default in the
performance of any of its obligations hereunder unless and until
Lessee shall have failed to perform such obligations after notice to
Lessee by Lessor properly specifying wherein Lessee has failed to
perform any such obligations.
{¶ 26} Lucic also points out that Telecom’s property manager testified
that Lucic did provide him with a current certificate of insurance that named
Telecom as an additional insured. To his knowledge, no one from Telecom had
advised Lucic in writing that Telecom considered the insurance unacceptable.
Because Telecom did not comply with the terms of the Lease by affording
Lucic with written notice of a perceived noncompliance, Lucic was not
afforded its right under the Lease to challenge or cure it. Under these
circumstances, Telecom could not refuse to honor the renewal option based on
items of noncompliance for which it provided Lucic no notice. This assignment
of error is overruled.
Judgment affirmed.
It is ordered that appellees recover of appellant its costs herein taxed.
The Court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this Court directing the
Cleveland Municipal Court to carry this judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to
Rule 27 of the Rules of Appellate Procedure.
JAMES J. SWEENEY, JUDGE
KENNETH A. ROCCO, J., CONCURS
MELODY J. STEWART, P.J., DISSENTS (SEE SEPARATE DISSENTING
OPINION ATTACHED)
MELODY J. STEWART, P.J., DISSENTING:
{¶ 27} The lease assignment contained the condition precedent that it
was contingent upon Lucic obtaining a liquor permit for the premises.
Telecom revoked the lease before Lucic obtained the liquor permit, so the
assignment was never completed. KAOS remained in possession of the
premises, not Lucic. It follows that Lucic was not in privity of contract with
Telecom, so Telecom was entitled to terminate the lease with KAOS. I
therefore dissent.
I
{¶ 28} When a lease is assigned, the assignee takes over all obligations
contained in the initial contract between the landlord and the lessee. The
“lessee is not discharged from his obligations under such lease, [but] the
assignee assumes the position of principal obligor for the performance of the
covenants of the lease, and the lessee becomes his surety for such
performance.” See Gholson v. Savin, 137 Ohio St. 551, 31 N.E.2d 858 (1941),
paragraph two of the syllabus.
{¶ 29} Lucic agreed to accept an assignment of KAOS’s rights under the
lease, but only on condition that Lucic obtain a liquor permit for the premises.
A condition precedent * * * is one which is to be performed before
the agreement of the parties becomes operative. A condition
precedent calls for the performance of some act or the happening
of some event after the contract is entered into, and upon the
performance or happening of which its obligation is made to
depend. Mumaw v. Western & Southern Life Ins. Co., 97 Ohio
St. 1, 119 N.E. 132 (1917), syllabus.
{¶ 30} It is undisputed that at the time Telecom informed Lucic that it
was terminating the lease in May 2009, Lucic had not yet obtained a liquor
permit in its name nor had KAOS attempted to renew the lease. The
necessary precondition for Lucic accepting the assignment did not occur, so as
a matter of law, Lucic was not an assignee when the option to renew the lease
expired. Lucic thus lacked the contractual right to exercise the option to
renew the lease.
{¶ 31} Although the trial court recognized that a precondition for
assignment did indeed exist, it found the precondition immaterial, reasoning
that the precondition was not made for Telecom’s benefit, but to protect Lucic
from being liable on the assignment if the liquor permit was denied. I would
find that this conclusion was erroneous. Regardless of whether the parties
intended for Telecom to derive any benefit from the precondition, no
assignment occurred as a matter of law. The important consequence of this
failure was that Lucic had no privity of contract with Telecom. Sandstone
Corp. v. Columbia Gas Transm. Corp., 10th Dist. No. 88AP-292, 1989 WL
43201. KAOS thus remained at all times liable on the lease and subject to
the terms contained in the lease, including the duty to make a timely renewal
of the lease.
II
{¶ 32} Lucic’s lack of privity of contract is important because it directly
affects the court’s finding that Telecom waived the right to deny Lucic’s
attempt to renew the option on the lease because it accepted rent from Lucic
for three years during which period Lucic did not have a valid liquor permit.
{¶ 33} Waiver is the voluntary relinquishment of a known right. White
Co. v. Canton Transp. Co., 131 Ohio St. 190, 2 N.E.2d 501 (1936), paragraph
one of the syllabus. The party asserting the defense of waiver bears the
burden of proving by a preponderance of the evidence “a clear, unequivocal,
decisive act of the party against whom the waiver is asserted, showing such
purpose or acts amounting to an estoppel on his part.” Id. at paragraph four
of the syllabus.
{¶ 34} Lucic was not an assignee during the lease renewal option period.
Neither was it technically a subtenant. The lease required Telecom’s
approval for either an assignment or a sublease, and Telecom only gave
permission for an assignment, not a sublease. With the failure of the
condition precedent at the option renewal period, no assignment occurred so
there was no privity of contract between Telecom and Lucic. Lucic had no
right to enforce any part of the agreement between the primary lessee and
the landlord. Stern v. Taft, 49 Ohio App.2d 405, 361 N.E.2d 279 (1st
Dist.1976). KAOS remained at all times liable on the lease to Telecom.
Crowe v. Riley, 63 Ohio St. 1, 9, 57 N.E. 956 (1900).
{¶ 35} In 767 Third Ave., LLC v. Kadem Capital Mgmt., Inc., 303 A.D.2d
199, 756 N.Y.S.2d 539 (2003), the New York Supreme Court, Appellate
Division, First Department, considered very similar facts concerning the
assertion of equitable defenses against a landlord by a party not in privity of
a lease. The landlord’s tenant leased certain office space. A third party who
also leased office space in the building wished to occupy the tenant’s space.
The tenant and third party entered into an “enforceable agreement in
principal [sic]” under which the tenant would surrender or assign its lease
and the third party would lease another office space from the landlord, pay to
improve it, and provide it free of charge for the tenant. The landlord was
aware of this agreement but not a party to it, although the landlord gave
approval for the third party’s remodeling plans and collected rent from the
third party attributable to the space formerly occupied by the tenant. At no
point, however, did the parties consummate an assignment or a sublease, nor
did the landlord consent in writing to this arrangement as required by the
lease. When the landlord sought to evict the third party, the third party
asserted that the landlord waived the prohibition against subletting and
should have been estopped from asserting that prohibition. The Appellate
Division held that “there never was a sublease to which Landlord could
consent, in writing or otherwise, and, there being no approved sublease, the
landlord is under no obligation to recognize [the third party’s] occupancy.”
Id. at 200 (internal quotations and citations omitted). Without a valid
contract, the third party lacked privity to assert equitable defenses of waiver
and estoppel. Id.{¶ 36} The analysis in 767 Third Avenue applies with equal force to this
case. While Telecom knowingly accepted rent from Lucic after the lease
option renewal period expired, it did not waive its rights under the lease.
There being no privity of contract between Telecom and Lucic at the time
Telecom filed this forcible entry and detainer action, Telecom was within its
rights to enforce the lease terms and find that KAOS did not properly exercise
the renewal option. Lucic’s attempt to do the same was a nullity.
{¶ 37} I would therefore find that the the court erred by refusing to
grant Telecom’s complaint in forcible entry and detainer.