Meinhard v. Salmon , 249 N.Y. 458 ( 1928 )

A tenant's expectancy of the renewal of a lease is a thing, tenuous, yet often having a real value. It represents the probability that a landlord will prefer to relet his premises to one already in possession rather than to strangers. Less tangible than "good will" it is never included in the tenant's assets, yet equity will not permit one standing in a relation of trust and confidence toward the tenant unfairly to take the benefit to himself. At times the principle is rigidly enforced. Given the relation between the parties, a certain result follows. No question as to good faith, or injury, or as to other circumstances is material. Such is the rule as between trustee and cestui (Keich v. Sanford, Select Cas. in Ch. 61); as between executor and estate (Matter of Brown, 18 Ch. Div. 61); as between guardian and ward (Milner v. Harewood, 18 Ves. 259, 274).

At other times some inquiry is allowed as to the facts involved. Fair dealing and a scrupulous regard for honesty is required. But nothing more. It may be stated generally that a partner may not for his own benefit secretly take a renewal of a firm lease to himself. (Mitchell v. Reed, 61 N.Y. 123.) Yet under very exceptional circumstances this may not be wholly true. (W. T. Leading Cas. in Equity [9th ed.], p. 657; Clegg v.Edmondson, 8 D.M. G. 787, 807.) In the case of tenants in common there is still greater liberty. There is said to be a distinction between those holding under a will or through descent and those holding under independent conveyance. But even in the former situation the bare relationship is not conclusive. (Matter of Biss, 1903, 2 Ch. 40). In Burrell v. Bull (3 Sand. Ch. 15) there was actual fraud. In short, as we once said, "the elements of actual fraud — of the betrayal by secret action of confidence reposed, or assumed to be reposed, grows in importance as the relation between the parties falls from an express to an implied or a quasi trust, and on to those cases where good faith alone is involved." (Thayer v. Leggett, 229 N.Y. 152.)

Where the trustee, or the partner or the tenant in common, takes no new lease but buys the reversion in good faith a somewhat different question arises. Here is no direct appropriation of the expectancy of renewal. Here is no offshoot of the original lease. We so held in Anderson v. Lemon (8 N.Y. 236), and although Judge DWIGHT casts some doubt on the rule in Mitchell v. Reed, it seems to have the support of authority. (W. T. Leading Cas. in Equity, p. 650; Lindley on Partnership [9th ed.], p. 396; Bevan v. Webb, 1905, 1 Ch. 620.) The issue then is whether actual fraud, dishonesty, unfairness is present in the transaction. If so, the purchaser may well be held as a trustee. (Anderson v. Lemon, cited above.)

With this view of the law I am of the opinion that the issue here is simple. Was the transaction in view of all the circumstances surrounding it unfair and inequitable? I reach this conclusion for two reasons. There was no general partnership, merely a joint venture for a limited object, to end at a fixed time. The new lease, covering additional property, containing many new and unusual terms and conditions, with a possible duration of eighty years, was more nearly the purchase of the reversion than the ordinary renewal with which the authorities are concerned.

The findings of the referee are to the effect that before 1902, Mrs. Louisa M. Gerry was the owner of a plot on the corner of Fifth avenue and Forty-second street, New York, containing 9,312 square feet. On it had been built the old Bristol Hotel. Walter J. Salmon was in the real estate business, renting, managing and operating buildings. On April 10th of that year Mrs. Gerry leased the property to him for a term extending from May 1, 1902, to April 30, 1922. The property was to be used for offices and business, and the design was that the lessee should so remodel the hotel at his own expense as to fit it for such purposes, all alterations and additions, however, at once to become the property of the lessor. The lease might not be assigned without written consent.

Morton H. Meinhard was a woolen merchant. At some period during the negotiations between Mr. Salmon and Mrs. Gerry, so far as the findings show without the latter's knowledge, he became interested in the transaction. Before the lease was executed he advanced $5,000 toward the cost of the proposed alterations. Finally, on May 19th he and Salmon entered into a written agreement. "During the period of twenty years from the 1st day of May, 1902," the parties agree to share equally in the expense needed "to reconstruct, alter, manage and operate the Bristol Hotel property;" and in all payments required by the lease, and in all losses incurred "during the full term of the lease,i.e., from the first day of May, 1902, to the 1st day of May, 1922." During the same term net profits are to be divided. Mr. Salmon has sole power to "manage, lease, underlet and operate" the premises. If he dies, Mr. Meinhard shall be consulted before any disposition is made of the lease, and if Mr. Salmon's representatives decide to dispose of it, and the decision is theirs, Mr. Meinhard is to be given the first chance to take the unexpired term upon the same conditions they could obtain from others.

The referee finds that this arrangement did not create a partnership between Mr. Salmon and Mr. Meinhard. In this he is clearly right. He is equally right in holding that while no general partnership existed the two men had entered into a joint adventure and that while the legal title to the lease was in Mr. Salmon, Mr. Meinhard had some sort of an equitable interest therein. Mr. Salmon was to manage the property for their oint benefit. He was bound to use good faith. He could not willfully destroy the lease, the object of the adventure, to the detriment of Mr. Meinhard.

Mr. Salmon went into possession and control of the property. The alterations were made. At first came losses. Then large profits which were duly distributed. At all times Mr. Salmon has acted as manager.

Some time before 1922 Mr. Elbridge T. Gerry became the owner of the reversion. He was already the owner of an adjoining lot on Fifth avenue and of four lots adjoining on Forty-second street, in all 11,587 square feet, covered by five separate buildings. Obviously all this property together was more valuable than the sum of the value of the separate parcels. Some plan to develop the property as a whole seems to have occurred to Mr. Gerry. He arranged that all leases on his five lots should expire on the same day as the Bristol Hotel lease. Then in 1921 he negotiated with various persons and corporations seeking to obtain a desirable tenant who would put up a building to cover the entire tract, for this was the policy he had adopted. These negotiations lasted for some months. They failed. About January 1, 1922, Mr. Gerry's agent approached Mr. Salmon and began to negotiate with him for the lease of the entire tract. Upon this he insisted as he did upon the erection of a new and expensive building covering the whole. He would not consent to the renewal of the Bristol lease on any terms. This effort resulted in a lease to the Midpoint Realty Company, a corporation entirely owned and controlled by Mr. Salmon. For our purposes the paper may be treated as if the agreement was made with Mr. Salmon himself.

In many respects, besides the increase in the land demised, the new lease differs from the old. Instead of an annual rent of $55,000 it is now from $350,000 to $475,000. Instead of a fixed term of twenty years it may now be, at the lessee's option, eighty. Instead of alterations in an existing structure costing about $200,000 a new building is contemplated costing $3,000,000. Of this sum $1,500,000 is to be advanced by the lessor to the lessee, "but not to its successors or assigns," and is to be repaid in installments. Again no assignment or sale of the lease may be made without the consent of the lessor.

This lease is valuable. In making it Mr. Gerry acted in good faith without any collusion with Mr. Salmon and with no purpose to deprive Mr. Meinhard of any equities he might have. But as to the negotiations leading to it or as to the execution of the lease itself Mr. Meinhard knew nothing. Mr. Salmon acted for himself to acquire the lease for his own benefit.

Under these circumstances the referee has found and the Appellate Division agrees with him, that Mr. Meinhard is entitled to an interest in the second lease, he having promptly elected to assume his share of the liabilities imposed thereby. This conclusion is based upon the proposition that under the original contract between the two men "the enterprise was a joint venture, the relation between the parties was fiduciary and governed by principles applicable to partnerships," therefore, as the new lease is a graft upon the old, Mr. Salmon might not acquire its benefits for himself alone.

Were this a general partnership between Mr. Salmon and Mr. Meinhard I should have little doubt as to the correctness of this result assuming the new lease to be an offshoot of the old. Such a situation involves questions of trust and confidence to a high degree; it involves questions of good will; many other considerations. As has been said, rarely if ever may one partner without the knowledge of the other acquire for himself the renewal of a lease held by the firm, even if the new lease is to begin after the firm is dissolved. Warning of such an intent, if he is managing partner, may not be sufficient to prevent the application of this rule.

We have here a different situation governed by less drastic principles. I assume that where parties engage in a joint enterprise each owes to the other the duty of the utmost good faith in all that relates to their common venture. Within its scope they stand in a fiduciary relationship. I assume primafacie that even as between joint adventurers one may not secretly obtain a renewal of the lease of property actually used in the joint adventure where the possibility of renewal is expressly or impliedly involved in the enterprise. I assume also that Mr. Meinhard had an equitable interest in the Bristol Hotel lease. Further, that an expectancy of renewal inhered in that lease. Two questions then arise. Under his contract did he share in that expectancy? And if so, did that expectancy mature into a graft of the original lease? To both questions my answer is "no."

The one complaint made is that Mr. Salmon obtained the new lease without informing Mr. Meinhard of his intention. Nothing else. There is no claim of actual fraud. No claim of misrepresentation to any one. Here was no movable property to be acquired by a new tenant at a sacrifice to its owners. No good will, largely dependent on location, built up by the joint efforts of two men. Here was a refusal of the landlord to renew the Bristol lease on any terms; a proposal made by him, not sought by Mr. Salmon, and a choice by him and by the original lessor of the person with whom they wished to deal shown by the covenants against assignment or underletting, and by their ignorance of the arrangement with Mr. Meinhard.

What then was the scope of the adventure into which the two men entered? It is to be remembered that before their contract was signed Mr. Salmon had obtained the lease of the Bristol property. Very likely the matter had been earlier discussed between them. The $5,000 advance by Mr. Meinhard indicates that fact. But it has been held that the written contract defines their rights and duties.

Having the lease Mr. Salmon assigns no interest in it to Mr. Meinhard. He is to manage the property. It is for him to decide what alterations shall be made and to fix the rents. But for twenty years from May 1, 1902, Salmon is to make all advances from his own funds and Meinhard is to pay him personally on demand one-half of all expenses incurred and all losses sustained "during the full term of said lease," and during the same period Salmon is to pay him a part of the net profits. There was no joint capital provided.

It seems to me that the venture so inaugurated had in view a limited object and was to end at a limited time. There was no intent to expand it into a far greater undertaking lasting for many years. The design was to exploit a particular lease. Doubtless in it Mr. Meinhard had an equitable interest, but in it alone. This interest terminated when the joint adventure terminated. There was no intent that for the benefit of both any advantage should be taken of the chance of renewal — that the adventure should be continued beyond that date. Mr. Salmon has done all he promised to do in return for Mr. Meinhard's undertaking when he distributed profits up to May 1, 1922. Suppose this lease, non-assignable without the consent of the lessor, had contained a renewal option. Could Mr. Meinhard have exercised it? Could he have insisted that Mr. Salmon do so? Had Mr. Salmon done so could he insist that the agreement to share losses still existed or could Mr. Meinhard have claimed that the joint adventure was still to continue for twenty or eighty years? I do not think so. The adventure by its express terms ended on May 1, 1922. The contract by its language and by its whole import excluded the idea that the tenant's expectancy was to subsist for the benefit of the plaintiff. On that date whatever there was left of value in the lease reverted to Mr. Salmon, as it would had the lease been for thirty years instead of twenty. Any equity which Mr. Meinhard possessed was in the particular lease itself, not in any possibility of renewal. There was nothing unfair in Mr. Salmon's conduct.

I might go further were it necessary. Under the circumstances here presented had the lease run to both the parties I doubt whether the taking by one of a renewal without the knowledge of the other would cause interference by a court of equity. An illustration may clarify my thought. A and B enter into a joint venture to resurface a highway between Albany and Schenectady. They rent a parcel of land for the storage of materials. A, unknown to B, agrees with the lessor to rent that parcel and one adjoining it after the venture is finished, for an iron foundry. Is the act unfair? Would any general statements, scattered here and there through opinions dealing with other circumstance, be thought applicable? In other words, the mere fact that the joint venturers rent property together does not call for the strict rule that applies to general partners. Many things may excuse what is there forbidden. Nor here does any possibility of renewal exist as part of the venture. The nature of the undertaking excludes such an idea.

So far I have treated the new lease as if it were a renewal of the old. As already indicated, I do not take that view. Such a renewal could not be obtained. Any expectancy that it might be had vanished. What Mr. Salmon obtained was not a graft springing from the Bristol lease, but something distinct and different — as distinct as if for a building across Fifth avenue. I think also that in the absence of some fraudulent or unfair act the secret purchase of the reversion even by one partner is rightful. Substantially this is such a purchase. Because of the mere label of a transaction we do not place it on one side of the line or the other. Here is involved the possession of a large and most valuable unit of property for eighty years, the destruction of all existing structures and the erection of a new and expensive building covering the whole. No fraud, no deceit, no calculated secrecy is found. Simply that the arrangement was made without the knowledge of Mr. Meinhard. I think this not enough.

The judgment of the courts below should be reversed and a new trial ordered, with costs in all courts to abide the event.

POUND, CRANE and LEHMAN, JJ., concur with CARDOZO, Ch. J., for modification of the judgment appealed from and affirmance as modified; ANDREWS, J., dissents in opinion in which KELLOGG and O'BRIEN, JJ., concur.

Judgment modified, etc.