Lessie Blankenship v. Century Health Services, Inc. ( 1995 )

IN THE COURT OF APPEALS OF TENNESSEE
WESTERN SECTION AT NA SHVILLE
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LESSIE BLANKENSHIP, Bedford Circuit
No. 6860
Plaintiff/Appellee. C.A. No. 01A01-9504-00137
VS. Hon. Lee Russell
Judge
CENTURY HEALTH SERVICES, INC.
Defendant/Appellant.
FILED
Dec. 15, 1995
Cecil Crowson, Jr.
CHARLES RICH, Bobo, Hunt & Bobo, Shelbyville Appellate Court Clerk
WILLIAM P. SURIANO, Riverside, Illinois, Pro Haec Vice
Attorneys for Defendant/Appellant.
AN DREW RAMBO, Bom ar, Shoffner, Irion & Ram bo, Shelbyville
Attorney for Plaintiff/Appellee
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
Opinion Filed:
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TOMLIN, Sr. J.
Lessie Blankenship ("plaintiff") filed suit in the Circuit Court of Bedford County
against Century Health Services, Inc. ("Century" or "defendant"), seeking damages for
breach of a commercial lease. Following a bench trial, the court awarded plaintiff
damages in the amount of $44,943.80 for rent due under the lease, costs incurred by
plaintiff in seeking to relet the prem ises, and attorney fees in the amount of 15% of the
amount of the judgment. On appeal, Century presents five issues for review: Whether
the trial court erred (1) in finding that Century had assum ed the lease between plaintiff
and South Central Home Health, Inc. (?South Central”), the original lessee; (2) in
concluding that Century had not properly terminated the lease; (3) in finding that plaintiff
had properly mitigated her damages; (4) in awarding plaintiff damages for future rent
under the lease; and (5) in awarding plaintiff attorney fees in the amount of 15% of
plaintiff's judgment. For the reasons hereinafter stated, we affirm in part, reverse in part
and remand.
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For the most part the underlying facts are not in dispute. In January 1992, plaintiff
and South Central entered into a written lease for a commercial building owned by
plaintiff in Shelbyville for use as a home health care facility. The term of the lease was
to expire on D ecem ber 31, 1995. At the time the parties entered into the lease, plaintiff
was an em ployee of defendant. In early 1993, defendant purchased certain assets of South
Central and continued to operate a hom e health facility in the leased premises. Although
defendant did not enter into a lease agreement with plaintiff, it continued to pay rent to
plaintiff pursuant to the terms of South Central's lease.
In March 1993, defendant terminated plaintiff's em ployment. Defendant first
began to complain about reported problems with the leased premises to plaintiff in August
of that year. Specifically, defendant reported problems with insect infestation in the
building along with a low electrical voltage on the right side of the premises. In response
to these complaints, plaintiff employed a pest control service and a Nashville contractor
to attempt to correct the problems.
On September 24, 1993, the building code enforcer for the City of Shelbyville
notified defendant that the following alleged violations of the Standard Existing Building
Code had been detected in the leased premises and that they required correction as soon
as possible:
1. Electrical - The panel box has plenty of space yet all electrical circuits
are tied into only two (2) breakers and this is not adequate to carry the
computer load.
2. The building has no exit signs and no emergency lighting.
3. The floor in the vault area needs som e attention. (It is a tripping hazard.)
4. Steps going into the rear storage room are unstable and need to be
secured.
5. The building needs a handrail
6. The rear door of the storage room allows water to enter the building.
This needs to be fixed.
Defendants regional administrator imm ediately wrote plaintiff on September 30, 1993,
demanding that the code violations as stated be corrected by plaintiff no later than
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Monday, October 4, or defendant would vacate the prem ises. Plaintiff received the letter
on October 5. On the following day, plaintiff faxed a letter to defendant informing it that
she had em ployed a contractor to correct the code violations the following week. After
the contractor failed to complete the repairs as stated, plaintiff again wrote defendant on
November 17, 1993 to assure them that the work would be completed within thirty (30)
days or another contractor would be employed.
On November 29, 1993, defendant advised plaintiff that due to her failure to "meet
the terms of the lease" defendant w ould treat the lease as no longer being in effect, and
that its occupancy of the prem ises would continue on a month-to-month basis. Shortly
thereafter, on Decem ber 9, 1993, the building code inspector again wrote to defendant
concerning the code violations. In his letter he noted that while some of the violations had
been corrected, the electrical problems had not. The inspector demanded that the
defendant correct these electrical problem s within ten (10) days or steps would be taken
by the city to "make the building safe," which included the possibility of cutting off the
power to the building. In this comm unication the inspector also noted, for the first time,
that the rear basement wall to the building had some structural damages as a result of
water leakage and required immediate attention.
Four days later on December 13, 1993 defendant's chief financial officer wrote
plaintiff demanding to know by the following day whether plaintiff would fix the
structural damage as noted in the building inspector's letter. After plaintiff failed to meet
defendant's demand, on December 16, 1993 defendant further informed plaintiff that it
would terminate the lease and vacate the premises on January 9, 1994. This threatened
action was then carried out by defendant.
The trial court issued its mem orandum opinion shortly after the hearing. The court
found that defendant had, by its conduct, becom e a party to the lease and was therefore
bound by its terms. The court also held that plaintiff's failure to correct the building code
violations was not a substantial breach of the lease but was merely a pretext for defendant
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to attempt to void the lease. The court awarded plaintiff a judgment against defendant in
the amount of $39,050 as damages for rent in the amount $1,650 per month upon the date
of breach until the date of the award, and $1,650 per m onth as rent from the date of the
award until the end of the lease period. In addition, plaintiff was awarded costs incurred
in connection with her attempt to relet the premises in the amount of $31.65 and attorney
fees of fifteen percent (15%) of the judgment, amounting to $5,862.15.
I. The Issue of Defendant's Liability Under the Lease
This court is of the opinion that defendant's first two issues can be considered
together and at the same time stated a bit differently—that is, whether the evidence
preponderates against the finding of the trial court that defendant was liable to plaintiff
under the terms of the lease agreem ent originally entered into between plaintiff and South
Central. Defendant contends that it did not assume the lease in existence between plaintiff
and South Central, and even if they had assumed same, plaintiff's failure to correct the
building code violations justified defendant’s termination of the lease.
Our scope of review on appeal is de novo upon the record in the trial court.
Findings of fact by the trial court come to this Court with a presumption of correctness.
Absent an error of law, unless w e find that the evidence presented to the trial court
preponderates against these findings, we must affirm. T.R.A.P. 13(d).
In finding defendant liable to plaintiff under the lease, the trial court stated in
relevant part as follows:
The first question to be decided is whether or not the Defendant
became a party to the lease and was bound by its terms. Clearly the
Defendant believed itself to be a party, acted as though it were a party,
benefitted under the lease as if it were a party, and demanded on its own
behalf that the Plaintiff meet her obligations to the Defendant under the
lease . . . . It is untenable for the Defendant to deny that it was subject to a
lease agreement after it had occupied premises [sic] pursuant to the lease,
paid rent pursuant to the lease, made dem ands under the terms of the lease,
and purported to convert and then terminate the lease.
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The record reflects that defendant, after purchasing some of the assets of South
Central, went into possession of plaintiff's premises under South Central's lease and
continued to occupy the premises for the purposes for which it was initially leased. In a
letter to plaintiff dated August 1993, defendant stated in part as follows:
This letter is to inform you of several problems with the building
leased by Century Home Health Care of South Tennessee, Inc., located at
107 East Holland Street. . . . (Em phasis added.)
....
The building is not suitable in its current condition for continued use
by Century Home Health. You are hereby requested, to correct the above
problems within 30 days from the date of this letter. If corrections are not
made, we will be forced to evacuate the building.
On September 24, 1993, the Codes Enforcement Office of the City of Shelbyville
wrote to defendant's administrator stating, "after inspecting the building you occupy [107
E. Holland Street] . . . the following is a list of problems we found that will need to be
corrected . . . . "
A letter from defendant's regional administrator dated September 30, 1993 states
in part:
This letter is a follow-up of Mr. Ed Augustine's letter dated August
9, 1993, identifying deficiencies and hazards in the building leased by
Century Home Health Care of South Tennessee, Inc., located at 107 E.
Holland Street.
This letter also threatened that if certain corrections of the deficiencies were not carried
out within a specific tim e, Century would "begin evacuation of this building."
A portion of the letter dated November 29, 1993 from an official of defendant to
plaintiff's attorney sheds more light upon the status of defendant as plaintiff's lessee:
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[Y]ou should be aware that your client, Mrs. Blankenship, has been notified
of her continued failure to m eet the terms of the lease on 107 E. Holland
Street. As a result, the lease on 107 E. Holland Street is no longer in effect
and we are presently renting the subject building on a month to month basis.
By letter of December 13, 1993 to plaintiff, the chief financial officer of Century
referred to the status of the parties as follows:
We have been advised . . . that the building Century Home Health
Care has leased from you at 107 E. Holland Street, Shelbyville, Tennessee
has structural problem s in the area of the rear basement w all. . . .
As you know, paragraph 7 of the Lease provides that all structural
repairs are the responsibility of the lessor.
Finally, in a letter from Century from defendant's secretary to plaintiff dated
Decem ber 16, 1993, the author makes the following references:
By letter dated December 13, 1993, I advised you of significant
structural problems with the building Century leases from you under the
terms of the lease dated January 1, 1992.
....
Accordingly, due to your breach of the lease and the condition of the
premises, please be advised the Century is terminating the lease effective
Sunday, January 9, 1994. . . .
In Sander v. Piggly Wiggly Stores, Inc., 95 S.W.2d 1266, 1270 (Tenn. App. 1936),
the middle section of this court held that where defendant Southern Stores Corporation
went into possession of the premises, acknowledged the lease, and paid rent for more than
two years, an assignm ent of the lease was presum ed where the assignor goes into
possession and pays rent. In addition, this court cited with approval a New York case to
the effect that where a person other than the lessee is shown to be in possession of the
leasehold premises the law presumes that the lease has been assigned to him. Id. (citing
Mann v. Ferdinand M uch Brewery, 121 N.E. 746, 747 (N.Y. 1919)).
In considering the record, particularly, the language used by defendant in the
various letters written to plaintiff and plaintiff's lawyer, defendant stands in the position
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of an assignee and a privity of estate is therefore created between defendant and plaintiff
as lessor. In our opinion, the evidence does not preponderate against the finding of the
trial court that defendant was bound by the term s of South Central's lease with plaintiff.
Defendant's reliance upon First American Nat'l Bank v. Chicken Sys. of America., Inc.,
616 S.W.2d 156, 158 (Tenn. App. 1980) is misplaced. There was a second assignm ent,
or ?reassignment” of the lease in First American, which we do not have in this case. The
defendant's contention that the abandonm ent of the premises by itself constitutes a
reassignment is without merit. Defendant's relinquishment of the leased prem ises
amounted to nothing m ore than abandonment. In order for this type of relinquishment of
the lease to terminate defendant's duty to pay rent for the remainder of the lease term,
there must be some proof to the effect that the lessor, plaintiff in this case, agreed to
terminate the lease, or that defendant assigned the lease to another tenant. Charleston
Mining & M fg. Co. v. American Agricultural Chem. Co., 150 S.W. 1143, 1145 (Tenn.
1911). Defendant has cited no authority for its proposition that its relinquishment of the
leased prem ises amounted to a "reassignm ent" to plaintiff.
We now consider the remaining portion of this issue to the effect that defendant
was justified in terminating the lease based upon the building code violations found by
the City of Shelbyville's representative. In essence, what defendant seeks to have this
court hold is that the discovery of building code violations during the term of an existing
lease provides the innocent party an imm ediate excuse of either not performing or
terminating a lease. The record reflects that the code violations were not discovered until
some twenty months after plaintiff and South Central entered into the lease and several
months after defendant occupied the premises under the lease and paid its rent to plaintiff.
Defendant presented no evidence to the effect that the "violations" actually constituted
such an unreasonable interference with its use and enjoyment of the building as to
constitute a constructive eviction. There was no evidence presented regarding the extent
of the structural damage, the magnitude of the water leak, or whether defendant had
supplies stored in the affected areas, nor was there any evidence that any of its supplies
or computers had been an any way adversely affected by this condition. D efendant's
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prediction that the code violations could conceivably affect their business is nothing more
than speculation.
Defendant relies upon Smith v. Owen, 841 S.W.2d 828 (Tenn. App. 1992) for its
contention that property owners are barred from leasing property to another unless the
conditions of the property com ply in every respect to certain sections of the Standard
Housing Code, adopted by the City of Shelbyville. This is an exaggerated stretch of the
holding of the middle section of this court in Sm ith. As to this issue, Sm ith stands for the
proposition that it is against the law —i.e., a duty placed on the property owner, to lease
to another any existing building unless that building complies with each and every
requirement enum erated in Chapter 3 of the Housing Code. Id. at 831. The effect of this
prohibition is the creation of negligence per se liability upon the lessor in the event
dam age or harm is done to another growing out of the occupancy and use of the leasing
of these premises to another. Id. We find that this aspect of this issue is w ithout m erit.
II. Mitigation of Damages
We next consider whether the trial court erred in finding that plaintiff had mitigated
her damages. The rule in this state as to the duty to mitigate on the part of the non-
breaching party is as follows:
Generally, one who is injured by the wrongful or negligent act of
another, whether by tort or breach of contract, is bound to exercise
reasonable care and diligence to avoid loss or to minimize or lessen the
resulting damage, and to the extent that his dam ages are the result of his
active and unreasonable enhancement thereof, or due to his failure to
exercise such care and diligence, he cannot recover.
Cook & N ichols, Inc. v. Peat Marwick, Mitchell & Co., 480 S.W.2d 542, 545 (Tenn. App.
1971). The burden is on the defendant who breached the contract to prove what amount
should be offset in m itigation dam ages. State ex rel. Chapdelaine v. Torrence, 532
S.W .2d 542, 550 (Tenn. 1975), cert. denied, 425 U.S. 953 (1976).
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Plaintiff testified that after defendant vacated the premises in January 1994, she
placed a ?for rent” sign in the building w indow and in addition ran a five (5) day classified
ad in the Shelbyville newspaper. She stated that she also spoke with a local banker and
a businessman about leasing the premises. Plaintiff also offered to rent the building to a
prospective tenant for $600 to $700 per month, a significant decrease from the $1,650 per
month rent under the lease. Notwithstanding, she was not able to rent the building during
the balance of defendant's term. Defendant stated no evidence of any other type of
advertising that plaintiff could have done that might possibly have rented the building.
Rather, defendant contends that because of its interpretation of Smith v. Owen, plaintiff
was barred from renting the premises because of building code violations, and therefore
plaintiff would not be entitled to any damages. We have reread Smith v. Owen, and do
not find such a holding in that case nor do we deem it subject to interpretation that
defendant would have us give it. Therefore, we will not extend the rule in Sm ith to
support defendant's contentions. In our opinion, the evidence does not preponderate
against the trial court's finding in this regard nor has defendant met its burden placed upon
it by our case law. This issue is without m erit.
III. The Aw ard of Future Rent Payments
In the event of a breach of the lease, it was provided therein that plaintiff should
receive the "worth" of rent payments due at the time of termination, the time of award,
and for the remainder of the lease period.1 The trial court awarded plaintiff rent in the
stated lease amount of $1,650 per month from January 9, 1994, the date defendant
1
The applicable portion of the lease reads as follows:
19. Remedies of Owner on Default: In the event of any breach of this lease by
Lessee, Lessor may, at his option, terminate the lease and recover from Lessee:
(a) the worth at the time of award of the unpaid rent which was earned at the time
of termination;
(b) the worth at the time of award of the amount by which the unpaid rent would
have been earned after termination until the time the award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided; and
(c) the worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental loss
that Lessee proves could have reasonably avoided . . . .
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abandoned the premises, until October 20, 1994, the date of the award. In addition the
court awarded plaintiff $1,650 per month from October 20, 1994 until December 31,
1995, the expiration date of the lease. Defendant contends that the trial court erred in so
doing, asserting that the court should have discounted to their present value future rent
payments due under the lease.
We agree. We have no Tennessee case directly on point but we have found what
we consider to be relevant and persuasive authority. In In re United American Financial
Corp., 55 B.R. 117, 119-20 (Bankr. E.D. Tenn. 1985), the court had under consideration
the very sam e issue we are considering here—whether a party can be given an accelerated
recovery in full of all rental payments under a lease or whether the court will reduce the
deficiency to a sum equivalent to the present cash value of the accelerated rental
payments. The court stated:
To the extent that the plaintiff's recovery will encompass damages
reflecting future rental payments which would not yet have come due under
the lease, that recovery must be discounted to present value.
The parties have not cited, and the court is not aware of, any
Tennessee authority specifically addressing this question. However, under
the most basic principle of contract damages the injured party is entitled
only to be placed, as nearly as possible, in the same position as he would
have been had the contract been performed. He is not entitled to be placed
in a better position by the recovery of damages than he would have been had
the contract been fully perform ed. Action Ads, Inc. v. William B. Tanner
Co., 592 S.W .2d 572, 575 (Tenn. App. 1977); Great American M usic
Machine, Inc. v. Mid-South Record Pressing Co., 393 F. Supp. 877 (M.D.
Tenn. 1975); Clark v. Ferro Corporation, 237 F. Supp. 230 (E.D. Tenn.
1964). See also Restatem ent (Second) of Contracts § 344 (1981).
Id. at 119.
In addition, the bankruptcy court stated that in discounting the future rental
paym ents to present value, the court should utilize a rate of interest statutorily mandated
for the calculation of post-judgment interest. Id. at 120. With this we also agree.
Accordingly, we reverse the trial court's judgment in this respect pertaining to the
accelerated balance of rent due under the lease from the date of judgment until the
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expiration date of the lease, and remand this case to the trial court, as to this issue, with
instructions to discount the future rental payments to be awarded utilizing the interest rate
mandated for post-judgm ent interest in accordance with T.C.A. § 47-14-121 (1995).
IV. Plaintiff's Attorney Fees
Finally, defendant contends that the trial court erred in awarding attorney's fees to
plaintiff's counsel in the amount awarded, and, in light of this record in awarding attorney
fees at all. To keep matters in context, the lease under which the parties are operating
provided that,
In case suit should be brought for recovery of the premises, or for any sum
due hereunder, or because of any act which may arise out of the possession
of the premises, by either party, the prevailing party shall be entitled to all
costs incurred in connection with such action, including a reasonable
attorney's fee.
At trial, plaintiff put on no proof as to the amount of time and labor expended on this case
or what a "reasonable" fee under those circumstances would be. The only mention of
attorney fees by plaintiff was in his closing and opening arguments. Plaintiff’s counsel
concluded his opening statement to the court with the following:
I guess the last item on my list, and first in my heart, would be that
the lease calls for attorney's fees; and we would ask the court for reasonable
attorney's fees; and we would subm it to the court that this has been an on-
going process from about August of '93 to date.
In the trial court's memorandum opinion the court said simply: "an attorney's fee of 15%,
standard in this jurisdiction, will be added pursuant to paragraph 22 of the lease."
We think this was error on the part of the trial court, not only in aw arding plaintiff
a fee of 15% of the amount of the judgment, but in awarding an attorney fee at all. W e
base this conclusion upon a holding by the western section of this court in Cummings &
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Co. v. Mascari, 402 S.W.2d 719, 727 (Tenn. A pp. 1965). In Cummings, the contract sued
on provided that in the event the lessor was required to institute suit w ith the enforcement
of any obligations of the lease of the lessee, and lessee agreed to pay "a reasonable
attorney's fee." Id. at 722. The trial court entered judgment for defendant and dismissed
plaintiff's suit. Id. at 722-23. On appeal, this court determined that plaintiff was entitled
to a reversal by the trial court and have a judgm ent entered in this court. Id. at 727. In
considering the various elements of plaintiff's damages, this court stated:
We cannot, how ever, allow attorney's fees in the instant case,
because the contract provides merely for a "reasonable attorney's fee" and
no proof was offered in the lower court as to what would constitute a
reasonable attorney's fee.
Id.
This Court disallowed the recovery of attorney's fees based upon an earlier opinion
of this court in Nu-Way Ice Cream Mach. Co. v. Pig’n W histle, wherein we stated in part:
In the absence of any proof as to what would be a reasonable attorney's fee,
and the failure upon the part of com plainant to m ake any proof on that
subject, we think that it stands as waived, and the chancellor was in error in
fixing any amount unless there was an agreement by both parties that the
chancellor could fix the amount without evidence, and no such agreement
appears to have been made.
Cummings & Co., 402 S.W.2d at 727 (quoting Nu-W ay Ice Cream Mach. Co. v. Pig-n
Whistle, 65 S.W.2d 575, 579 (Tenn. App. 1933). We resolve this issue in favor of
defendant.
Accordingly, we reverse the trial court’s award of future rent payments and remand
this aspect of the case to the trial court for further action not inconsistent with this
opinion. We reverse the award of attorney fees to plaintiff. Otherwise, we affirm the trial
court in all respects. Costs in this cause are taxed one-half to plaintiff and one-half to
defendant, for which execution may issue if necessary.
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TOM LIN, Sr. J.
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HIGH ERS, J. (CONCURS)
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FARMER, J. (CONCURS)
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