Shree Krishna, LLC d/b/a Quizno's Classic Subs v. Broadmoor Investment Corp.

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
August 23, 2011 Session
SHREE KRISHNA, LLC, D/B/A QUIZNO’S CLASSIC SUBS
v.
BROADMOOR INVESTMENT CORP.
An Appeal from the Chancery Court for Madison County
No. 66126 James F. Butler, Chancellor
No. W2011-00514-COA-R3-CV - Filed February 1, 2012
This case involves the breach of a commercial lease. The plaintiff leased property from the
defendant for a franchise restaurant. The lease granted the plaintiff options to renew for two
additional lease periods. The parties’ agreement with the franchisor provided that the lease
and the options were assignable, and that the landlord’s consent to the assignment could not
be unreasonably withheld. The plaintiff sought to assign the lease and the renewal options
to a third party. The defendant landlord refused to consent to the assignment and attempted
to negotiate a new lease with the prospective assignee on different terms. After the assignee
withdrew its offer to purchase the plaintiff’s franchise, the plaintiff agreed to sell it to the
assignee for a reduced price. The plaintiff then filed this lawsuit against the defendant
landlord for breach of contract, alleging that it unreasonably withheld consent to the original
proposed assignment. After a bench trial, the trial court held in favor of the plaintiff. The
defendant landlord now appeals. We affirm, finding that the evidence supports the trial
court’s conclusion that the defendant landlord unreasonably withheld consent in order to
extract an economic concession or improve the landlord’s economic position.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court is Affirmed
H OLLY M. K IRBY, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and J. S TEVEN S TAFFORD, J., joined.
S. Newton Anderson and Paul R. Sciubba, Memphis, Tennessee, for the Defendant/Appellant
Broadmoor Investment Corp.
Lewis L. Cobb and Sara E. Barnett, Jackson, Tennessee, for the Plaintiff/Appellee Shree
Krishna, LLC, d/b/a Quizno’s Classic Subs
OPINION
F ACTS AND P ROCEEDINGS B ELOW
In 2002, Hasmukh D. Patel, M.D. (“Dr. Patel”), a physician, and his wife, Chandra Patel
(“Ms. Patel”), decided to purchase a Quizno’s sub shop franchise to be operated by their son,
Manish “Mike” Patel (“Mike”). Toward that end, Ms. Patel and Mike formed a limited
liability company, Plaintiff/Appellee Shree Krishna, LLC (“Shree Krishna”), for the purpose
of owning and operating the Quizno’s franchise.1
On January 10, 2003, Shree Krishna (“Tenant”) entered into a commercial lease (“Lease”)
with Defendant/Appellant Broadmoor Investment Corp. (“Landlord”) to lease shopping
center property at 143 Stonebrook Place, Suite H, in Jackson, Tennessee, out of which it
operated the Quizno’s franchise. The Lease was for an initial term of five years, or 60
months, from the “Commencement Date” of May 1, 2007. The parties also executed an
addendum to the Lease required by Landlord (“Landlord’s Addendum”). The Landlord’s
Addendum granted Tenant an option to renew the Lease, specifically, an “option to extend
the term of this Lease for two (2) additional periods of sixty (60) months upon the same
terms and conditions” as the original Lease, with modifications in price. To exercise the
renewal option, the Landlord’s Addendum required Tenant to notify Landlord in writing of
the intent to renew at least 180 days (six months) prior to the expiration of the current Lease
term. The Landlord’s Addendum prohibited assignment of the renewal option, and provided
that if Tenant did not exercise the first renewal option, Tenant had to reimburse Landlord half
of the estimated build-out costs of the space, a total of $29,185.00.
As franchisor, Quizno’s required Tenant to include its own required addendum (“Quizno’s
Addendum”) to the Lease. The Quizno’s Addendum basically overrode any contrary
provisions in the other parts of the Lease.2 To facilitate transfer of the Quizno’s franchise,
the Quizno’s Addendum permitted Tenant to assign the Lease:
1. ASSIGNMENT PROVISIONS. Tenant shall agree to attorn to any
assignee of Landlord provided such assignee will agree not to disturb Tenant’s
possession of the Premises. Tenant shall have the right to assign this Lease or
1
Though Dr. Patel was somewhat involved in the Quizno’s business, Ms. Patel and Mike were the only two
members of Shree Krishna.
2
The Quizno’s Addendum provided that its terms “shall control and be interpreted in such a manner as to
override any provision in the Lease which would prevent the spirit and letter of the terms and provisions from
this [Quizno’s] Addendum from being given full force and effect.”
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sublet the Premises, without charge and without Landlord’s consent or sublet
the Premises, without charge and without Landlord’s consent being required[,]
to The Quizno’s Franchise Company (“TQFC”), or its parent, subsidiaries, or
affiliates (TQFC, its parent, subsidiaries and affiliates are each referred to
herein as a “TQFC Entity”) or to a duly authorized franchisee of TQFC with
Landlord’s consent not to be unreasonably withheld or delayed. In the event
of an assignment to a TQFC Entity, the TQFC Entity shall have the right to
reassign the Lease, without charge and with Landlord’s consent not to be
unreasonably withheld or delayed, . . . to a duly authorized franchisee of the
TQFC Entity and . . . thereupon TQFC Entity shall be released from any
further liability under the Lease, at which time the authorized franchisee of
TQFC together with the Tenant shall be responsible for the Lease. Any options
to extend the term of the Lease shall automatically transfer to an assignee in
connection with a transfer made pursuant to the foregoing.
(Underlining in original, italics added). Thus, although the Landlord’s Addendum prohibited
the assignment of the renewal options, the Quizno’s Addendum provided that the Lease was
assignable, and also stated that “[a]ny options to extend the term of the Lease shall
automatically transfer to an assignee in connection with a transfer . . . .” The Tenant had the
right to assign the Lease to Quizno’s3 without Landlord’s consent. The Quizno’s Addendum
gave Tenant the right to assign the Lease to a “duly authorized” Quizno’s franchisee “with
Landlord’s consent not to be unreasonably withheld or delayed.” According to the last
sentence, renewal options “automatically transfer” with the assignment of the Lease, but the
parties dispute whether this provision applies to an assignment made to a franchisee.
Landlord and Tenant both signed the Quizno’s Addendum, and it was attached as part of the
original Lease when the Lease was made.
For several years, Tenant operated the Quizno’s franchise out of the leased property. Ms.
Patel and her son each worked full-time at the restaurant; Ms. Patel would open the restaurant
each morning and work until her son came to work each afternoon. Ms. Patel maintained
that it was necessary to have a family member at the restaurant at all times to prevent
employees from pilfering the restaurant’s inventory.4
3
The Quizno’s Addendum uses the defined terms TQFC (The Quizno’s Franchise Company) and TQFC
Entity (The Quizno’s Franchise Company or its parent, subsidiaries, or affiliates). For ease of reference, we
will refer to Quizno’s as inclusive of all.
4
Ms. Patel called it “meat walks out of the freezer” when employees would filch the restaurant’s sub
sandwich supplies.
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In approximately January 2006, the Patels’ son Mike decided that he no longer wanted to
work at the Quizno’s restaurant. Once he stopped working at the restaurant, the burden of
managing it fell to Ms. Patel, who thereafter was working both the day and evening shifts
every day. The Patels had purchased the franchise for their son, and Ms. Patel did not want
to continue working double shifts at the restaurant every day, so the decision was made to
sell the business.
The Patels searched for someone to purchase the business. In March 2007, they finally found
a prospective purchaser, Stonebrook Quiz, LLC, owned by Rajesh Aggarwal5 (“Mr.
Aggarwal”) and his nephew/business partner, Manish “Mac” Kharat.6 The agreed-upon sales
price was $210,000 plus inventory. The sale of the Quizno’s business was made contingent
upon the assignment of the Lease and upon Quizno’s approval for new ownership.
Around that time, Tenant notified Landlord that it wanted to assign the Lease to Mr.
Aggarwal and requested Landlord’s consent to do so per the Quizno’s Addendum. Consent
to the assignment was not immediately given by Landlord.
In June or July of 2007, the Quizno’s franchise approved Mr. Aggarwal as a franchisee. The
transfer of the Quizno’s franchise from Tenant to Mr. Aggarwal was scheduled for late July
2007. Landlord’s consent to the assignment of the Lease was necessary to effectuate the
transfer.
Landlord and Mr. Aggarwal began communicating directly about Landlord’s consent to the
assignment of the Lease. Many of their communications were by email, primarily between
Mr. Aggarwal and two representatives of Landlord, Bill Scarbrough (“Mr. Scarbrough”) and
Justin Sterling (“Mr. Sterling”). The email exchanges reflect that Mr. Aggarwal sought
Landlord’s consent to the assignment of the ten months remaining on the original Lease as
well as the two five-year renewal options. A June 20, 2007 email from Mr. Sterling to Mr.
Scarbrough states Mr. Sterling’s opinion that “[i]t’s not reasonable for any Landlord to
assign a lease with less than a year remaining on the term,” and “[a] Franchisee to
Franchisee assignment does not meet the qualification for the renewal options to
automatically transfer.” (Emphasis in original). On this basis, Landlord concluded that it
could reasonably withhold its consent to the assignment of the existing Lease. According to
Landlord’s interpretation of the Lease and the addenda, it was also not obligated to assign
5
Mr. Aggarwal is a professor at Middle Tennessee State University.
6
Most of the business dealings with Stonebrook Quiz, LLC, were through Mr. Aggarwal.
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the renewal options along with the Lease.7 In the negotiations with Mr. Aggarwal, Landlord
effectively gave Mr. Aggarwal three options: (1) sublease the space from Tenant, in which
case Tenant would remain liable under the Lease and would lose the option to later assign
the Lease to Mr. Aggarwal, (2) agree to an assignment of the Lease for 70 months, with only
one renewal option, or (3) agree to an assignment of the Lease for the remaining ten months
on the original Lease term, with only one renewal option.8 Under the second and third
alternatives, Landlord would require the $29,185 build-out fee to be placed in escrow, to be
forfeited in the event that Mr. Aggarwal did not exercise his renewal option. Mr. Aggarwal
did not find any of these options acceptable, and so the parties reached an impasse.
In an effort to break the impasse, Tenant contacted representatives at Quizno’s for assistance,
to no avail. Quizno’s delayed the transfer of the franchise from Tenant to Mr. Aggarwal until
the assignment of the Lease was complete.
Frustrated by Landlord’s intransigence, on July 23, 2007, Mr. Aggarwal withdrew his offer
to purchase the Quizno’s business from Tenant. Mr. Aggarwal explained that he was
unwilling to go through with the purchase without the assignment of the original Lease and
both five-year renewal options, commenting that he was “not willing to buy a business for
only a period of 5 years.” On this basis, Mr. Aggarwal informed Tenant that he would not
be purchasing the Quizno’s business.
By that time, the negotiations had consumed several months. When Mr. Aggarwal withdrew
his offer, the October 31, 2007 deadline for Tenant to exercise the first five-year renewal
option was approaching. At that point, Tenant would be faced with either renewing the
Lease on a franchise that Ms. Patel did not want to continue to run by herself or pay the
$29,185 “build-out cost” penalty for not renewing. Ms. Patel was exhausted and despairing.
In August 2007, Tenant and Mr. Aggarwal renegotiated the sale of the Quizno’s business.
Mr. Aggarwal agreed to purchase the Quizno’s business for a lower price, $150,000, and
accept Landlord’s offer to consent to the assignment of the remaining months of the original
Lease with one five-year renewal option. Thus, on September 25, 2007, Tenant entered into
an Assignment of Lease (“Assignment”) with Mr. Aggarwal, to be effective on October 1,
2007. The Assignment was also signed by Landlord. With respect to the renewal options,
the Assignment provided that the first five-year renewal option would be assigned to Mr.
Aggarwal, but the second option would not. In addition, the Assignment required either
7
Initially, Landlord informed Mr. Aggarwal that there was an “assignment fee” of $1,000. It later recognized
that this was erroneous and the request for the “fee” was withdrawn.
8
The original Lease was set to expire on April 30, 2008.
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Tenant or Mr. Aggarwal to deposit the build-out cost of $29,185 into escrow. Although
Tenant’s original agreement required Mr. Aggarwal to make this deposit, in the renegotiated
arrangement, Tenant made this deposit.
In order to operate a Quizno’s franchise, Quizno’s required a prospective owner to first be
approved by Quizno’s, and then to undergo specific training on sandwich-making and
running a Quizno’s store in order to become “certified.” During the negotiations, Quizno’s
approved Mr. Aggarwal to own the Quizno’s franchise, but he was not yet certified to operate
it. To facilitate the sale of the business, in May 2007, Mrs. Patel temporarily became a
member of Mr. Aggarwal’s LLC, Stonebrook Quiz, LLC, because she was already certified
to operate the Quizno’s business. In January 2008, Mr. Aggarwal’s nephew and business
partner, Mac, completed the necessary training and became certified to operate the Quizno’s
franchise, and Mrs. Patel resigned her membership in Stonebrook, LLC.
Mr. Aggarwal and Mac operated the Quizno’s business for several months, but they decided
not to exercise the renewal option. Consequently, Tenant forfeited the $29,185 it had placed
in escrow with Landlord.
On April 16, 2009, Tenant filed this lawsuit against Landlord, alleging that Landlord
breached the Lease by wrongfully withholding consent to assign the Lease in full to Mr.
Aggarwal.9 Tenant claimed that Landlord’s unreasonable withholding of consent to assign
the second renewal option to Mr. Aggarwal caused Tenant to lose $60,000 from the reduction
in sales price of the Quizno’s business and the $29,185 it had placed in escrow for the build-
out costs. Landlord filed an answer denying liability. Discovery ensued.
On May 11, 2010, Landlord filed a motion for summary judgment, claiming that Tenant had
waived its breach of contract claims against Landlord by executing the September 2007
Assignment, and that Landlord “had no obligation to allow [Tenant] to assign the lease to a
third-party.” In response, Tenant argued that the September 2007 Assignment to Mr.
Aggarwal at a reduced price was an attempt to mitigate the damages caused by Landlord’s
breach. Tenant also argued that Landlord’s withholding of consent to the assignment of all
of the Lease provisions to Mr. Aggarwal was unreasonable and constituted a breach of the
Lease. On July 13, 2010, the trial court entered an order denying Landlord’s motion for
summary judgment, finding that genuine issues of material fact existed for trial.10 The case
was set for trial.
9
On July 7, 2010, the trial court permitted Tenant to amend its complaint.
10
The trial court attached and incorporated into its order a July 12, 2010 letter ruling explaining its decision
in more detail.
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On July 14, 2010, the trial court conducted a bench trial on the merits. The trial court heard
testimony from Dr. Patel, Ms. Patel, and Mr. Scarbrough as the representative of Landlord.11
The testimony focused primarily on the dealings between the parties and the reasons for
Landlord’s decision to withhold its consent to the assignment of the existing Lease and two
renewal options.
Dr. Patel testified that he conducted the negotiations between Tenant and Mr. Aggarwal in
the sale of the Quizno’s business. He stated that the original agreement with Mr. Aggarwal
did not close because Landlord would not assign the Lease with the two renewal options to
Mr. Aggarwal. After the impasse with Landlord over the assignment and Mr. Aggarwal’s
decision to back out, Dr. Patel negotiated the new agreement with Mr. Aggarwal. Under the
new sales agreement, Dr. Patel said, Tenant agreed to accept $60,000 less for the business
and place into escrow the $29,185 build-out cost penalty for failing to renew. Dr. Patel
believed that he had no choice but to accept this less attractive offer to induce Mr. Aggarwal
into buying the business, because the only alternative was to lose his entire investment. By
way of explanation, Dr. Patel commented that getting “[s]omething is better than nothing.”
Ms. Patel also testified at trial. She explained the process Quizno’s required in order to
operate a Quizno’s franchise. In order to obtain Quizno’s approval or authorization to own
the Quizno’s franchise, Tenant was required to send to the Quizno’s main office financial
statements and other such documents. Once Quizno’s “approved” or “authorized” Tenant
to be a franchisee based on the financial statements, Quizno’s gave Tenant a certain amount
of time for personnel to travel to the Quizno’s facility in Denver, Colorado, to undergo weeks
of training in sandwich-making and other operational matters in order to become certified
to operate the Quizno’s business.
Ms. Patel testified that, in July 2007, during the negotiations with Landlord, Mr. Aggarwal
was approved to own a Quizno’s franchise, but not yet certified. She said that at no time
during negotiations did Landlord indicate that its refusal to consent to the assignment was
based on the belief that Mr. Aggarwal was not a “duly authorized franchisee” of Quizno’s.
Ms. Patel testified that her attempts to get Landlord’s consent to the assignment of the
original Lease were fruitless. During the negotiations, she stated, Landlord received Mr.
Aggarwal’s verified financial statements, but nevertheless refused to consent to the
assignment of the second renewal option to Mr. Aggarwal. On top of that, she said, Landlord
attempted to charge Tenant a $1,000 fee to make the assignment, although this charge was
later withdrawn. Frustrated by Landlord’s position, Ms. Patel said, Mr. Aggarwal withdrew
11
In addition to the testimony at trial, the trial court reviewed the deposition testimony of Mike, Mr. Sterling,
and Mr. Aggarwal.
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his offer to purchase the franchise. Mr. Aggarwal later relented and agreed to the sale, albeit
at a lower price. The email exchanges among Tenant, Landlord, and Mr. Aggarwal were
submitted into evidence.
Landlord’s representative Mr. Scarbrough testified as well. At the time of the negotiations
with Mr. Aggarwal, Mr. Scarbrough said, Landlord had received advice that the Quizno’s
Addendum, mandating assignment of any renewal options along with any assignment of the
Lease, would not apply to any transaction with Mr. Aggarwal, and Landlord’s actions were
based on that advice. At the time of trial, Mr. Scarborough still believed that to be the case.
Mr. Scarbrough said that, in negotiating the assignment of the Lease on behalf of Landlord,
he was “trying to do whatever he could to help [the Patels] get their deal done. But at the
same time [he couldn’t] do something that’s bad for [Landlord].” He further claimed that,
at the time of the negotiations, he was concerned that Mr. Aggarwal would make a bad
tenant, because after negotiations began, Mr. Aggarwal refused to disclose his financials and
failed to confirm his franchisee status. Mr. Scarbrough also noted his impression that Mr.
Aggarwal was very difficult to work with, based on Mr. Aggarwal’s rejection of Landlord’s
offer of a new lease that would have given him 70 months plus one five-year option at the
original lease rates in lieu of an assignment of the existing Lease.12 Mr. Aggarwal’s refusal
to agree to the 70-month proposal raised a “red flag,” Mr. Scarbrough said, because most
new tenants want a new lease. In the portions of his deposition that were read into evidence,
Mr. Scarbrough testified that Landlord was operating under the belief that it was not required
to consent to the assignment of the renewal options and that “[i]t was bad business to do so.”
He stated that there were only ten months remaining on the original Lease, “and we had no
assurances from [Mr. Aggarwal] that he was going to stay, [and] we didn’t feel like it was
a very good deal for us. I mean, it wasn’t – there were too many unresolved questions about
Mr. Aggarwal.”
On cross-examination, Mr. Scarbrough admitted that he had testified in his deposition that
Landlord’s rationale for declining to consent to a straight assignment of the Lease and both
renewal options was because “under the terms of the lease we were not required to extend
the option. It was bad business to do so.” From Landlord’s perspective, Mr. Scarbrough
said, “We would love to have had [Mr. Aggarwal] locked in [to the Lease] for ten years.”
Mr. Scarbrough agreed that if a landlord has a tenant such as Mr. Aggarwal locked in, the
landlord is in a better negotiating position. He conceded that Mr. Aggarwal eventually
provided Landlord the required financial information, and that Mr. Aggarwal was in fact
financially qualified to have the Lease assigned to him:
12
Mr. Scarbrough complained that Mr. Aggarwal “didn’t want to do something that would be good for all
of us. He wanted to do it his way or no way, and that – it did not necessarily work for us.”
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Q: . . . Mr. Aggarwal, once he provided you with the financial information,
was a qualified person to have the lease assigned to him or his business?
A: Financially, yes.
Q: Well, he must have been qualified because y’all eventually approved the
assignment, didn’t you?
A: Yes.
Mr. Scarbrough maintained that Landlord acted reasonably under the circumstances.
On January 4, 2011, the trial court issued a letter ruling holding in favor of Tenant.13 In its
ruling, the trial court determined that, under the Quizno’s Addendum,
[Tenant] made a proper request and gave proper notice of its intent to assign
the Lease to Aggarwal and that [Landlord] breached the Lease agreement
when it refused to allow assignment of the two options to extend to the
proposed assignee, who was an authorized franchisee of [Quizno’s] and who
had been financially approved by [Landlord] as an assignee.
The trial court also determined that Landlord’s breach of the Lease damaged Tenant in the
amount of $60,000 by forcing Tenant to mitigate its damages and accept a lesser sales price
for the Quizno’s business, and also in the amount of $29,185, the amount Tenant had placed
in escrow for build-out costs for failure to renew the Lease. Accordingly, the trial court
awarded Tenant $89,185 in damages, plus costs.14 On January 14, 2011, the trial court
entered a “Final Judgment,” incorporating the letter ruling by reference and awarding Tenant
an additional $1,660.15 in discretionary costs. From this order, Landlord now appeals.
ISSUES ON A PPEAL AND S TANDARD OF R EVIEW
On appeal, the primary issue Landlord raises for review is, “Whether the trial court erred in
finding that [Landlord] breached the Lease Agreement when it refused to allow assignment
13
The January 4, 2011 letter was filed with the trial court on January 5, 2011.
14
The trial court also denied Tenant’s request for attorney fees.
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of the two options to extend to the proposed assignee.”15 Under this umbrella, Landlord
raises four sub-issues:
1. Whether Landlord was obligated to assign the Lease under the Quizno’s
Addendum at all, much less the second renewal option?
2. Whether Landlord had a reasonable basis for its failure to consent to the
assignment of the second option?
3. Whether Tenant waived its breach of contract claim when it voluntarily
executed the September 2007 Assignment?
4. Whether the trial court erred in determining that the September 2007
Assignment was brought about by economic duress of Landlord in attempting
to force a new contract?
Because this was a bench trial, we review the trial court’s findings of fact de novo on the
record, presuming those findings to be correct unless the evidence preponderates otherwise.
Tenn. R. App. P. 13(d); see Poole v. Union Planters Bank, N.A., 337 S.W.3d 771, 777
(Tenn. Ct. App. 2010). Factual determinations based on a trial judge’s assessment of witness
credibility receive a high degree of deference, so we will not reverse a finding of the trial
court based on credibility absent clear and convincing evidence to the contrary. Wells v.
Tenn. Bd. of Regents, 9 S.W.3d 779, 783 (Tenn. 1999). We review questions of law de novo
with no presumption of correctness. Bowden v. Ward, 27 S.W.3d 913, 916 (Tenn. 2000).
In interpreting a contract, we must ascertain the intent of the parties and enforce the plain and
ordinary language in the contract:
The cardinal rule in the construction of contracts is to ascertain the intent of
the parties. If the contract is plain and unambiguous, the meaning thereof is
a question of law, and it is the Court’s function to interpret the contract as
written according to its plain terms. The language used in a contract must be
15
Landlord also challenges the trial court’s July 13, 2010 order denying its motion for summary judgment.
However, “when the trial court’s denial of a motion for summary judgment is predicated upon the existence
of a genuine issue as to a material fact, the overruling of that motion is not reviewable on appeal when
subsequently there has been a judgment rendered after a trial on the merits.” Arrow Elecs. v. Adecco
Employment Servs., Inc., 195 S.W.3d 646, 650 (Tenn. Ct. App. 2005) (citing Hobson v. First State Bank,
777 S.W.2d 24, 32 (Tenn. Ct. App. 1989); Mullins v. Precision Rubber Prods., 671 S.W.2d 496, 498 (Tenn.
Ct. App. 1984); Tate v. County of Monroe, 578 S.W.2d 642, 644 (Tenn. Ct. App. 1978)). Because the trial
court’s July 13, 2010 order denying Landlord’s motion for summary judgment was based on the existence
of genuine issues of material fact, and a judgment was rendered after a trial on the merits, the order denying
summary judgment is not reviewable on appeal.
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taken and understood in its plain, ordinary, and popular sense. In construing
contracts, the words expressing the parties’ intentions should be given the
usual, natural, and ordinary meaning. If the language of a written instrument
is unambiguous, the Court must interpret it as written rather than according to
the unexpressed intention of one of the parties. Courts cannot make contracts
for parties but can only enforce the contract which the parties themselves have
made.
Pitt v. Tyree Org., Ltd., 90 S.W.3d 244, 252 (Tenn. Ct. App. 2002) (citations and internal
quotation marks omitted). Issues of contract interpretation are questions of law and,
accordingly, are reviewed de novo. Honeycutt v. Honeycutt, 152 S.W.3d 556, 561 (Tenn.
Ct. App. 2003).
A NALYSIS
Application of the Quizno’s Addendum
The first issues raised by Landlord concern the applicability of the Quizno’s Addendum.
Landlord argues that: (1) Mr. Aggarwal was not a “duly authorized franchisee” of Quizno’s
at the time of the alleged breach, so the Quizno’s Addendum did not apply; and (2) even if
Mr. Aggarwal were considered a “duly authorized franchisee,” the renewal options did not
automatically transfer to a “duly authorized franchisee” with an assignment of the Lease. We
will address each of these arguments in turn.
Duly Authorized Franchisee
The Landlord argues that Mr. Aggarwal was not a “duly authorized franchisee” of Quizno’s
within the meaning of the Quizno’s Addendum when the alleged breach occurred, and
therefore the Quizno’s Addendum is inapplicable, and the renewal options were not
assignable per the terms of the Landlord’s Addendum.16 Landlord notes that, during the time
period in which the alleged breach occurred, roughly June through September 2007, neither
Mr. Aggarwal nor his nephew Mac were certified by Quizno’s to be a franchisee. Landlord
insists that Mr. Aggarwal did not become “authorized” by having Ms. Patel (who was already
certified by Quizno’s) join as a member of his LLC from May 2007 through March 2008,
because she had no real ownership in the LLC, and having Mrs. Patel as a temporary LLC
member was merely a “scheme to circumvent the Quizno’s certification requirements.”
Landlord argues that Mr. Aggarwal and his LLC did not become a “duly authorized
16
Landlord also argues that Mr. Aggarwal was not a Quizno’s “Entity” within the meaning of the Quizno’s
Addendum, and Tenant does not dispute this.
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franchisee” of Quizno’s until Mac became certified to operate a Quizno’s franchise in
January 2008. This interpretation of the Quizno’s Addendum, Landlord argues, is supported
by the plain language of the Quizno’s Addendum and by Ms. Patel’s testimony at trial.
In her testimony, Ms. Patel described the process required by Quizno’s to own and operate
a Quizno’s franchise. Ms. Patel appeared to use the words “authorized” and “approved,”
interchangeably; we look more to the substance of her testimony than the particular language
used. Ms. Patel explained: “For authorized you have to send your financial statements, and
the Quizno then looks at all your background and authorizes you to be a franchisee. . . . Once
the Quizno approves from our financial, we are approved.” Certification from Quizno’s
involved instruction and training in running a Quizno’s franchise in the manner mandated
by Quizno’s. This involved first some training at any Quizno’s restaurant, then a written
examination on franchise rules and regulations, and then travel to the Quizno’s facility in
Denver, Colorado, for further instruction on Quizno’s methods for making their sandwiches,
hiring employees, and running a store. She described the stages of the process as (1)
approval or authorization from Quizno’s, based on an applicant’s background and financial
information, (2) transfer of the Lease, and (3) certification on Quizno’s methods for their
franchises.
The Quizno’s Addendum was not the product of negotiations between these parties; rather,
it was included in the Lease as a requirement of Quizno’s. Therefore, we look to Quizno’s
intent in drafting its required addendum. The overall Addendum sets forth the process for
a Quizno’s franchise holder to transfer a lease for a Quizno’s store location, either to (1)
Quizno’s or a corporate affiliate of Quizno’s, or (2) another Quizno’s franchishee. In the
event that the franchisee assigns the Lease to Quizno’s or a corporate affiliate of Quizno’s
(i.e., a Quizno’s “Entity”), the Landlord’s consent to the assignment is not “required.” If the
lease is assigned to a “duly authorized franchisee” of Quizno’s, either by the original
franchise holder or by a Quizno’s “Entity,” then the assignment takes place “with Landlord’s
consent not to be unreasonably withheld or delayed.” (Underlining omitted).
The apparent purpose of this provision of the Quizno’s Addendum is to ease the transfer of
a Quizno’s franchise, including the lease for the physical store location, from one franchisee
to a successor franchisee. A landlord would be acutely interested in the background and
financial strength of a successor franchisee as a tenant; the landlord would have little reason
to be interested in whether the successor franchisee had become indoctrinated in the
Quizno’s way of making sandwiches and running a Quizno’s restaurant. This supports Ms.
Patel’s description of the overall process of becoming a Quizno’s franchise holder; first
approval by Quizno’s based on the successor franchisee’s background and financial
information, then transfer of the lease for the physical store to the successor franchisee, and
then certification in the Quizno’s way of doing business. This reinforces Tenant’s assertion
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that a “duly authorized franchisee” within the meaning of the Quizno’s Addendum is a
successor franchisee who has been approved by Quizno’s based on his background and
financial information, but it does not require that the successor franchisee be “certified.”
Landlord argues that an “authorized” Quizno’s franchisee must be “certified” to operate a
Quizno’s store. As Tenant points out, however, Landlord offers no evidence to support this
interpretation of the term “duly authorized franchisee” of Quizno’s, but relies only on the
plain language of the Quizno Addendum. We note also that Landlord never indicated to Mr.
Aggarwal or Tenant during the negotiations that Landlord’s basis for refusing to assign the
entire Lease to Mr. Aggarwal was his lack of Quizno’s certification.
In light of the plain language of the Quizno’s Addendum, its purpose, and the uncontradicted
testimony at trial, we find that Mr. Aggarwal was a “duly authorized franchisee” of Quizno’s
at the time of the alleged breach.
Automatic Transfer of Renewal Options
Tenant based its right to assign the two renewal options along with the assignment of the
Lease on the language in the last sentence in the Assignment Provisions of the Quizno’s
Addendum, which states: “Any options to extend the term of the Lease shall automatically
transfer to an assignee in connection with a transfer made pursuant to the foregoing.”
(Emphasis added). Landlord argues that the term “foregoing” applies only to the
immediately preceding sentence, which refers only to assignments made to a Quizno’s
“Entity,” and that it does not apply to an assignment to a successor franchisee such as Mr.
Aggarwal. Therefore, Landlord claims, its failure to consent to the transfer the two renewal
options along with the assignment of the Lease to Mr. Aggarwal did not constitute a breach
of the Lease. In response, Tenant argues that the term “foregoing” in the sentence at issue
applies to the entire paragraph titled “Assignment Provisions,” based on Quizno’s purpose
for this paragraph, that is, to make it easier for a Quizno’s franchisee to sublet or assign the
leased Quizno’s store premises to a new Quizno’s franchisee without delay or renegotiation
of the Lease agreement. Consistent with this purpose, Tenant argues, the “automatic
transfer” of renewal options with assignments of the Lease to either a Quizno’s Entity or to
a duly authorized franchisee of Quizno’s are required by the Quizno’s Addendum.
We note that the first paragraph of the Quizno’s Addendum states that the Addendum should
be “interpreted in such a manner as to override any provision of the Lease which would
prevent the spirit and letter of the terms and provisions of this Addendum from being given
full force and effect.” We agree with Tenant that the “spirit” and purpose of the Assignment
Provisions in the Quizno’s Addendum is to facilitate a seamless assignment of the Lease,
along with any renewal options, to either the parent company or to an entity that seeks to
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operate a Quizno’s franchise, specifically overriding any contrary non-assignment provision
in a lease. In our view, restricting the term “foregoing” to the immediately preceding
sentence, as advocated by Landlord, would “prevent the spirit and letter of the terms and
provisions of [the] Addendum from being given full force and effect.”
As stated above, when interpreting a contract, we must ascertain the intent of the parties and
give effect to the plain and unambiguous terms of the contract. From our reading of the
entire Quizno’s Addendum, we agree with Tenant that the term “foregoing” plainly applies
to the entire “Assignment Provisions” paragraph and not simply to the sentence immediately
preceding the term.
Based on this interpretation of the term “foregoing,” the two renewal options were to
automatically transfer to an assignee along with the assignment of the Lease. Therefore, the
provision in the Quizno’s Addendum permitting Tenant to assign the Lease with the consent
of Landlord, not to be unreasonably withheld or delayed, included the two renewal options.
Accordingly, we reject Landlord’s argument that it was not required to have a reasonable
basis for refusing to consent to the inclusion of the two renewal options in Tenant’s
assignment of the Lease to Mr. Aggarwal.
Reasonable Basis for Withholding Consent
Under the Quizno’s Addendum, Tenant had “the right to assign [the] Lease . . . without
charge . . . to a duly authorized franchisee of [Quizno’s] with Landlord’s consent not to be
unreasonably withheld or delayed.” (Underlining in original). The trial court below
determined that Landlord breached the Lease “when it refused to allow assignment of the two
options to extend to the proposed assignee, who was an authorized franchisee of [Quizno’s]
and who had been financially approved by [Landlord] as an assignee.” The clear implication
of this holding, in view of the evidence, was that Landlord acted unreasonably when it
refused to give Tenant consent to assign the two renewal options to Mr. Aggarwal.
On appeal, Landlord claims that the evidence preponderates against the trial court’s finding
that it unreasonably withheld its consent to transfer both renewal options to Mr. Aggarwal
with the assignment of the Lease. Landlord points out that its obligation to give consent to
the assignment in this case was not unfettered, it had only an obligation not to withhold its
consent “unreasonably.” Landlord applies the definition of “unreasonable” found in Black’s
Law Dictionary: “arbitrary, capricious, absurd, immoderate, or exorbitant, not comfortable
to reason, irrational, beyond the bounds of reason or moderation.” Brief of Appellant at p.
11 (citing Black’s Law Dictionary 536 (6th ed. 1996)). Under this definition, Landlord
argues, the preponderance of the evidence submitted at trial shows that its decision to
withhold consent to assign the two five-year renewal options to Mr. Aggarwal was a
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reasonable business decision based on objective factors. Therefore, it was not arbitrary,
capricious, or absurd. In support of this argument, Landlord relies in large part on the
testimony of Mr. Scarbrough, Landlord’s representative, who explained why Landlord
withheld its consent to the assignment.
This Court addressed a “reasonable” withholding of consent in this context in First
American Bank of Nashville, N.A. v. Woods, 781 S.W.2d 588 (Tenn. Ct. App. 1989). In
Woods, a business entity leased property from the plaintiff lessor for the operation of a fast
food restaurant. The defendants, who owned the business entity, were personal guarantors
of the business’s obligations under the lease. The lease provided that the lessee had the right
to assign the lease to another tenant “with the written consent of the Lessor, which shall not
be unreasonably withheld.”17 Woods, 781 S.W.2d at 589.
Without notifying the lessor or obtaining its consent, the lessee in Woods assigned the lease
to another business entity. The lessor discovered the assignment and was displeased that it
was not first consulted. Subsequently, the defendants sent a belated written request to the
lessor for its consent to the assignment of the lease. The lessor refused to consent to the
assignment unless the defendants reaffirmed their personal guaranties. The defendants would
not agree to continue their guaranties, but the assignment was not rescinded. Therefore, the
validity of the assignment and the defendants’ personal guaranties remained in dispute.
Subsequently, the assignee abandoned the lease. After this, the lessor, the assignee, and the
guarantors became embroiled in protracted litigation over the parties’ obligations under the
lease.18 Id.
Later, the lessor filed a lawsuit against the defendants based on their personal guaranties.
The defendants argued that they were not liable under the guaranties, and that the lessor acted
unreasonably in conditioning its consent to the assignment on the continuation of the
personal guaranties. Id. at 590. The lessor argued that its decision to withhold unconditional
consent to the assignment was reasonable, because the assignee’s financial condition was
uncertain, and continuation of the guaranties would have ensured performance under the
lease. After a hearing, the trial court determined that the lessor’s refusal to assign the lease
without a continuation of the personal guaranties was reasonable, and that the defendants
remained liable under their guaranties. Id.
17
The contract actually provided that the lessee could sublease the property to another that would “assume
full responsibility” for the lessee’s obligations under the lease, and that the lessee would be released from
all further liability. This type of sublease was treated as an assignment. See Woods, 781 S.W.2d at 589-90.
18
For a detailed discussion of the lawsuits and other dealings between these parties, see First American Bank
of Nashville, N.A. v. Woods, 734 S.W.2d 622 (Tenn. Ct. App. 1987).
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On appeal, the defendants argued that the lessor had unreasonably withheld consent to the
assignment under the circumstances. In addressing this issue, the appellate court explained
that the provision of the lease requiring that the landlord’s consent be “not unreasonably”
withheld requires the landlord’s actions to be “commercially” reasonable:
The standard usually applied in determining whether withholding of consent
was reasonable is expressed as a reasonable commercial standard. The
standard is generally understood to include the elements of “good faith” and
“fair dealing.” The question is whether the landlord’s conduct is that of “a
reasonably prudent person ... exercising reasonable commercial responsibility.”
A landlord may not withhold consent because of personal whim or taste, or
other arbitrary reasons, when the lease provides that consent to an assignment
will not be unreasonably withheld. The Trustee had a duty to act in good faith.
A primary factor in determining whether a landlord acted in good faith and in
a commercially reasonable manner is the “financial responsibility of the
proposed subtenant.” In considering the proposed assignee’s finances, an
analysis should focus on the reasonableness of the landlord’s perception that
the proposed tenant presented financial or other risks.
In making a determination of whether to withhold its consent, it is
unreasonable for a landlord to take into consideration “personal taste,
convenience or sensibility.” The landlord’s desire “to extract an economic
concession”or “philosophical or ideological differences with [a] subtenant”
may not be taken into consideration.
Normally, the standard for determining the reasonableness of consenting or
withholding consent under a lease is to make a comparison of the financial
stability of the present tenant and/or guarantors as contrasted to the proposed
assignee.
Id. at 590-91 (citations and quotations omitted; emphasis added). Thus, a landlord cannot
withhold consent based on “personal whim, taste, or other arbitrary reasons,” or on
“convenience or sensibility,” or to “extract an economic concession;” rather, in determining
whether to consent to the assignment, the landlord must focus on whether the proposed
assignee poses “financial or other risks.” Id. The Woods court further recognized that the
burden was on the defendant guarantors to prove by a preponderance of the evidence that the
lessor acted unreasonably. Id. at 591.
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Courts addressing a lease provision such as the one at issue here have almost universally
found it reasonable for a landlord to withhold consent to an assignment based on objectively
legitimate concerns about the prospective assignee’s ability to meet the financial
requirements of the lease. See 49 Am. Jur. 2d Landlord & Tenant § 942. In contrast, if the
landlord refuses to consent to the assignment in order to strike a better bargain or obtain a
higher rent from the prospective assignee, this is generally found to be unreasonable:
Courts are particularly apt to find that a landlord’s withholding of consent to
an assignment . . . was unreasonable in cases where the only apparent reason
for refusal was the landlord’s desire to rent directly to the proposed assignee
. . . under a new lease at a higher rent. A number of courts have stated that it
is not reasonable for a landlord to withhold consent to an assignment . . . solely
to extract an economic concession or to improve the landlord’s economic
position.
69 Am. Jur. Proof of Facts 3d 191 § 19 (Supp. 2011) (footnotes omitted, citing cases).
The trial court below summarized the pertinent portions of Mr. Scarbrough’s testimony as
follows:
Scarbrough admitted that [Landlord’s] rationale for not assigning both
extensions [of the Lease to Mr. Aggarwal] was that it would be a bad business
decision and not a good deal for [Landlord]. He testified [Landlord] could
have granted the second option if [Landlord] had wanted to, but did not want
to. Basically, he testified that [Landlord] wanted Aggarwal “locked-in” for ten
years and that under the two [Lease renewal] option transfer, Aggarwal would
have the option not to stay and [Landlord] wanted to keep the negotiating
power in it’s [sic] hands.
From our review of the record, this summary is well supported by the evidence at trial. It is
apparent from the email exchanges and the testimony of Mr. Scarbrough that the primary
basis for Landlord’s unwillingness to allow Tenant to assign Mr. Aggarwal the existing
Lease with the two renewal options was that it would not behoove Landlord to have a tenant
for only ten months without a longer commitment. In his words, it was “bad business.”
Instead, Landlord thought it was a better for Landlord’s business to lock Mr. Aggarwal into
the Lease for seventy months (ten months plus the first renewal period) and then give him
only one option to renew, which would ensure that Landlord’s property was leased for at
least five years under the new management. Had Landlord simply consented to the
assignment of the Lease and the two renewal options, unchanged, the negotiating power
would have been tilted in favor of Mr. Aggarwal. As was explained in Woods, however, a
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contract term giving Landlord the right to withhold consent on a reasonable basis does not
provide Landlord with an opportunity to force the assignee into renegotiating the terms of
the Lease or to extract an economic concession from the assignee. Nor was Landlord
permitted to withhold consent based on personal whim or taste, or on the perception that the
assignee was “difficult” to work with on a personal level. According to the standard in
Woods and other caselaw, these are not “reasonable” bases for Landlord to withhold consent
to an assignment of the Lease.
Mr. Scarbrough also indicated that Landlord withheld consent based on some unspecified
“uncertainty” about Mr. Aggarwal’s financial stability. However, the trial court apparently
discredited this testimony and credited the other evidence suggesting that Landlord found Mr.
Aggarwal to be satisfactory from a financial perspective. Indeed, the fact that Landlord
wanted to lock Mr. Aggarwal into the Lease for a longer period time is evidence that it
deemed him to be financially stable.19 Thus, we find that the evidence preponderates in favor
of the trial court’s finding that Landlord breached the Lease when it withheld its consent to
the assignment of the Lease and the two renewal options.
Waiver Based on Doctrine of Merger
Landlord next argues that Tenant waived any claim that it breached the Lease by entering
into the second sale agreement with Mr. Aggarwal and by executing the September 25, 2007
Assignment. This argument appears to be based on the doctrine of merger, under which “the
last agreement concerning the same subject matter that has been signed by all parties
supersedes all former agreements, and the last contract is the one that embodies the true
agreement.” Magnolia Group v. Metro. Dev. & Hous. Agency of Nashville, 783 S.W.2d
563, 566 (Tenn. Ct. App. 1989) (citing Bringhurst v. Tual, 598 S.W.2d 620 (Tenn. Ct. App.
1980)). Landlord notes that the September 25, 2007 Assignment, assigning the Lease and
the first renewal option to Mr. Aggarwal, states: “The Second [renewal] Option is NOT
transferable.” Landlord contends that, because the Assignment was the last agreement
concerning the renewal options for this property, it embodies the parties’ “true agreement,”
and it either precludes the transfer of the second option under the new language or modifies
the original Lease to that effect.
The merger doctrine is well-established in Tennessee; the doctrine puts structure to
ascertaining the parties’ intent where there are successive agreements. See Dunn v. United
Sierra Corp., 612 S.W.2d 470, 474 (Tenn. Ct. App. 1980); 17A Am. Jur. 2d Contracts § 539
(2011). Synthesizing the holdings in Tennessee caselaw, the merger doctrine has been
19
One July 14, 2007 email from Mr. Aggarwal to Mr. Sterling recounted Mr. Sterling’s comment to Mr.
Aggarwal that he did not “care even if [the assignee] is Bill Gates.”
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summarized as follows: “Under the doctrine of merger, parties to a contract may enter into
a subsequent agreement concerning the same subject matter as the prior one; the earlier
contract . . . merges into the latter contract, and is rescinded or extinguished.” Stephen W.
Feldman, 22 Tenn. Prac. Series, Contract Law and Practice § 10.11 (2011) (citing cases).
For merger to apply, the successive contracts must have the same parties, and they generally
“must contain inconsistent terms such that they cannot stand together as supplemental
agreements.” Id.; see also R ESTATEMENT (S ECOND) OF C ONTRACTS § 279 (Supp. 2011).
Under these circumstances, the “subsequent contract then stands as the only contract between
parties.” M&M Props. v. Maples, No. 03A01-9705-CH-00171, 1998 WL 29974, at *10
(Tenn. Ct. App. Jan. 12, 1998).
The doctrine of merger is inapplicable to the facts of this case. First, the plain language of
the Assignment indicates that the parties to the Assignment did not intend for the Lease to
“merge into” the Assignment, as the Assignment itself states that the “Lease is valid and
existing.” In addition, the subject matter addressed in the Lease is separate and apart from
the Assignment. The Assignment is what the title suggests, that is, an assignment of the
original Lease to a successor tenant, Mr. Aggarwal; thus the Lease and the Assignment
“stand together as supplemental agreements.” 22 Tenn. Prac. § 10.11. For these reasons,
we find that the doctrine of merger is inapplicable. Accordingly, we find no waiver of
Tenant’s breach of contract claim based on the merger doctrine.
This holding pretermits the issue of whether the trial court erred in finding that Tenant
entered into the September 2007 Assignment based upon the economic duress imposed by
Landlord on Tenant in attempting to force a new contract.
C ONCLUSION
The decision of the trial court is affirmed. Costs on appeal are to be taxed to Appellant
Broadmoor Investment Corporation and its surety, for which execution may issue, if
necessary.
_________________________________
HOLLY M. KIRBY, JUDGE
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