Boiler Supply Company, Inc. v. Lunn Real Estate Investments

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
FILED
July 1, 1998
BOILER SUPPLY COMPANY, INC. ) Cecil W. Crowson
) Appellate Court Clerk
Plaintiff/Appellant, ) Davidson Chancery
) No. 93-2848-I
VS. )
)
LUNN REAL ESTATE INVESTMENTS, ) Appeal No.
INC., ) 01A01-9605-CH-00246
)
Defendant/Appellee. )
APPEAL FROM THE CHANCERY COURT
FOR DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR
For Plaintiff/Appellant: For Defendant/Appellee:
Charles Patrick Flynn Stephen H. Price
Gerald D. Neenan FARRIS, WARFIELD & KANADAY
FLYNN AND NEENAN Nashville, Tennessee
Nashville, Tennessee
John B. Link, III
Nashville, Tennessee
AFFIRMED AND REMANDED
WILLIAM C. KOCH, JR., JUDGE
OPINION
This appeal involves a dispute over the interpretation of a provision allocating
the responsibility for paying legal expenses in the event of a default or breach of two
leases. The lessee filed suit against the lessor in the Chancery Court for Davidson
County seeking a declaration that the leases had expired and requesting its attorney’s
fees in accordance with the provisions of the lease agreements. The trial court
granted the lessee’s motion for summary judgment and declared that the leases had
expired but denied the lessee’s claim for legal expenses. The lessee has appealed.
We have determined that the trial court correctly interpreted the lease agreements
and, therefore, affirm the summary judgment.
I.
Wallace Edward Lunn, Sr. established two businesses during his lifetime -
Boiler Supply Company, Inc. and Lunn Real Estate Investments, Inc. Boiler Supply
operated out of two industrial buildings in Nashville and Knoxville on property
leased from Lunn Real Estate Investments. When Mr. Lunn died in 1978, the
interests in the two businesses were divided among various family members. On
January 1, 1989, Boiler Supply and Lunn Real Estate Investments entered into two
new leases containing an ambiguous provision regarding their duration that stated on
one hand that the term of the lease was for three years, but on the other provided that
the lease would begin on January 1, 1989 and end on December 31, 1992 (a period
of four years).1
Disputes among Mr. Lunn’s family eventually caused them to redistribute their
interests in the two corporations. In May 1990, the family agreed that Wallace
Edward Lunn, Jr. would acquire all the stock in Boiler Supply that had been
previously held by other family members and, in return, that he would relinquish his
interests in the other assets in his father’s estate, including Lunn Real Estate
Investments. Part of this agreement included amendments to the 1989 leases
1
The lease specifically provided:
Lessor leases to Lessee, to have and to hold the same subject to all terms and
conditions set forth herein for a term of three (3) years, beginning on the 1st day of
January, 1989, and ending on the 31st day of December, 1992, unless sooner
terminated as provided herein (hereinafter referred to as the “Term”).
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providing (1) that the leases could be extended following the end of their initial terms
at Lunn Real Estate Investments’ option, (2) that Boiler Supply could purchase the
properties if Lunn decided to extend the leases, (3) that the purchase price for the
properties, if Boiler Supply elected to purchase them, would be the greater of
$200,0002 or average appraised value of the properties,3 and (4) that the leases would
terminate in ninety days if Lunn Real Estate Investments rejected Boiler Supply’s
proposed contract to purchase the properties.
As the end of 1991 approached, Boiler Supply wrote Lunn Real Estate
Investments to inquire whether it intended to extend the leases beyond their three-
year term. Lunn Real Estate Investments responded that discussions concerning the
extension of the leases were premature because the leases did not expire until
December 31, 1992. On January 2, 1992, Boiler Supply formally notified Lunn Real
Estate Investments that its three-year leases had expired and that it was holding over
on a month-to-month basis under the leases’ holdover clauses. Lunn again responded
that the initial terms of the leases did not expire until December 31, 1992.
In May 1992, Boiler Supply offered to purchase the properties for $240,000.
Lunn Real Estate Investments rejected the offer on the ground that it was premature.
In December 1992, Boiler Supply again offered to purchase the properties, this time
for $200,000. Lunn Real Estate Investments again declined Boiler Supply’s offer and
informed Boiler Supply that it had decided to extend the term of both leases.
Thereafter, in March 1993, Boiler Supply again offered to purchase the properties.
Both parties designated appraisers, but when Boiler Supply did not receive the results
of Lunn Real Estate Investments’s appraisal, it submitted an offer to purchase the
properties for $221,500. Lunn Real Estate Investments rejected this offer, as it had
the preceding two offers.
2
The Nashville property was valued at $150,000; while the Knoxville property was valued
at $50,000.
3
The leases provided that the properties would be appraised by three appraisers, one chosen
by Boiler Supply, one chosen by Lunn Real Estate Investments, and the third appointed by the other
two appraisers.
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In September 1993, Boiler Supply sued Lunn Real Estate Investments in the
Chancery Court for Davidson County alleging that the leases had expired and that
Lunn Real Estate Investments had not acted in good faith when it refused to turn over
its appraisal information. Boiler Supply requested the trial court to construe the terms
of the leases, to determine the rights of the parties, and to declare that the leases and
their amendments were terminated. It also requested the trial court to award legal
expenses pursuant to a provision in the leases.4 Lunn Real Estate Investments
responded to the complaint by asserting that Boiler Supply had failed to maintain the
property in good condition and that the parties had been unable to agree whether the
properties should be appraised “as is” or “as repaired.” It also asserted that Boiler
Supply’s offers to purchase the property had not been timely.
In June 1995 Boiler Supply moved for a summary judgment based on its claims
that the leases had expired because Lunn Real Estate Investments had failed to
properly exercise its option to continue the leases past their original terms and had
refused to accept its offers to purchase the property. At the hearing on the summary
judgment motion, Lunn Real Estate Investments conceded that the original leases
expired on December 31, 1991 and abandoned its claims that Boiler Supply had
failed to maintain the property. On August 18, 1995, the trial court granted Boiler
Supply a summary judgment and declared that the leases had terminated. When
Boiler Supply pressed for its legal expenses, the trial court held that it was not
entitled to its legal expenses because Lunn Real Estate Investments had not breached
or defaulted during the original term of the leases. Boiler Supply filed this appeal
after the trial court denied its motion to alter or amend its order granting the summary
judgment.
II.
4
The provision for legal expenses in the lease provided:
If, on account of any breach or default by Lessor or Lessee of their
obligations to any of the parties hereto, under the terms, covenants and conditions of
this Lease, it shall become necessary for any of the parties hereto to employ an
attorney to enforce or defend any of their rights or remedies hereunder, and should
such party prevail, it shall be entitled to any reasonable attorneys’ fees incurred in
such connection.
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Under the “American Rule” followed in Tennessee’s courts, losing parties need
not pay the legal expenses of prevailing parties unless required either by statute,
contract, or some other recognized equitable ground. See Kultura, Inc. v. Southern
Leasing Corp., 923 S.W.2d 536, 540 (Tenn. 1996); Kimbrough v. Union Planters
Nat’l Bank, 764 S.W.2d 203, 205 (Tenn. 1989). This appeal involves a contractual
fee-shifting provision.
Contracting parties remain free to agree to allocate the responsibility to pay
legal expenses caused by a breach in their contract. These agreements are subject to
the normal canons of contract construction. Accordingly, courts must construe these
agreements as written, see Associated Press v. WGNS, Inc., 48 Tenn. App. 407, 417,
348 S.W.2d 507, 511-12 (1961), and must also give effect to the parties’ intentions
consistent with legal principles. See Bob Pearsall Motors, Inc. v. Regal Chrysler-
Plymouth, Inc., 521 S.W.2d 578, 580 (Tenn. 1975). We must also construe the
agreement objectively without favoring either party, see Taylor v. White Stores, Inc.,
707 S.W.2d 514, 516 (Tenn. Ct. App. 1985), and we should ordinarily construe the
language according to its technical legal meaning unless the parties have established
some other meaning or unless the context in which the terms are used sensibly
indicates some non-technical meaning. See Empress Health & Beauty Spa, Inc. v.
Turner, 503 S.W.2d 188, 191 (Tenn. 1973); Fariss v. Bry-Block Co., 208 Tenn. 482,
487-89, 346 S.W.2d 705, 708 (1961).
Where a contract contains a provision allocating the responsibility for paying
legal expenses, the obligation to pay legal expenses is limited to only those instances
provided for in the contract. See Chicago Southshore & S. Bend R.R. v. Itel Rail
Corp., 658 N.E.2d 624, 634 (Ind. Ct. App. 1995). Legal expenses cannot be
recovered if the subject matter of the lawsuit is beyond the terms of the provision.
See Romero v. Hariri, 911 P.2d 85, 94 (Haw. Ct. App. 1996).
The expense-shifting provision at issue on this appeal applies only to the
necessary legal expenses incurred “on account of any breach or default by Lessor or
Lessee of their obligations . . . under the terms, covenants and conditions of this
Lease.” Accordingly, in order to recover its legal expenses, Boiler Supply must not
only be the prevailing party, but it must also demonstrate that it prevailed with regard
to claims involving Lunn Real Estate Investments’s breach or default of its
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obligations under the leases. See Houston v. Booher, 647 N.E.2d 16, 22 (Ind. Ct.
App. 1995); Shull v. First Interstate Bank, 887 P.2d 193, 196-97 (Mont. 1994).
Paragraph twenty-two of the leases defines the six events that constitute a
default under these leases. Since each of these events involves conduct of the lessee,
the contract contains no provision for default by the lessor. Accordingly, Boiler
Supply will be entitled to recover its legal expenses from Lunn Real Estate
Investments only if it was required to hire a lawyer to enforce or defend its rights
under the leases because of Lunn Real Estate Investments’ breach of the leases.
Boiler Supply argues that Lunn Real Estate Investments breached the leases in
two ways: first, by not agreeing with its interpretation of the provision defining the
term of the leases and second, by refusing to provide its appraiser’s report concerning
the value of the properties in Knoxville and Nashville. A good faith disagreement
over the meaning of an ambiguous contractual provision does not constitute a breach
of contract. Accordingly, Lunn Real Estate Investments was not contractually
obligated to agree with Boiler Supply’s interpretation of paragraph two of the leases
and did not breach the leases by taking the plausible position that they did not expire
until December 31, 1992, rather than on December 31, 1991 as insisted by Boiler
Supply.
Under the 1990 amendment to the leases, Boiler Supply had the right to offer
to purchase the properties only if Lunn Real Estate Investments effectively extended
the leases indefinitely beyond their original terms. Since Lunn Real Estate
Investments failed to extend the leases before their initial terms expired, Boiler
Supply became a month-to-month tenant under the hold over provisions in the leases.
As a hold over tenant, Boiler Supply did not have a contractual right to purchase
either or both properties for the greater of $200,000 or the averaged appraised value
of the two properties. Thus, the parties’ negotiations concerning the property
beginning in 1992 were not governed by the leases, and the parties were free to
negotiate in any way they wished. Accordingly, Lunn Reality Investments had no
contractual obligation to hire an appraiser or to furnish Boiler Supply an appraisal
report during the negotiation process.
Even if Boiler Supply had a right to purchase the property under the 1990
amendment to the leases, Lunn Real Estate Investment’s failure to turn over its
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appraiser’s report is still not a breach of contract. The amendment to the leases
required the parties to ascertain the average assessed value of the properties based on
three appraisals - one appraisal performed by appraisers chosen by the parties and the
third appraisal by an appraiser appointed by the parties’ two appraisers. While the
parties apparently retained their own appraisers, their appraisers did not, at least
insofar as this record shows, designate a third appraiser. The average appraised value
of the properties could not be determined without this third appraisal, and without the
third appraisal, Boiler Supply could not purchase the properties. Since Boiler Supply
did not make an appropriate offer to purchase the properties, it cannot insist that Lunn
Real Estate Investments breached the leases by failure to turn over its appraiser’s
report.
III.
Boiler Supply’s complaint against Lunn Real Estate Investments also
undermines its claim for legal expenses. Tenn. R. Civ. P. 8.01 requires complaints
to contain a short, plain statement showing that the plaintiff is entitled to relief and
a demand for judgment for the particular relief sought. While courts have a duty to
give effect to pleadings according to their substance rather than to their form, Fann
v. City of Fairview, 905 S.W.2d 167, 175 n.14 (Tenn Ct. App. 1994), they cannot
create claims that have not been pled. See Donaldson v. Donaldson, 557 S.W.2d 60,
62 (Tenn. 1977); Rampy v. ICI Acrylics, Inc., 898 S.W.2d 196, 198 (Tenn. Ct. App.
1994).
Boiler Supply’s complaint simply requested a declaration that its leases expired
on December 31, 1991. It cannot now transmogrify its declaratory judgment
complaint into one for breach of the leases. In a similar case, the Florida Court of
Appeals held that a seller of property who filed a declaratory judgment action arising
from an appraisal dispute with the buyer could not recover its legal expenses because
it had not filed suit to enforce the contract against the buyer. See Dade Sav. & Loan
Ass’n v. Broks Ctr. Ltd., 529 So. 2d 775, 776-77 (Fla. Dist. Ct. App. 1988). Boiler
Supply’s suit seeking a declaration that the leases had terminated was not an action
to enforce its rights against breach or default by Lunn Real Estate Investments.
Accordingly, the trial court properly refused to award Boiler Supply its legal
expenses under the leases’ expense-shifting provisions.
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Boiler Supply’s declaratory judgment complaint must be distinguished from
Lunn Real Estate Investments’ later detainer action filed to recover possession of the
properties. Lunn Real Estate Investments filed this action when Boiler Supply
breached the leases by failing to vacate the premises. This court affirmed the trial
court’s decision to award Lunn Real Estate Investments its legal expenses because
the “lease contract provides for an award of attorney’s fees in the event of a breach,
if successfully litigated.” Lunn Real Estate Investments, Inc. v. Boiler Supply Co.,
No. 01A01-9704-CV-00191, 1998 WL 221112, at *__ (Tenn. Ct. App. May 6, 1998)
(No Tenn. R. App. P. 11 application filed). Since Boiler Supply’s action in this case
did not arise out of a breach of the leases, our decision in Lunn Real Estate
Investments’ appeal does not control the outcome of this case.
IV.
We affirm the judgment and remand the case to the trial court for whatever
further proceedings may be required. We also tax the costs of this appeal to Boiler
Supply Company, Inc. and its surety for which execution, if necessary, may issue.
______________________________
WILLIAM C. KOCH, JR., JUDGE
CONCUR:
_____________________________________
HENRY F. TODD, PRESIDING JUDGE
MIDDLE SECTION
_____________________________________
SAMUEL L. LEWIS, JUDGE
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