Daily Development for Thursday, June 14, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; WASTE: It is waste for a long term tenant to sublease to the City a right to build a retention pond on the land, necessitating the removal of four feet of soil, where the City intends that the retention pond will be a permanent installation, when the City could acquire the property now by eminent domain.

Hood v. Freemon, 2007 Westlaw 27121 (Tenn. App. 1/3/07) (unreported case)

This case is of some note because the victorious counsel, obtaining reversal on appeal, is DIRTer H. Anthony Duncan of Franklin, Tennessee.

Landlord lease a 6 acre parcel to tenant for an initial ten year term with renewals at lessees option for successive ten year terms not to exceed 99 years.  The rent was $300 per month (plus taxes) for the first 20 years, rising to $500 per month thereafter.  Although 80% of the land was swampy, there was a portion along the highway that proved valuable to tenant.  He subleased to various users to generate a return of $4000 to $5000 a month. 

Obviously, the lease in general was beneficial to the tenants side, but there was a provision that stated that in the event of eminent domain, the landlord would receive all compensation for the land while tenant would be compensated only for the value of any buildings tenant had constructed. 

The local city wished to add the land to a larger retention pond it was intending to build.  It approach Tenant for the rights to do so, but, upon discovering the circumstances of the lease arrangement, went to Landlord and proposed to pay Landlord a portion of the fair market value of the property, with the rest going to Tenant.  Landlord balked at this, because, under the lease, the Landlord would get all the proceeds if the City had condemned the property, since the City planned to leave the valuable commercial sublease property intact. 

Tenant then proposed to sublease the land to City. City, in order to insure that the lease remained in place, would pay all the ground rent and the taxes directly to Landlord.  Presumably there was some  kicker to Tenant.  Otherwise, Tenant could have simply waived any claim to compensation and let city acquire the land. 

City admitted that it believed that the retention pond would be permanent and that, if and when the lease ended, City would likely acquire Landlords interest by eminent domain. 

The consequence of the deal, of course, was that the rich got richer in that Tenant would reap all the benefits of the value of the retention pond for the balance of the term, even though the City could have used eminent domain to terminate his lease and acquire the land, in which case Landlord would have received nothing.

The landlord sought to enjoin the proposed project as waste.  The trial court found no waste and denied the injunction, commenting that in any event landlord had an adequate remedy in damages.  The appeals court here reversed, finding that the proposed project did constitute waste by the tenant and remanding for determination as to whether the landlords legal remedies were sufficient to justify denying the injunction. 

The court noted that a significant change in the character of the land that could have an adverse impact on its value in the hands of the landlord constituted tenant waste.  The court stated that it was axiomatic that removing four feet of dirt from the land and building a permanent retention pond there would both damage the remainder and have and diminish the value of the property.  Hence, it was an easy determination that waste would occur. 

The court also noted that on remand the court could consider whether the proposed waste would constitute breach of the lease.  (We are not told whether the lease provided with a remedy of termination for waste, or even whether waste was itemized as a breach).

Comment 1: This is a cute little case, and indicates the problems that arise in measuring the rights of parties under a long term ground lease.  Better for them to try to be more specific in anticipating what changes the landlord is prepared to permit, because certainly over a 100 year term the tenant is going to have lots of novel ideas.

Comment 2: On what point in time does a court focus in reaching a determination of whether certain changes in the land would constitute waste?  At the time they are made, even though the tenant retains possession?  At least end only?  Shouldnt the landlord be protected in the event that the tenant abandons or otherwise terminates the lease prematurely?  The editor believes that the court should consider whether the change, at the time of the courts judgment, is a change that adversely affects the value.   Then it should determine whether the parties, expressly or implicitly,  intended that the tenant have the right to implement this kind of change. If not, its waste.

Comment 3: The editor notes that Friedman on Leases doesnt deal with the issue of tenant waste at all. That will change.

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