Daily Development for Thursday, September 9, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

 LANDLORD/TENANT; ASSIGNMENTS AND SUBLETS; LANDLORD'S CONSENT CLAUSE; "REASONABLENESS" REQUIREMENT: A landlord is not "unreasonable" in refusing to consent to a proposed lease assignment if the landlord conditions its consent on an agreement by the present tenant or its assignee to be responsible for existing leaking underground storage tanks installed by a predecessor to tenant but used by tenant.

Wright v. RubaDub Car Wash, Inc., 1999 WL 605709 (Miss. 8/12/99)

One thing that makes this case interesting is that the original Chancellor in this case awarded the tenants $50,000 for the landlord's interference in the sale of their business by not assenting to the assignment without the stated condition, and, following a reversal by the Court of Appeals, this case was decided by a sharply divided Mississippi Supreme Court with several diseents and partial concurrences.

The landlord leased to Vickery vacant property on a ground lease under an instrument that provided that tenant could construct a building on the property and "install various items of machinery, equipment, appliances and fixtures therein;" . . . and it is further agreed that all such machinery, equipment, appliances and fixtures (no matter how attached to the realty) whall at all times remain and be the personal property of Lessee and Lessee shal have full right to remove same from the demised premises at the end of the primary and/or renewal term."

The tenant built a car wash on the property and installed several underground petroleum storage tanks from which it dispensed gasoline in connection with its car wash business. The tanks were installed without the landlord's consent but with the landlord's knowledge. The court does not say whether the tanks were installed "in" the building, but clearly deems the above language to be applicable to these tanks.

Two years after entering into the lease, Vickery assigned the lease to Turner, apparently in connection with the sale of the business. Landlord approved the assignment. (The Chancellor's findings use the terms "sublease" and "assign" apparently interchangeably, but the appeals court treats this event as an assignment.)

The assignment and sale of business, apparently, were silent as to the tanks. The Chancellor characterized the tanks as "abandoned" at this point. The Supreme Court characterized them as covered by the lease language quoted above, and therefore owned by Turner, as tenant.

Thirteen years later, landlord and Turner entered into a new lease that contained the same language with respect to ownership of the improvements to the property.

All during the time of Turner's occupancy, she dispensed gasoline from the tanks. The record shows that there was some spillage or leakage from the tanks, but it is not clear whether this occurred during Vickery's occupancy or Turner's.

Two years after entering into the new lease, Turner entered into a sale of business agreement with Langdon, whereby Langdon agreed to acquire the business, but specifically refused to take ownership of the tanks. The landlord consented to the assignment of the lease in connection with the sale of business to Langdon, but specifically noted that it was not the owner of the tanks, either.

Langdon continued to use the tanks to dispense gasoline.

Four years later, Langdon attempted to "sublease" [assign?] the property again in connection with a sale of the business. It was at this point that the landlord noted its requirement that either Langdon or the new proposed assignee take responsibility for the tanks.

The Chancellor, as noted, ruled both that the landlord owned the tanks, and could not recover for leakage from them, and that that the landlord's requirements on assignment were unreasonable, and imposed a $50,000 damages judgment upon landlord for interfering with the sale of the business. The Court of Appeals reversed, finding that the requirements were reasonable. It remanded on the counterclaim issue, as it determined that there was an inadequate basis upon which to reach a conclusion as to the ownership of the tanks, an issue relevant to the question of whether the landlord or tenant was liable for the existing damage.

On appeal from the Court of Appeals: held: Reversed. The Supreme Court agreed with the Court of Appeals that the issue of ownership should be remanded, but it also concluded that the question of ownership was central to the question of whether the conditions on assignment were reasonable. Therefore, it ruled that the Court of Appeals improperly rendered a judgment for the defendant landlord on that issue. It remanded the issue of damages as well as the issue of ownership.

The Supreme Court concurred that the record was incomplete with regard to the issue of ownership of the tanks.

Although the Court of Appeals had viewed the issue of who owned the tanks to be irrelevant to the question of whether the assignment requirements were reasonable, the Supreme Court concluded that the question was, in fact relevant. Mississippi law would impose liability on the landlord for spillage from the tanks if it owned them. Since the assignment conditions dealt with assumption of for spillage and for removal of the tanks, if necessary, the reasonableness of the conditions depended upon whether the landlord potentially would be liable for that spillage, and this question in turn depended upon ownership. In the view of the court, if indeed the landlord was liable under the statutes for the spillage from the tanks, and the current tenant was not, then the landlord would have been unreasonable in attempting to impose liability on the tenant or its assignee at the time of assignment.

The court stated that "it would be a valid argument that it not be commercially unreasonable for [landlord], the owners of the property to take steps to assure that the tenants or proposed tenants operate and maintain the underground storage tanks so as not to commit waste, something the tenants would be responsible for absent an agreement to the contrary."

The court doesn't really say so, but apparently concluded that the landlord's requirements on assignment in fact went beyond merely assuring that the tenant and assignees would properly maintain the tanks. Rather, it attempted to seek indemnification against and protection from liability for spillage that had already occurred and may not have been caused by the present tenant.

Several strong dissents took the view that the present record supported the conclusion that the landlords were attempting to write a new lease as a condition of the assignment something that clearly was unreasonable.

Comment 1: The majority opinion, particularly, is quite dense and difficult to penetrate. As indicated above, the Court makes much of the clause in the lease purporting to establish that the landlord did not own the tanks, even though the clause is a bit ambiguous on the point unless the tanks could be regarded as the "building" or were within the "building," and both these propositions are unlikely. But let us assume that indeed the lease did establish that the tenant, and not the landlord, owned the tanks.

Comment 2: If the lease said that the tenant owns the tanks, and the terms of the assignment provide that the tenant does not own the tanks, who owns them? Did the landlord, in approving the assignment generally, specifically approve the language of assignee's nonownership? It appears that the landlord likely knew of the issue, because it apparently insisted that the bill of sale from Turner to RubaDub, that stated the tanks were not transferred, also provide a statement that e landlord claimed not to own the tanks. This would have left the tanks in e ownership of Turner, who, in any event, indemnified RubaDub for any preexisting leakage and gave RubaDub permission to continue to use the tanks.

Because the court is remanding on the issue of ultimate ownership, we cannot assume at this juncture any conclusion as to whether RubaDub owned the tanks, any more than we can conclude that the landlord did not own them, even though the facts suggest strongly that the latter is the case.

Comment 3: The landlord's mistake was in permitting the assignment to RubaDub without dealing with the tanks issue at that time. Had it insisted on provisions of tenant liability at the time of the Turner/RubaDub assignment, it's case would have been far stronger. The landlord ought be able to require a tenant who has liability for potential waste in the form pollution to acknowledge liability prior to being given permission to assign. After the assignment, the assigning tenant will be gone, and rhaps beyond the reach of the landlord when the liability "comes to roost."

Comment 4: The landlord also would have been within its rights requiring RubaDub to acknowledge liability for spillage that occurred while RubaDub operated the tanks, whether or not RubaDub owned them. But the landlord's demand went beyond this.

If the case has any lesson to be gained, aside from the presentation of an interesting issue, it is that a landlord cannot impose new requirements on tenants as a condition for approving an assignment when the landlord has a duty to be reasonable. A further lesson is that a ground lessor should insist that the lease provide clearly that underground tanks belong to the tenant and the landlord should never permit an assignee to disclaim ownership of those tanks..

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