RIVERBEND INVESTORS V GREG SMITH
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STATE OF MICHIGAN
COURT OF APPEALS
RIVERBEND INVESTORS,
FOR PUBLICATION
February 14, 2003
9:00 a.m.
Plaintiff-Appellee,
No. 234633
Ottawa County Circuit Court
LC No. 99-033403-CK
v
PROGRESSIVE SURFACE PREPARATION,
LLC,
Defendant-Appellant.
Updated Copy
April 25, 2003
Before: Sawyer, P.J., and Jansen and Donofrio, JJ.
DONOFRIO, J.
Defendant, Progressive Surface Preparation, LLC, appeals from a judgment entered for
plaintiff, Riverbend Investors. The case was submitted to the trial court for decision on
stipulated facts, briefs of law, and oral argument. Before submission to the trial court, plaintiff
voluntarily dismissed with prejudice its claim against Sandra J. Smith. The trial court by written
opinion found for plaintiff against defendant and dismissed the plaintiff 's claim with respect to
Greg Smith. No further appeal has been taken.
Inasmuch as the matter was submitted for decision on stipulated facts, the circuit court
rendered its determination as if on cross-motions for summary disposition as a matter of law.
We therefore will review the trial court's grant or denial of summary disposition de novo. Spiek
v Dep't of Transportation, 456 Mich 331, 337; 572 NW2d 201 (1998). We reverse and remand.
Plaintiff 's action is for unpaid rent, taxes, and insurance at the Hudsonville Industrial
Center (hereafter the "property") under a claimed lease with defendant. On September 22, 1990,
plaintiff entered into a lease on the property with Greg Smith and his then business partner Brian
Shoup, a nonparty. The initial lease was for a term of one year, subject to automatic renewals,
and called for monthly rent, including an annual increase pursuant to the Consumer Price Index,
and the payment of taxes and insurance.
Smith and Shoup were the owners of Marings Polishing and Buffing, Inc. Marings
operated out of the property until 1992 and made all payments due under the lease to Riverbend
until successor companies took possession of the property. However, plaintiff continued to
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communicate with Smith at Marings about the property annually through 1998, advising of the
base rent, rent increase, and new base rent. Successor occupants of the property, for whom
Smith was an employee, made rent and ancillary payments through December 22, 1998.
On June 2, 1998, defendant, through Greg Smith, notified plaintiff in writing that
defendant would vacate the property in December 1998 and pay rent to plaintiff through
December 22, 1998. On June 9, 1998, plaintiff, writing to Smith at defendant, rejected the letter
of termination and insisted, by virtue of the renewal clause of the lease, that termination would
not be effective until September 22, 1999. With respect to the duration of the tenancy, the lease
provided that "[t]he lease will be renewed for annual periods on each anniversary of the
commencement date unless Tenant gives Landlord written notice at least six (6) months prior to
the then current expiration date."
Six months before the current expiration date was March 21 of the renewal year. During
the interim dates of September 22, 1990, the date of lease inception, and December 22, 1998, the
last date of payment of rent, three entities, Marings, Specialized Metal Finishing, Inc. (SMF),
and defendant occupied the property. SMF acquired the assets of Marings in 1992 when
Marings became financially distressed. SMF hired Smith and continued with operations at the
property until April 1997, when it experienced financial distress. SMF then surrendered its
assets to its primary secured creditor, a bank. The bank sold some of the acquired assets to
defendant, who hired Smith as an employee-manager of the company and took possession of the
property. All rent and ancillary payments during the referenced period have been made to
plaintiff by the occupying entities and not by Smith. No documents of assumption or assignment
have been entertained between any of the parties or entities concerning the property. The only
writings referencing the leasehold estate are eight annual rental increase letters to Smith at
Marings, the termination letter by Smith at defendant, and the plaintiff 's letter of rejection of the
date of effective termination to Smith at defendant.
In 1993, Smith and his wife underwent a personal bankruptcy and failed to list plaintiff as
a creditor. They were adjudged bankrupt on March 4, 1994. On December 23, 1998, the Smiths
filed a motion to conditionally reopen the bankruptcy case to include plaintiff. Plaintiff did not
object to the reopening of the bankruptcy case and any debt to the plaintiff was discharged. With
respect to bankruptcy, the lease provides:
If following the filing of a petition by or against Tenant under the
provisions of the Bankruptcy Code . . . Landlord shall not be permitted to
terminate this Lease as provided above, then Tenant . . . agrees promptly within
no more than fifteen (15) days upon request by Landlord to assume or reject this
Lease . . . . Landlord shall thereupon [the rejection of the lease after filing of
bankruptcy] immediately be entitled to possession of the Property without further
obligation to Tenant or the Trustee, and this Lease shall be terminated . . . .
Plaintiff attempted without success to rent out the property during the period from December 22,
1998, to September 22, 1999. The amount of damages claimed was not in dispute.
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Under the stipulated facts, the trial court found that the conduct of the parties created a
privity of estate and held defendant liable to plaintiff for the lease payments under the lease to
the property as an assignee of Smith. The trial court further found Smith's obligation under the
lease contract to plaintiff discharged in bankruptcy and vitiated under the bankruptcy terms of
the lease. The trial court directed judgment for Smith.
On appeal, defendant contends that the trial court erred in finding an assignment of the
lease from Smith to defendant rather than finding the tenancy to be on a month-to-month basis
and subject to the proffered termination.
Defendant first argues that the lease between Smith and plaintiff was terminated
automatically, and therefore not subject to assignment to defendant, by the bankruptcy terms of
the lease when Smith first filed for bankruptcy in 1993, or at least when the petition to reopen the
bankruptcy case was filed on December 23, 1998, to include plaintiff as an omitted creditor to
discharge any debt. The argument must fail because, first, plaintiff was neither noticed as a
creditor nor made a party to the proceedings to discharge. Second, Smith continued to hold over
in possession of the property after both the filing and the discharge in bankruptcy. Third, the
termination under the lease bankruptcy provision was not automatic. Plaintiff did not request
assumption or rejection of the lease and therefore, in the absence of such request and rejection,
"shall not be permitted to terminate this lease." Finally, Smith's rejection was not made manifest
until the filing of the motion to reopen the bankruptcy case on December 23, 1998, to discharge
the claims of plaintiff. Thereafter, the lease with respect to Smith was terminated. Defendant
argues, without support, that the termination of Smith's lease vitiates any lease interest of
defendant in the property. A party may not announce a position, offer no support for the
proposition, and then leave it to the Court to analyze and advance the proposition. Wilson v
Taylor, 457 Mich 232, 243; 577 NW2d 100 (1998); Silver Creek Twp v Corso, 246 Mich App
94, 99; 631 NW2d 346 (2001).
Defendant next argues that in the absence of a formal assignment between the parties,
monthly payments submitted to plaintiff, without an agreement to assume the obligations of the
original tenants under the terms of the lease, constitutes nothing more than a month-to-month
lease. Defendant argues that because the arrangement was month to month, defendant was
required to only provide one month's notice of its intent to terminate its leasehold interest. MCL
554.134(1); Gurunian v Grossman, 331 Mich 412, 418; 49 NW2d 354 (1951). Defendant further
claims that its notice of termination to plaintiff was sufficient to terminate the leasehold estate
and eliminate defendant's obligation to pay rent after it vacated the premises pursuant to its
notice to plaintiff.
Under the stipulated facts, the trial court found that the conduct of the parties created a
privity of estate and held defendant liable to plaintiff for the lease payments under the lease to
the Property as an assignee of Smith. The trial court stated:
Although there is no written assignment from Smith to Progressive the
latter took over the estate of the leased premises, occupied the premises, paid the
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rent, taxes and insurance and a privity of estate was created between the lessor
and assignee and must be accepted by the assignee.
* * *
Although Progressive correctly argues there is no privity of contract
between it and plaintiff, nevertheless by operation of the law the conduct of the
parties did create a privity of estate.
For purposes of this appeal the parties do not challenge the finding of an absence of a
privity of contract between plaintiff and defendant.
Defendant challenges the trial court's finding of an assignment of the obligation of the
terms of renewal of the lease, not the rent obligation during its possession, from Smith to itself.
Defendant further challenges the term of tenancy obligation imposed by the trial court in
applying a privity of estate.
Paragraph 13 of the lease as incorporated into the Stipulated Statement of Facts provides:
Tenant may not assign this Lease. The sale, issuance, or transfer of any
voting capital stock of Tenant which results in a change in the voting control of
Tenant shall be deemed to be an assignment of this Lease which requires the
Landlord's prior written consent under this Paragraph 13. Tenant will be
subleasing. [Emphasis added.]
The terms of the plaintiff 's lease with Smith anticipated that possession of the property may be
in someone other than Smith when it provides, "[t]enant will be subleasing." Further, the lease
precludes an assignment of the lease to another tenant without the consent of the landlord.
Whether the legal relationship of the parties is by sublease or by assignment is significant
with respect to the rights and liabilities of each. In Weatherwax Investment Co v PPG Industries,
Inc, 43 Mich App 546; 204 NW2d 353 (1972), the plaintiff landlord sought a declaratory
judgment to determine renewal option rights under a lease. That case, like this one, was
submitted to the trial court on stipulated facts and briefs. The landlord had entered into a lease
with the Smith-Winchester Company for two of its units in a shopping center. The lease
provided the opportunity for assignment and subletting of the premises with the consent of the
landlord. Smith-Winchester fell into difficulties and sought relief under the lease. Thereafter,
the landlord, Smith-Winchester, and the defendant, PPG, entered into a three-party written
agreement wherein the defendant was substituted for Smith-Winchester as lessee of the east half
of the premises under the prior lease for the remainder of the term. Under this agreement, the
defendant was to pay rent directly to the plaintiff, and '"assume directly with [plaintiff] the
obligations of lessee under the lease."' Id., 548. After taking possession, the defendant sought to
invoke the renewal clause of its predecessor's lease. The plaintiff objected on the basis that the
three-party agreement was a subletting, the agreement recited that the lease was still binding and
in effect with respect to Smith-Winchester, and that it agreed '"to accept Pittsburgh as substitute
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lessee . . . without releasing Smith-Winchester from its underlying obligations to pay full rent."'
Id. The plaintiff claimed that the right to renewal of the lease was vested in Smith-Winchester,
and not with the defendant. The Court found the position of the plaintiff strained the operative
provision of the agreement that required the defendant to assume the position of lessee and the
plaintiff to assume the position of lessor. The Court further found that the transfer constituted an
assignment vesting the defendant with renewal rights.
In the instant case, the stipulated facts reveal that other than the payment of rent as
established by the landlord with notice to Smith at Marings, there were no communications,
writings, or agreements between plaintiff and defendant concerning the lease or the obligations
thereunder. Each year, before the anniversary of the Smith lease, plaintiff notified Smith, eight
consecutive times, of the rental increase. Clearly, the lease payments were always made by the
entity in possession and accepted by plaintiff. These factors together with the fact that the lease
precluded assignments, but allowed nonconsensual subleasing, suggest that plaintiff intended
that the status of defendant be that of a sublessee rather than an assignee. We must conclude that
defendant was a sublessee to Smith taking possession of the property under Smith's authority and
not from the landlord.
Defendant further challenges the trial court's imputation to defendant of the renewal
period under the theory of privity of estate. That imputation, however, was predicated on the
finding of an assignment. Possession of property alone may create a privity of estate. However,
a privity of estate obligates the possessor to perform only those covenants that run with the land.
The covenant to pay rent runs with the land. Buhl Land Co v Franklin Co, 258 Mich 377, 379;
242 NW2d 772 (1932). In Buhl, the defendant was an assignee of a lessee without the express
consent of the lessor. The lessor accepted rent for several years from defendant. After default,
the lessor commenced suit to recover rent, ancillary costs such as remodeling, and to impose a
lien against the personal property of the defendant under the terms of the lease. The court ruled
that the defendant was obligated to the plaintiff for the payment of rent for its possession of the
premises. However, the defendant was not obligated to the plaintiff for the remodeling costs
owed under the lease. Further, the plaintiff was not entitled to assert its lien rights under the
lease against the defendant. The court reasoned that with respect to the claim for remodeling
costs, none was owed in the absence of privity of contract. Therefore, with respect to the
plaintiff 's right to assert a lien on personal property as provided in the lease, such claim must
similarly fail because the defendant was obligated by privity of estate, and not by privity of
contract. Id., 380-381.
A similar result was reached in George Realty Co v Gulf Refining Co, 275 Mich 442; 266
NW 411 (1936). The plaintiff sought to recover rent from the defendant. The defendant was the
assignee of a lessee's lease with the plaintiff. The lease contained no restrictions against
assignment and declared the lease binding upon assigns. During its possession, the defendant
performed its obligations under the lease. The defendant assigned the lease to another who
accepted the assignment and went into possession of the property and failed to pay rent. It was
the plaintiff 's contention that the assignment to, and the accompanying assumption of the lease
by, the defendant rendered the defendant directly liable to the plaintiff for the balance of the
term. The defendant allowed that the transaction resulted in privity of estate between the parties
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and not privity of contract so that the defendant's liability to the plaintiff continued only while it
was in possession of the premises. Upon the defendant's assignment to another, its liability to
the plaintiff ceased. The Court stated:
In order to create privity of contract in the case at bar there must have
been a mutual agreement by the plaintiff, defendant, and [defendant's assignor] . .
. . We do not think . . . the agreement establishes plaintiff 's theory as plaintiff
company was not a party to it. [Id., 449.]
The Court continued:
We think the instant case is governed by Tapert v Schultz, 252 Mich 39
[232 NW 701 (1930)], where we held that vendors may not maintain an action at
law against vendee's assignee for payments due under a land contract, even
though the assignee agreed with the vendee to perform the terms of the contract,
as there was no privity of contract between the assignee and vendors. [Id., 450.]
The Court concluded:
We fail to find from our examination of the record where the defendant
has promised the plaintiff that it would perform under the lease. Mere payment of
rent does not establish such a promise to perform and we agree with the trial court
that the evidence does not show that the defendant corporation assumed the
obligations of the Paragon Refining Company of Michigan under the lease and
that the assignment by defendant corporation to McCausland terminated its privity
of estate and all further liability for rent under the lease. [Id., 451.]
Here, the trial court found the transaction between defendant and Smith created a privity
of estate, and not a privity of contract. Our review of the record leads us to the same conclusion.
However, we find that the trial court's reliance on Buhl, supra, for its holding is a
misinterpretation of Buhl and its progeny. Because neither an assignment existed between
defendant and plaintiff, nor was a privity of contract created, defendant's obligation for rent
ceased upon vacating the property.
We reverse and remand to the trial court for dismissal. We do not retain jurisdiction.
/s/ Pat M. Donofrio
/s/ David H. Sawyer
/s/ Kathleen Jansen
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