1963 Jackson, Inc. v. Lloyd De Vos
2013 Tenn. App. LEXIS 750
| Tenn. Ct. App. | 2013Background
- Long-term ground lease (1967, modified 1985) for a 205-room hotel; lessee must maintain premises and replace furnishings but annual MRR spending capped at 5% of gross room rentals (5% cap). 1963 Jackson became lessee in 2009 after bank foreclosure and hired Ocean Hospitality to manage the hotel.
- In Feb 2010 1963 Jackson contracted to assign the lease to the Morgan Group for $850,000; lease required lessor’s written consent which could not be unreasonably withheld or delayed.
- Lessor De Vos sent a March 26, 2010 notice alleging multiple defaults (including failure to maintain/replace furnishings), then a May 31, 2010 termination letter alleging additional defects and “waste”; he refused to consent to the assignment and later negotiated separately to sell the property.
- 1963 Jackson disputed default, made substantial post-notice repairs and MRR expenditures, continued paying rent, and sued for declaratory relief and damages for wrongful termination and for unreasonable withholding of assignment consent.
- Trial court found no lease breach, held De Vos unreasonably withheld consent to the assignment, and awarded $150,000 to 1963 Jackson; appellate court affirms on breach, notice, consent and evidentiary issues but reverses the damages award.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether lessee committed waste / breached maintenance/furnishing covenants | 1963 Jackson: conditions were commercially reasonable, many rooms intentionally taken out of service due to low demand; expenditures exceeded the 5% cap and no waste existed on termination date | De Vos: conditions (unrentable rooms, stripped annex, low occupancy, damaged fixtures) amounted to waste and breach; 5% cap doesn’t shield against waste | Court: No waste; expert testimony showed taking rooms out of service was commercially reasonable; no breach on these grounds affirmed |
| Whether the March 26 Notice put lessee on notice of waste/default | 1963 Jackson: March 26 letter did not allege waste; thus termination for waste was ineffective | De Vos: March 26 letter reasonably put lessee on notice of waste even if word not used | Held: March 26 letter did not sufficiently notify of waste; termination for waste (May 31) was ineffective because notice procedures for forfeiture were not followed |
| Whether De Vos unreasonably withheld consent to assignment to Morgan Group | 1963 Jackson: Morgan Group’s principals were financially responsible and offered personal guarantees; De Vos’s additional demands were unreasonable and sought extra economic concessions | De Vos: Morgan Group was a shell with no management history; requested reasonable vetting (plans, budgets, guarantees, liquidity, appraisals) to protect rent expectations | Held: Withholding consent was unreasonable; financial information and personal guarantees made the Morgan Group commercially acceptable; De Vos impermissibly sought extra economic concessions; affirmed |
| Whether damages award of $150,000 to 1963 Jackson was proper | 1963 Jackson: lost $150,000 because assignment fell through and subsequent sale to Morgan Group closed at $700,000 vs $850,000 deal | De Vos: 1963 Jackson suffered no loss; U.S. Bank (owner of 1963 Jackson) incurred the loss, and Morgan Group actually benefitted | Held: Reversed — the $150,000 loss was suffered by U.S. Bank/Morgan Group, not 1963 Jackson; trial court’s compensatory award to 1963 Jackson vacated |
Key Cases Cited
- Chapman Drug Co. v. Chapman, 341 S.W.2d 392 (Tenn. 1960) (defines waste as unreasonable use or omission causing substantial injury)
- Thompson v. Thompson, 332 S.W.2d 221 (Tenn. 1960) (waste requires lasting damage or diminution in value)
- Brummitt Tire Co. v. Sinclair Refining Co., 75 S.W.2d 1022 (Tenn. Ct. App. 1934) (assignee steps into assignor’s shoes and is liable on covenants running with the land)
- First Am. Bank of Nashville v. Woods, 781 S.W.2d 588 (Tenn. Ct. App. 1989) (reasonableness of withholding consent judged by commercial standard and financial responsibility of proposed assignee)
- Dick Broadcasting Co. v. Oak Ridge FM, 395 S.W.3d 653 (Tenn. 2013) (contracts governed by good faith and commercial reasonableness principles)