Opinion
No. 3-933 / 03-0128.
August 26, 2004.
Appeal from the Iowa District Court for Scott County, Nancy S. Tabor, Judge.
A defendant sublessee and its defendant guarantor appeal from a district court ruling that found the sublessee held over after termination of the sublease, and awarded plaintiff owner and plaintiff sublessor damages. AFFIRMED IN PART, REVERSED IN PART.
Thomas D. Waterman and Robert V.P. Waterman, Jr. of Lane Waterman, Davenport, and Hugh C. Griffin and Dale T. Miller of Lord, Bissell Brook, Chicago, Illinois, for appellants.
Joseph C. Creen of Bush, Motto, Creen Koury, PLC, Davenport, and William R. Skolnick of Skolnick Associates, P.A., Minneapolis, Minnesota, for appellees.
Heard by Zimmer, P.J., and Miller and Hecht, JJ.
Defendants Merchants Wholesale of Iowa, Inc. and its parent company and guarantor Merchants Wholesale, Inc., appeal following a district court judgment in favor of plaintiffs Nathan Lane Associates, L.L.P. and Marmax, Inc. The defendants assert the court erred in a number of particulars, including the determination that Merchants Wholesale of Iowa, Inc. was a holdover tenant under its sublease with Marmax, Inc., several aspects of its damages award to the plaintiffs, and the denial of the defendants' motion to amend the pleadings to conform to the evidence. Although we must vacate the district court's award of $50,000 for restoration expenses, we affirm the remainder of its judgment.
I. Background Facts and Proceedings.
Nathan Lane Associates, L.L.P. (Nathan Lane) and Marmax, Inc. (Marmax) are related entities and, respectively, the owner/lessor and lessee of a commercial building in Davenport. The building is a warehouse space that contains a large commercial freezer and, at the times relevant to this proceeding, a three-story racking and conveyor system attached to the building surfaces by bolts. Nathan Lane provided Marmax written authorization to sublease the property to Merchants Wholesale of Iowa, Inc. (Merchants Iowa). In December 1999 Marmax and Merchants Iowa entered into a one-year sublease. Merchants Iowa also leased with an option to purchase certain personal property located on the premises, including computers, office equipment, fork lifts, and the racking and conveyor system.
In December 2000 Marmax and Merchants Iowa entered into a new, one-year sublease. The sublease required, among other things, that Merchants Iowa maintain and make necessary repairs to all portions of the leased premises. At the same time the parties entered into a personal property purchase agreement (PPPA), wherein Merchants Iowa agreed to purchase for $460,000 the previously leased personal property. The sublease and the PPPA contained cross-default provisions, which provided that a default under either agreement constituted a default under the other. Merchants Iowa's parent company, Merchants Wholesale, Inc. (Merchants), provided a written guarantee for both the sublease and the PPPA.
The initial 1999 sublease and the 2000 sublease were each subject to a Freezer/Warehouse Commercial Lease governing portions of the building. The 1999 sublease was subject to a lease between Marmax and Thomas-Proestler Company, and the 2000 sublease to a lease between Marmax and Catch Up Logistics.
The sublease contained a provision allowing Merchants Iowa to terminate the leasehold early in the event it was financially unable to remain in business and provided that it had paid in full for the personal property subject to the PPPA. In March 2001, Merchants Iowa informed Marmax it wanted to exercise its right of early termination. After it was reminded it had to complete payment for the personal property, and sometime prior to April 20, 2001, Merchants Iowa paid the balance owed under the PPPA. On May 3, 2001, Merchants Iowa sent its formal ninety-day notice of its intent to terminate the lease, effective August 1, 2001. Merchants Iowa also requested a bill of sale for the personal property purchased under the PPPA. Although a bill of sale was prepared by the plaintiffs' attorney, LuAnn Petricka, it was never provided to Merchants Iowa.
Marmax responded to Merchants Iowa, through attorney Petricka, that the property purchased under the PPPA must be removed, and the building restored, on or before August 3. However, attorney Petricka further informed Merchants Iowa that they would not be allowed to remove the property until a number of issues had been addressed, including alleged defaults under the sublease. Although Merchants Iowa did address some issues, such as past-due rent, they failed to address all of Marmax's concerns. Specifically, Merchants Iowa failed to meet certain costs associated with maintenance and repair of the freezer system in the building, as required of Merchants Iowa under the sublease.
Although the notice of termination provided that the sublease would terminate on August 1, the parties appear to treat August 3 as the final day of the leasehold.
Despite the fact Marmax continued to insist that Merchants Iowa had no right to remove the property from the building until all the concerns had been addressed and defaults cured, Merchants Iowa removed some items of property subject to the PPPA, such as forklifts and office equipment, prior to the August 3 lease termination date. However, Merchants Iowa did not remove the attached racking and conveyor system. The system remained in the building as of August 4, 2001, at which time the plaintiffs repossessed the premises and changed the locks.
The plaintiffs filed suit in September 2001, alleging Merchants Iowa and Merchants, as guarantor, had breached the sublease by holding over, by failing to remove the personal property and restore the premises, and by failing to pay for repairs and maintenance. Merchants Iowa and Merchants claimed Marmax never conveyed title to the personal property. Merchants Iowa alternatively argued that to the extent it was required to remove the property, it was precluded from doing so because Marmax claimed an interest in the property, changed the locks on the warehouse, and otherwise blocked its access to the property.
In February 2002 the plaintiffs filed a motion for partial summary judgment, alleging that the defendants had failed to remove personal property from the premises, despite numerous demands, and requesting that the property be removed. In resistance the defendants "admit[ted] that their personal property remains on the premises owned by the Plaintiffs," but asserted that the plaintiffs had prevented them from removing the property. In April 2002 the court granted the motion, and ordered the parties to agree upon ownership of any remaining personal property, the defendants to remove the property and make necessary repairs to building, and the personal property to be sold at auction. The process of removal and sale was to begin within thirty days.
In August 2002 the defendants removed and sold some property, but neither removed nor sold the racking and conveyor system. In September 2002 the plaintiffs sought enforcement of the court's prior order, asking that they be allowed to physically remove any remaining equipment or machinery belonging to the defendants, and to assess the costs to the defendants. Concluding that "the defendants have tied up the disposition of the subleased property for approximately thirteen months," the court granted the plaintiffs' request. A supplemental request by the defendants for additional time to remove the property was denied by the court. The plaintiffs arranged for the removal of the racking and conveyor system in October 2002.
Following the November 2002 bench trial in this matter, the district court found the defendants were in default under the sublease and had held over after termination of the sublease. The court entered judgment in favor of the plaintiffs for $940,014.44. This amount included an award for double rent for the period of the holdover, pursuant to Iowa Code section 562.2 (2001).
The defendants appeal. They contend Merchants cannot be liable for failing to remove the personal property from the warehouse, as Marmax never transferred title to the property. Alternatively, they assert that even if they did hold over after the termination of the sublease, the double rent holdover penalty of Iowa Code section 562.2 should not be applied to this case. The defendants further contend the court erred in a number of other respects, including its determination that the plaintiffs adequately mitigated their damages, its computation of damages, and its denial of the defendants' motion to amend.
The defendants further assert that, since Marmax took the position prior to filing suit that Merchants Iowa could not remove the personal property from the warehouse, Marmax is estopped from claiming Merchants Iowa owned the personal property or was required to remove it. They forward alternate affirmative defenses of equitable estoppel and election of remedies. However, the district court did not rule on the equitable estoppel issue, and the defendants did not bring this omission to the court's attention via a post-ruling motion. Thus, error has not been preserved. See Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002). In addition, after reviewing both the election of remedies defense asserted in this matter, and the case law governing the election of remedies, we agree with the plaintiffs that the defendants cannot establish an election by Marmax to pursue self-help that was inconsistent with the relief requested in the petition. See Hartford-Carlisle Sav. Bank v. Van Zee, 569 N.W.2d 386, 389-90 (Iowa Ct.App. 1997) (outlining requirements for election of remedies, and noting that the "doctrine is designed to prevent double recovery for a single injury, not to prevent recourse to alternative remedies").
II. Scope and Standards of Review.
A review of the record indicates this matter was tried as an action at law. Accordingly, our scope of review is for the correction of errors at law. Iowa R. App. P. 6.4. The district court's findings of fact have the same effect as a jury verdict; they are binding upon this court so long as they are supported by substantial evidence. Grinnell Mut. Reins. Co. v. Voeltz, 431 N.W.2d 783, 785 (Iowa 1988). Evidence is substantial when a reasonable mind would accept it as adequate to reach the same findings. Id. Evidence is not insubstantial merely because it would have supported contrary inferences. Id. Decisions that rest in the sound discretion of the district court, such as the denial of a motion to amend the pleadings to conform to the proof, are reversed only upon a demonstrated abuse of discretion. Scott v. Grinnell Mut. Reins. Co., 653 N.W.2d 556, 561 (Iowa 2002).
III. Holdover Tenancy.
The defendants' primary argument in this appeal is that Merchants Iowa did not in fact hold over after the August 3 termination of the lease. They do not dispute that personal property subject to the PPPA remained in the building after the termination of their tenancy, that prior to the termination of the tenancy and up to and including the time of trial Merchants Iowa was in default of the sublease for failing to assure and meet the costs of certain maintenance and repairs, and that as a result it was also in default under the PPPA. The defendants contend, however, that Merchants Iowa was precluded from removing the personal property, specifically the racking and conveyor system, because Marmax never transferred title to the property. Like the district court, we cannot credit this argument.
Where, as here, delivery is to be made without physical movement of the goods, the passage of title is dependent upon the agreement of the parties. Iowa Code 554.2401(3). Delivery of a document of title is required to transfer title only if the seller is to deliver such a document. Id. § 554.2401(3)(a). Here, none of the property covered by the PPPA requires a valid document of title for its sale or purchase. However, the defendants assert such a document — a bill of sale — was required by the following language of the PPPA: "Title to the Personal Property shall not be transferred to Buyer or its assigns until payment in full of the above monies as set forth herein." They contend that, because a bill of sale was never provided, title to the property has never been transferred.
As the district court noted, use of the word "transferred" in the PPPA, rather than "vested," could indicate an intent that some form of actual or symbolic transfer occur beyond the mere payment of the purchase price. However, the quoted language stops far short of actually requiring a document of title. In addition, other language in the PPPA indicates that the parties intended title to vest in Merchants Iowa once the purchase price had been paid in full. Under the PPPA Merchants Iowa's obligation to seek consent of Marmax prior to removal of the personal property, to provide adequate insurance for the personal property, and to avoid the attachments of any liens or encumbrances to the personal property, were all tied to "payment in full" of the purchase price, and not the transfer of title.
We agree with the district court that the language regarding passage of title is ambiguous. Thus, the district court was free to look to not only the circumstances surrounding the agreement, but also other extrinsic evidence, in determining the parties' intent at the time of contracting. See Walsh v. Nelson, 622 N.W.2d 499, 503 (Iowa 2001).
Relying on evidence of the parties' dealings and their treatment and categorization of the personal property, the district court found that both the plaintiffs and the defendants acted as if title to the personal property under the PPPA had vested in Merchants Iowa upon final payment of the purchase price. Substantial evidence in the record supports this finding. It is clear that at all times prior to the filing of this action by the plaintiffs, Merchants Iowa took the position that it owned the property purchased under the PPPA. No evidence demonstrates this more clearly than the fact that Merchants Iowa removed easily portable personal property subject to the PPPA prior to the termination of the lease agreement. There is also evidence supporting the court's finding that Marmax too acted as if title vested upon payment.
We are mindful of Marmax's assertions, through attorney Petricka, that Merchants Iowa could not remove the property until certain conditions had been met, including the cure of defaults. However, demanding that Merchants Iowa not remove the property prior to the cure of default is not necessarily inconsistent with the vesting of title at the time of payment. The PPPA placed no limits or proscriptions on Marmax's right to retake possession of the personal property in the event Merchants Iowa was in default of the sublease, and therefore in default of the PPPA. The substantial majority of the plaintiffs' actions indicated or were consistent with an intent that title would transfer upon payment in full.
The PPPA stated, in relevant part:
D. Provided Buyer is not in default of any of its agreements herein, Seller will not remove or otherwise retake possession of said Personal Property.
. . . .
Any one of the following events shall constitute a default by Buyer: . . . breaches or violations of any of the terms and condition of the Sublease Agreement . . . . .
Although at one point attorney Petricka did assert that Merchants Iowa did not have title to the personal property because it had yet to be transferred by Marmax, she explained at trial that the "overly aggressive" statement arose from "frustration" over the situation, and was an attempt to "get [Merchant Iowa's] attention."
We agree with the district court that under the totality of the evidence title did in fact pass to Merchants Iowa at the time the purchase price was paid in full.
The defendants argue that merely leaving personal property in the warehouse is insufficient to create a holdover tenancy, and that in any event there could be no holdover tenancy subsequent to August 4, the date the plaintiffs exercised "self-help" by locking Merchants Iowa out of the warehouse. The defendants assert that they could not have removed the racking and conveyor system from the warehouse after that date as they had no reason to believe Marmax would have granted them access, as Marmax continued to assert that Merchants Iowa could not remove the system until defaults had been addressed and surety given for any damage to the leasehold caused by the property's removal. While the defendants' argument does have some appeal, we conclude substantial evidence in the record demonstrates that Merchants Iowa held over after the expiration of the sublease, up to the removal of the racking and conveyor system in October 2002.
Leaving property on premises may constitute a holding over by the tenant. 52 C.J.S. Landlord and Tenant § 109, at 171 (2003). Whether it does in fact constitute a holding over is a question of fact to be determined in light of all the surrounding circumstances. Id. In this instance, the property in question is not insubstantial, nor of necessary benefit to a future tenant. Rather, there was evidence that this massive system took up significant space in the building, and was in fact a hindrance, rather than an asset, in re-letting the premises. Substantial evidence supports the conclusion that by leaving the property in the building, even though it no longer held physical possession of the building, Merchants Iowa held over after the expiration of the lease term.
The defendants seek to limit this holdover to a period of one day, asserting that by changing the locks on August 4 Marmax in fact divested Merchants Iowa of any possessory right in the personal property. However, a rightful reentry and repossession of the leasehold does not constitute a conversion of the tenant's personal property. 52A C.J.S. Landlord and Tenant § 717, at 82; see also 49 Am.Jur.2d Landlord and Tenant § 353, at 315 (1995) ("A tenant who without the consent of the landlord retains possession of part of the premises must be considered as holding over as to all."). Nor does a demand that the tenant provide some surety against injury to the leasehold prior to removal of the property. 52A C.J.S. Landlord and Tenant § 717, at 83. Moreover, there is substantial evidence in the record that Marmax would have granted access to the warehouse if it had in fact been requested.
The defendants nevertheless assert that Marmax would not have allowed Merchants Iowa to remove the personal property, as it continued to insist that Merchants Iowa cure its default under the sublease, by reimbursing Marmax for sums expended on maintenance and freezer repairs. This argument would be more persuasive if there were some real question as to whether Merchants Iowa was in fact in default under the sublease. However, the defendants stipulated at trial that they were responsible for the freezer repairs incurred up to August 3, 2001, and the duties of maintenance and repair are ones indisputably belonging to Merchants Iowa under the sublease. These duties continued during the term of a holdover tenancy. See Restatement (Second) of Property: Landlord and Tenant § 14.7, cmt. b (1977) ("The responsibilities of the tenant who improperly holds over will in every case remain as great as they were under the original lease.").
Moreover, substantial evidence in the record supports the conclusion that, rather than actually believing it was prevented from removing the racking and conveyor system, Merchants Iowa made a conscious decision to leave the racking and conveyor system in the warehouse. Perhaps most significant in this regard is the fact that, without regard to Marmax's demands, Merchants Iowa removed other personal property purchased under the PPPA prior to the termination of the sublease. In addition, statements by agents of the defendants indicated Merchants Iowa found the $30,000 to $50,000 expense of the removing the system to be cost prohibitive, and that in any event Merchants Iowa preferred to leave the system intact in order to maximize profit from its eventual sale. Finally, the court cannot ignore Merchants Iowa's failure to cooperate in the removal of the racking and conveyor system, even after being ordered to do so by the district court.
The district court did not err in finding a holdover tenancy from the period of August 2001 through October 2002.
IV. Double Rent.
The defendants' primary complaint regarding the damages awarded by the district court is the fact that the court awarded double rent for the entire holdover period. The basis for the award is Iowa Code section 562.2, which provides:
A tenant serving notice of intention to quit leased premises at a time named, and holding over after the time, and a tenant or the tenant's assignee willfully holding over after the term, and after notice to quit, shall pay double the rental value of the leased premises during the time the tenant holds over to the person entitled to the rent.
The defendants assert that section 562.2 requires proof that Merchants Iowa willfully held over following termination of the sublease, and that the record does not establish willfulness on the part of Merchants Iowa. We need not decide whether substantial evidence in the record would support a finding of willfulness, as a plain reading of the statute demonstrates that willfulness is only required if a tenant holds over after receiving a notice of termination from the landlord. Where, as here, the tenant sends a notice of intent to quit at a specific time, the statute requires only that the tenant hold over after that time. Id.; see also Leslie Pontiac, Inc. v. Novak, 202 N.W.2d 114, 117 (Iowa 1972).
The question we must answer is whether it is appropriate to apply the statute in this case. In Leslie Pontiac, Inc. v. Novak, 202 N.W.2d 114, 117 (Iowa 1972), our supreme court determined that section 562.2 was a penal statute, to be strictly construed, and not to be extended beyond its terms or the evil it seeks to remedy. Thus, the court concluded the statute should not be applied in "doubtful cases." Leslie Pontiac, 202 N.W.2d at 117. The court concluded that Leslie Pontiac was such a doubtful case, given that the landlord "induced" the holding over by the tenant car dealership. Id.
The decision in Leslie Pontiac turned on the fact that, just days prior to the end of the lease agreement, the landlord obtained an injunction that precluded the tenant from removing certain property and improvements from the leasehold. Id. at 115, 117. Accordingly, after the injunction issued the tenant did not vacate the premises, but rather remained in possession until trial. Id. at 115. The court concluded that, but for the landlord's action, the tenant would have peaceably and timely vacated the premises, and that the landlord in effect nullified the tenant's notice to quit. Id. at 117.
The defendants assert that the plaintiffs' actions in this case, demanding that Merchants Iowa cure its defaults and address certain other concerns prior to removal of the property, are tantamount to the injunction in Leslie Pontiac. However, there are distinct differences between this matter, and the facts occurring in Leslie Pontiac. There, the evidence indicated that the landlord's actions prevented the tenant from exercising certain justiciable rights, and that but for the injunction the tenant would have timely and fully surrendered the premises. Here, there is substantial evidence in the record that the defendants left personal property in the warehouse, not because the plaintiffs prevented them from removing it, but because they simply chose not to remove it. Moreover, the plaintiffs' demands extended only to those obligations the defendants were clearly bound to perform under the lease. We find no error in the court's award of double rent under section 562.2.
V. Mitigation.
The defendants assert that the plaintiffs failed to mitigate their damages. They do not claim that the plaintiffs failed to use reasonable diligence in re-letting the premises. See Finish Line, Inc. v. Jakobitz, 557 N.W.2d 914, 915 (Iowa Ct.App. 1996) (citation omitted) ("When a lessee abandons leased premises prior to the termination of the lease, the landlord has a duty to mitigate damages by using reasonable diligence to relet the property at the best obtainable rent."). In fact, there is substantial evidence in the record that the plaintiffs were reasonably diligent in their attempts to re-let the building.
Rather, the defendants seem to rely on general principles of mitigation, to assert that "reasonable diligence" required the plaintiffs to remove the defendants' property. See R.E.T. Corp. v. Frank Paxton Co., Inc., 329 N.W.2d 416, 422 (Iowa 1983) (defining duty to mitigate in context of breach of contract). This argument, however, seems to ignore the basic character of a holdover tenancy. The very fact that Merchants Iowa improperly held over after expiration of the lease term entitled Marmax to recover compensation for Merchants Iowa's use and occupancy of the building based on the prior rental rate, and required Merchants Iowa to meet its obligations under the former lease, until such time as the holdover tenancy ended. See Restatement (Second) of Property: Landlord and Tenant, §§ 14.5, .7. While a landlord does have a duty to reasonably mitigate any "special damages," see id. § 14.6, we see no evidence that any such damages were awarded in this matter.
Moreover, we find no error in the district court's implicit determination that reasonable diligence would not, in any event, require the plaintiffs to expend $35,000, the eventual cost to remove the racking and conveyor system from the premises. Regardless of the amount of damages the plaintiffs eventually recovered, the costs of removal were not insubstantial.
VI. Remaining Issues.
The defendants have raised several other claims. We have considered those claims and, with one exception, find them to be unsupported or without merit. In particular, we conclude the district court did not abuse its discretion when it denied the defendants' motion to amend their pleadings to conform to the proof, a motion that was made some fourteen months after the filing of the petition and more than two weeks after the end of trial. The amendment would have added a counterclaim by Merchants Iowa for rescission of the PPPA. Such an amendment would not have, as the defendants suggest, merely formalized an issue tried by consent; rather, it would have added a new and materially distinct issue to the case. See Scott v. Grinnell Mut. Reins. Co., 653 N.W.2d 556, 561 (Iowa 2002) ("The crucial question is whether the amendment substantially changed the issues before the court.").
However, we agree with the defendants that the district court erred in awarding the plaintiffs $50,000 as the estimated cost of restoring the building following removal of the racking and conveyor system. The record reveals that an individual contracted to perform and was paid, by the defendants, for not only the removal of the racking and conveyor system, but the restoration of the premises, and that by the time of trial the removal and restoration was at least largely complete. Moreover, even if the record had been silent as to restoration work on the building, there was no reasonable basis from which cost of restoration could be estimated. See Field v. Palmer, 592 N.W.2d 347, 353 (Iowa 1999) (requiring the record to contain a reasonable basis from which the amount of damages can be approximated).
The only evidence the plaintiffs offered as to the costs of restoration was the following testimony from attorney Petricka:
Q. . . . There's . . . another item on the first page, and that's restoration of premises, estimated, $50,000. A. Correct.
. . . .
Q. Where did you obtain it, if you remember? A. . . . I have . . . a number of developer clients, but one in particular had a similar situation, and I was trying to go off of that estimate.
Q. But you never actually received an estimate to restore the premises here in Davenport at the facility in this litigation. A. No, I did not.
This testimony is speculative, at best. As such, it was error for the district court to award the plaintiffs damages for the restoration of the building. See Jamison v. Knosby, 423 N.W.2d 2, 6 (Iowa 1988).
VII. Conclusion.
The district court's conclusion that Merchants Iowa was a holdover tenant between August 2001 and October 2002 is supported by substantial evidence and consistent with Iowa law. We reach the same conclusion in regard to the court's award to the plaintiffs of $890,014.44 in damages, representing double rent for the holdover period, as well as certain expenses. However, we vacate the district court's award of $50,000 in restoration costs.
Although double rent and expenses for 2001 and 2002 amounted to $1,149,932.12, the defendants received a $242,916.49 credit for freezer rent, and a $16,101.19 credit for a tax stamp refund.
Costs on appeal are taxed three-fourths to appellants Merchants Wholesale of Iowa, Inc. and Merchants Wholesale, Inc., and one-fourth to appellees Nathan Lane Associates, L.L.P. and Marmax, Inc.