13
NINE TENNESSEE COMMERCIAL
LEASING ISSUES
BROOKS R. SMITH
*
, PETER C. SALES
**
AND FRANKIE SPERO
***
Any transactional lawyer in Tennessee has clients, whether
landlords, tenants, or lenders, who require assistance in the evaluation,
drafting, and negotiating of commercial leases. In this article we intend
to emphasize a few of the unique leasing issues attorneys may face in
Tennessee. We specifically do not address the Uniform Residential
Landlord and Tenant Act, which can be found in the Tennessee Code.
1
Most leasing lawyers have a variety of forms that they will use to
create a first draft of the lease matching the letter of intent or notes from
discussions with their client. The problem with these forms of leases is
that they are often not updated to conform to changes in the law,
custom, or practice. Or worse, at times these standard forms are
negotiated forms and thus not a true "form" at all but one that includes
pro-landlord or pro-tenant concessions. These concessions are often
slight and therefore potentially not properly identified. Thus, the control
of the initial draft can be crucially important to the client. Most landlords
have a standard form lease,
2
but in the event there is none, a tenant may
have an opportunity to even the playing field, so to speak.
In fairness, depending on the relative size of the lease, it may not
be practical to address every issue or risk in a lease. It would not make
much sense for a tenant to spend months' worth of rent in attorneys'
fees negotiating a small lease. Accordingly, we include here a few
commercial lease specific issues that can cause problems, and provide
some general suggestive provisions.
*
Partner, Bradley Arant Boult Cummings LLP; Adjunct Professor of Law, Belmont
University Law School; B.A., Sewanee, The University of the South, 1993; J.D.,
University of Tennessee College of Law, 1996.
**
Partner, Bradley Arant Boult Cummings LLP; B.A., Duke University, 1994; J.D.,
University of Florida Levin College of Law, 2001.
***
Associate, Bradley Arant Boult Cummings LLP; B.S., University of Tennessee,
Chattanooga, 2007; J.D., University of Memphis School of Law, 2010.
1
TENN. CODE ANN. §§ 66-28-101 to -521.
2
In fact, most reasonably sophisticated lenders will require a form of lease be included
within their loan documentation diligence.
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The relevant conclusion of our review of Tennessee law is that
the courts defer to the parties and to the writing incorporated within the
lease agreement. Words are given their ordinary and customary usage:
mean what you say and say what you mean.
Caveat Habitator or Tenant Beware
Absent fraudulent statements to the contrary made by the
landlord, specific misrepresentations as to relevant conditions of the
leased premises, or the express assumption of responsibility and duty to
repair by a landlord, a landlord generally has no obligation to repair the
leased premises in Tennessee.
3
The Tennessee Supreme Court has held
that, "in the ordinary contract of letting, it does not imply any warranty
on the part of the landlord that the leased premises are in a safe and
habitable condition, since the tenant ordinarily has it in his power to
inspect the premises, and so accepts them at his own risk."
4
Over 110
years later, the Court of Appeals affirmed this concept even when the
landlord, regarding a leaky roof, said that she would talk about fixing the
leaky roof in the second year of the lease.
5
However, stating the general
rule, "in the absence of an express agreement, a landlord is not obligated
to repair or to keep in repair a leased building."
6
From the tenant's perspective, a suggested provision might look
like the following. However, specific issues should be addressed carefully
and clearly.
CONDITION OF PREMISES. Notwithstanding
anything to the contrary herein contained, at the time
possession is delivered to Tenant, the Premises shall
comply with all laws, rules, regulations, orders,
ordinances, and requirements of all federal, state, and
municipal government departments, commissions,
3
C.F. Prop., LLC v. Scott, No. E2010-01981-COA-R3-CV, 2011 WL 4446995, at *1
(Tenn. Ct. App. 2011) (citing Evco Corp. v. Ross, 528 S.W.2d 20, 23 (Tenn. 1975);
Boyd v. McCarty, 222 S.W. 528, 529 (Tenn. 1920); Gooch-Edenton Hardware Co. v.
Long, 69 S.W.2d 254, 257 (Tenn. Ct. App. 1933)).
4
Schmalzreid v. White, 36 S.W. 393, 394 (Tenn. 1896).
5
C.F. Prop., No. E2010-01981-COA-R3-CV, 2011 WL 4446995, at *1.
6
C.F. Prop., No. E2010-01981-COA-R3-C, 2011 WL 4446995, at *4-5; see also, EVCO
Corp. v. Ross, 528 S.W.2d 20, 23-24 (Tenn. 1975).
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 15
boards, and officers, and all orders, rules, and
regulations of the National Board of Fire Underwriters,
the local Board of Fire Underwriters, or any other
agency or agencies, body or bodies exercising similar
functions that may be applicable to the Premises,
including but not limited to, compliance with all
building, fire and electrical codes required for Tenant’s
contemplated use of the Premises as set forth in this
Lease, and compliance with all federal and state
environmental laws. Landlord’s obligations under this
provision shall survive Tenant’s acceptance of the
Premises.
Constructive Eviction
Under Tennessee law, constructive eviction of a commercial
tenant
[M]ay arise from the improper conduct of the landlord
in interfering with the beneficial enjoyment of the
premises by threats of expulsion, attempts to lease the
premises to others, or unreasonable demands, insults, or
assaults . . . [which] must substantially interfere with the
tenant’s beneficial enjoyment of the premises, and the
interference must be of a permanent nature.
7
Whether a landlord’s action constitutes a substantial and permanent
interference is a question of fact.
8
Furthermore, a tenant must abandon
the leased premises within a reasonable amount of time after the incident
triggering the constructive eviction takes place.
9
There are examples of situations where Tennessee courts have
found that constructive evictions have taken place. For example, in Tenn-
Tex Properties v. Brownell-Electro, Inc., the landlord and tenant were
unsuccessful in negotiating a renewal to the lease, but the original lease
7
Tenn-Tex Props. v. Brownell-Electro, Inc., 778 S.W.2d 423, 428 (Tenn. 1989).
8
Dairy Gold, Inc. v. Thomas, No. E2001-02463-COA-R3-CV, 2002 WL 1751193, at
*3 (Tenn. Ct. App. 2002).
9
Couch v. Hall, 412 S.W.2d 635, 638 (Tenn. 1967).
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had not yet expired.
10
The Tennessee Supreme Court held that a
constructive eviction occurred when the landlord thereafter demanded
that the tenant pay amounts not due under the lease and wrongfully
declared the tenant in default.
11
Furthermore, in Dairy Gold, Inc. v. Thomas,
a constructive eviction occurred when the landlord was notified by the
Tennessee Department of Environment and Conservation that
underground storage tanks were contaminating the premises and that the
area would have to be remediated.
12
Finally, in Hogan v. Coyne International
Enterprises, Corp., the Tennessee Court of Appeals found that there was a
constructive eviction where the landlord refused to repair the roof of the
premises, even though the roof leaked so much that an expert deemed
the building unsafe.
13
Tenant's Right of Offset
The law in Tennessee is that the landlord's and tenant's
obligations are independent of one another.
14
Accordingly, if the
landlord defaults, the tenant does not have the right to unilaterally offset
against rent.
15
For example, in Jaffe v. Bolton, the tenant made significant
improvements to the leased premises at tenant's expense, with no right
of offset.
16
The Jaffe tenant invested significant personal and borrowed
funds to repair and rehabilitate a building for the purpose of opening a
restaurant in the rehabilitated leased premises.
17
The tenant conducted
significant clean up and demolition prior to executing a lease
agreement.
18
When the restaurant failed just months after opening, the
tenant filed bankruptcy, and the landlord sought recovery of past due
10
Tenn-Tex Props., 778 S.W.2d at 424.
11
Id. at 428.
12
Dairy Gold 2002 WL 1751193, at *3.
13
Hogan v. Coyne Int’l Enters. Corp.,996 S.W.2d 195, 202 (Tenn. Ct. App. 1998).
14
Smith v. Wiley, 60 Tenn. 418, 419-20 (1872).
15
Smith, 60 Tenn. at 419-20; see also Estabrook v. Club Chalet of Gatlinburg, Inc., No.
C.A. 133, 1988 WL 1736, at *6 (Tenn. Ct. App. 1988).
16
Jaffe v. Bolton, 817 S.W.2d 19, 24-26 (Tenn. Ct. App. 1991).
17
Id. at 21.
18
Id.
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 17
rents, among other damages.
19
The tenant argued that the repairs and
improvements made by tenant should offset against the past due rents.
20
The Court of Appeals did not agree, restating the general rule that "a
tenant who voluntarily makes improvements on leased property is not
entitled to reimbursement."
21
Because the leased premises were leased to
tenant "as is,” the lease agreement manifested the parties' intentions, and
when "the tenant voluntarily assumes the responsibility for making these
necessary repairs, he cannot thereafter seek recoupment, set-off or
damages for his expenses incurred."
22
Practically, it would be unusual for a landlord to agree to allow a
right of offset. If there is a loan encumbering the property, the likelihood
of the landlord being able to allow a right of offset is even less.
However, a suggested provision for a tenant to insert might be the
following:
SELF-HELP RIGHTS. If Landlord neglects to make
any such repairs following Tenant’s reasonable written
notice thereof, then Tenant shall have the right, but not
be obligated, to make any such repairs on behalf of
Landlord, and thereafter demand payment from
Landlord, and Landlord shall promptly reimburse
Tenant for any and all such reasonable costs. If
Landlord does not promptly reimburse Tenant for such
costs or for any buildout allowance that Landlord may
owe to Tenant, Tenant shall have the right to deduct
such amount from the rent and other sums payable
under this Lease.
Landlord's Self Help and Right of Reentry
Tennessee law does not provide for a landlord to exercise self-
help in the event of a default by the tenant.
23
There are obvious reasons
19
Id. at 22.
20
Id.
21
Id. at 23 (quoting Parsons v. Hall, 199 S.W.2d 2d 99 (Tenn. 1947)).
22
Jaffe, 817 S.W.2d at 26.
23
94th Aero Squadron of Memphis v. Memphis-Shelby Cnty. Airport Authority, 169
S.W.3d 627, 636-37 (Tenn. Ct. App. 2004).
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for this – the primary one being the importance of keeping the peace.
24
Tennessee Code provides the basis for forcible entry:
Forcible entry and detainer; exceptions
(a) A forcible entry and detainer is where a person, by
force or with weapons, or by breaking open the doors,
windows, or other parts of the house, whether any
person be in it or not, or by any kind of violence
whatsoever, enters upon land, tenement, or possession,
in the occupation of another, and detains and holds the
same; or by threatening to kill, maim, or beat the party
in possession; or by such words, circumstances, or
actions, as have a natural tendency to excite fear or
apprehension of danger; or by putting out of doors or
carrying away the goods of the party in possession; or
by entering peaceably and then turning or keeping the
party out of possession by force or threat or other
circumstances of terror.
(b) No action for forcible entry and detainer shall lie
against any tenant who has paid all rent due for current
occupancy of the premises and who is not in violation
of any law nor otherwise in breach of the tenant's
written lease, but this subsection shall not apply in any
manner to farm property, nor shall the provisions of
this subsection be construed to alter or amend any valid
lease agreement in effect on May 31, 1979.
25
“[A]bsent abandonment or surrender of the premises by the
tenant, the landlord is required to seek a writ of possession before
reentering the land.”
26
Although some other states allow a commercial
24
See 94th Aero Squadron, 169 S.W.3d at 637 (Tenn. Ct. App. 2004) (citing Childress v.
Black, 17 Tenn. 317, 320 (1836); 35A AM. JUR.2D Forcible Entry and Detainer § 6 (2001)).
25
TENN. CODE ANN. § 29-18-102 (2012).
26
94th Aero Squadron, 169 S.W.3d at 636-38 (citing Cain P’ship v. Pioneer Inv. Servs.
Co., 914 S.W.2d 452, 456 (Tenn. 1996); Matthews v. Crofford, 167 S.W. 695, 698
(Tenn. 1914); Hayes v. Schweikart’s Upholstering Co., 402 S.W.2d 472, 484 (Tenn. Ct.
App. 1965); Cutshaw v. Campbell, 3 Tenn. App. 668, 688 (Tenn. Ct. App. 1925);
William B. Tanner Co. v. United States, No. C-75-337, 1976 WL 1065, at *4 (W.D.
Tenn. 1976)).
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 19
tenant to waive its statutory protection from self-help repossession
through a right-of-reentry clause, in Tennessee, “the action of unlawful
detainer is the legal substitute for personal entry.”
27
In Cutshaw v.
Campbell, this Court stated, “the jurisdiction of the courts to determine
these questions of disputed sovereignty cannot be delegated to
individuals.”
28
The court further stated that even if the right-of-reentry
provision undertook to allow for self-help, “it was right in the teeth of
the law, subversive of its peaceful process, and void.”
29
Another case, 94
th
Aero Squadron of Memphis, Inc. v. Memphis-Shelby
County Airport Authority, is interesting because it is a case in which a
tenant is in default for failure to pay rent, but after a landlord improperly
exercised its right of reentry, the Court of Appeals limited the damages
assessed to landlord to nominal damages.
30
The salient point is that even if your lease provides a right of
reentry in the event of default, that provision is not enforceable in
Tennessee.
31
A tenant may wish to clarify a landlord's rights of access to the
leased premises. There are multiple provisions which address landlord's
access in a variety of ways. Two complicating factors are bank privacy
issues with tenant's who manage or control or house financial
information, and also with medical leases the impact of HIPPA and the
need for the protection of health information. Nonetheless, a suggested
provision might look like the following:
LANDLORD’S ACCESS. In the exercise of the rights
of Landlord set forth in this Lease Agreement, Landlord
will use its best efforts to minimize interference with
Tenant’s business operations at the Premises and
inconvenience to Tenant. Landlord shall pay for any
damage caused by Landlord to Tenant’s leasehold
improvements or property in the Premises as a result of
27
Matthews, 167 S.W. at 698.
28
Cutshaw, 3 Tenn. App. at 688.
29
Id.
30
94th Aero Squadron of Memphis, Inc. v. Memphis-Shelby County Airport Authority, 169
S.W.3d 627 (Tenn. Ct. App. 2004).
31
Id.
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the exercise of such rights. In addition, Landlord agrees
to obtain such non-disclosure agreements from visitors
as Tenant may reasonably require prior to Landlord’s
entry.
Holdover
A typical holdover provision provides that a tenant who has not
surrendered possession of the premises at or after the expiration of the
term of the lease must pay a multiple of the previously agreed upon rent.
These provisions are enforced for a multitude of reasons. Before
discussing the strategic implications of a holdover provision, the first
question that must be addressed is whether holdover provisions are
enforceable under Tennessee law.
Generally, Tennessee law disfavors penalties and damages
provisions that are unreasonable will not be enforced, regardless of an
agreement by the parties.
32
However, the Tennessee Court of Appeals
has held that a double rent holdover provision does not constitute an
unenforceable penalty.
33
In Brooks, the Court of Appeals reaffirmed that “[w]here a tenant
receives reasonable notice of a change in rental, his continuance in
possession beyond the rent period renders him liable for the new rent
notwithstanding any protest he may make.”
34
The Court of Appeals went
on to hold that it would be axiomatic to allow a landlord to increase the
rent upon reasonable notice, based upon the holding in Russells, and to
not allow an increase expressly contracted for in a written contract.
35
For
those reasons, the Brooks court found that the double rent holdover
provision was enforceable and was not an unenforceable penalty.
36
It
should be noted that in the absence of a well-drafted holdover provision,
if a tenant refuses to surrender possession, the tenant will be liable for
32
See Beasley v. Horrell, 864 S.W.2d 45, 48 (Tenn. Ct. App.1993); see also Harmon v.
Eggers, 699 S.W.2d 159, 163 (Tenn. Ct. App.1985).
33
See Brooks v. Networks of Chattanooga, Inc., 946 S.W.2d 321 (Tenn. Ct. App. 1996).
34
Id. at 325 (quoting Russells Factory Stores, Inc. v. Fielden Furniture Co., 232 S.W.2d
592 (Tenn. Ct. App. 1950)).
35
Id.
36
Brooks, 946 S.W.2d at 321.
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 21
the fair market rental value.
37
Specifically, the Tennessee Supreme Court
has stated:
In summary, the rule as enunciated in Brinkley and
Russells continues to be the law in Tennessee in
situations where the landlord gives a reasonable notice
of the rent increase in the form of a definite demand.
Where there is no agreement between the parties, the
tenant becomes liable for the fair market rental value for
the period that it occupies the premises beyond the
term of the lease.
38
Now that we know that holdover provisions are enforceable, the
discussion of the strategic implications may ensue. Holdover provisions
can benefit a landlord in a multitude of ways.
First, and the most obvious, is that if a tenant holds over, a well-
drafted holdover provision provides the basis to recover a multiple of
the rent. Absent any such provision, the tenant would only be liable for
the fair market rental value.
Second, the multiplier can create obvious leverage when a
landlord is seeking to extricate a tenant from the premises. Obviously, if
a tenant has an impending increase of rent to the tune of two times its
immediately previous rental rate, the tenant is financially motivated to
surrender the premises. It should be noted that any holdover provision
should provide that it applies in the cases including the expiration of the
term or earlier termination of the lease pursuant to landlord’s right to
terminate, whether that be upon an event of default by the tenant or
earlier termination provision.
Third, when the term of a lease expires, there is oftentimes a
situation in which the tenant leaves the premises in a condition that is
not compliant with the turnover provision contained in the lease. A well-
drafted holdover provision combined with a well-drafted surrender
provision can provide a landlord leverage to force the tenant to repair
the premises to an acceptable condition. If a tenant does not surrender
the property in compliance with the turnover provision, the landlord can
take the position that no surrender has occurred. Therefore, the
37
See AHCI, Inc. v. Lamar Advert. of Tenn., Inc., 898 S.W.2d 191 (Tenn. 1995).
38
Id. at195.
22 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17
holdover provision, applies, and the tenant is liable for the increased rent
up to and including the day that the property in surrender is in
compliance with the turnover provision.
These are just three examples of how important a holdover provision
can be in lease management. Accordingly, a holdover provision should
never be viewed as simply a toss in provision but instead should be
highly scrutinized when drafting leases.
A sample provision is as follows:
HOLDING OVER. If Tenant remains in possession of the Premises
after the expiration or termination of the term hereof, without the
execution of a new lease, Tenant shall be a tenant at will, and
Landlord shall have no obligation to notify Tenant of any
termination of Tenant’s possession. Commencing on the date
following the date of such expiration or termination, the Minimum
Rent shall, for each month or fraction thereof that Tenant so
remains in possession, be one and one-half (150%) of the Minimum
Rent in effect at the expiration or termination of this Lease, subject
to all the other terms and provisions of this Lease. Tenant shall
indemnify and hold Landlord harmless from all loss or liability,
including any claim made by any successor tenant founded upon
Tenant’s failure to surrender the Premises on a timely basis.
Non-Waiver
Typically, a “Non-Waiver Provision” is an overlooked standard
provision in a commercial lease. A non-waiver provision is rarely a point
of contention in commercial lease negotiations. However, a well-drafted
non-waiver provision can form the basis of a well-designed and executed
eviction or litigation strategy. Therefore, these provisions should not be
neglected, and should be highly scrutinized.
For example, in Brooks, the term of the lease had expired.
39
The
landlord and the tenant were negotiating a new lease.
40
During that time
the tenant was paying, and landlord was accepting, rent payments equal
to the amount due under the standard rent provision.
41
Once the lease
39
Brooks, 946 S.W.2d at 323.
40
Id.
41
Id.
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 23
negotiations broke down, the tenant moved out, eight months after the
expiration of the term.
42
The landlord filed suit against the tenant and
sought double rent under the holdover provision for the eight months
that the tenant was in possession after the expiration of the term of the
lease.
43
The non-waiver provision stated:
Non–Waiver Provisions. The failure of Landlord to
insist on a strict performance of any of the terms,
conditions and covenants herein shall not be deemed to
be a waiver of any subsequent breach or default in the
terms, conditions and covenants herein contained
except as may be expressly waived in writing.
44
The tenant argued that by the landlord’s failure to demand the double
rent during the holdover and accepting the standard rent, the landlord
had waived any right to such assertions.
45
Relying upon the non-waiver
provision, the Brooks court ruled that the tenant was liable for the double
rent.
46
The Brooks case demonstrates the value of a well-drafted non-
waiver provision. In many cases, whether it be a situation in which a
landlord is attempting to negotiate a new lease, attempting to enforce a
termination, or a situation in which a landlord is attempting to enforce a
separate and distinct provision of the lease, tenants typically try to argue
that acceptance of rent constitutes a waiver. For example, it is very
common for landlords to have rent lockboxes whereby tenants simply
mail in rent payments, which are directly deposited in landlord’s bank
account. Tenants will often mail in rent that is deposited in landlord’s
account without landlord’s direct knowledge. Absent a non-waiver
provision, tenant can successfully argue that landlord has accepted the
rent and waived potential breaches or alternatively established a new
42
Id.
43
Id.
44
Id. at 326.
45
Id.
46
Id.; see also Hill v. Osborne, 2000 WL 337550, at * 4 (Tenn. Ct. App. 2000) (holding
that due to non-waiver provision, accepting monthly payments did not waive landlord’s
right to enforce annual rent increase).
24 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17
term. A well-drafted non-waiver provision can protect landlord from this
argument. For these reasons, non-waiver provisions must not be
overlooked and should be carefully crafted to protect the respective
parties to the lease.
Renewal Provisions
Renewal Provisions are typically highly negotiated, but this does
not mean that all renewal provisions are drafted well. A well-drafted
renewal provision will provide the following: (1) whether the renewal is
automatic or optional; (2) whether the landlord and/or tenant has the
option to renew; (3) how the renewal shall be exercised; (4) the rent
terms for the new lease term; (5) the length of the new term; and (6)
when the renewal must be exercised. Absent all of these terms, the
parties are left to the vagaries of the court system, which does not
necessarily lead to predictable outcomes.
For example, in Carhart v. White Mantel & Tile Co., the parties had
a renewal provision that failed to provide how and when the tenant was
required to exercise the renewal option.
47
In that case, after the
expiration of the new term, the tenant held over and continued to make
the rental payments under the now expired term.
48
A dispute arose over
the tenant’s failure to pay the increased rent provided for in the renewal
provision.
49
The landlord argued that by holding over, the tenant had
exercised the renewal provision and was liable for the increased rent.
50
The tenant, on the other hand, argued that he had not exercised the
renewal provision and was simply a month-to-month tenant.
51
The court
sided with the lessee because, while the lessee held over, he had also not
paid the increased rent required by the lease.
52
Specifically, the court
reasoned:
47
Carhart v. White Mantel & Tile Co., 123 S.W. 747 (Tenn. 1909).
48
Id.
49
Id.
50
Id.
51
Id.
52
Id.
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 25
[W]e are of [the] opinion that the mere continuance of
occupancy by the tenant or lessee after the expiration of
the lease period is ordinarily accepted as the exercise of
the option reserved in the lease to occupy the premises
for an additional term. This is the presumption that
ordinarily arises from the mere fact of holding over; but it
is not conclusive of the lessee's intention to accept the
lease for an additional term. If the lease, as in this case,
provides for an additional term at an increased rental, and
after the expiration of the lease period the tenant holds
over and pays the increased rental, this is affirmative
evidence on his part that he has exercised the option to
take the lease for an additional term; but where, under a
lease like the present, the tenant holds over after the
expiration of the original term, and does not pay the
increased rental as provided by the lease, but continues to
pay the original rental, which is accepted by the lessor,
this negatives the idea of the acceptance of the privilege
of an additional term. Under such circumstances, the
lessee holding over will occupy the status of a tenant at
will.
53
The following principle was recognized in Carhart —the holding over
and the continuing payment and acceptance of the agreed-upon rent
creates a presumption that the lessee has effectively exercised an option
to extend a lease that does not require the lessee to give notice of its
decision to extend the lease.
The Tennessee Supreme Court has continued to follow this
principle. For example, in Ellis v. Pauline S. Sprouse Residuary Trust et al.,
the Supreme Court held that if a lease does not contain a specific
provision regarding how and when the lessee may execute its option to
extend the term of the lease, yet the lessee retains possession of the
premises after the expiration of the original lease and pays in accordance
with the terms of the renewal, the option to renew has been exercised
even absent notification of renewal.
54
The Supreme Court further stated
if the landlord had wanted such a provision, it should have “bargained
for and agreed to a more specific provision relating to the time and
53
Id. at 750.
54
Ellis v. Pauline S. Sprouse Residuary Tr. et al., 280 S.W.3d 806, 814-15 (Tenn. 2009).
26 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17
manner for [tenant] to exercise his option to extend the lease beyond its
initial term. [Landlord] was not prevented from bargaining for a more
specific provision regarding the exercise of the option.”
55
In all situations, certainty is the desired outcome. Certainty, while
never certain, can be approached through well-drafted lease provisions.
Specifically, if tenant and landlord do not wish to leave their futures in
the hands of a well-intentioned judge, a well-drafted renewal provision is
necessary. Once again, a well drafted renewal provision will provide the
following: (1) whether the renewal is automatic or optional; (2) whether
the landlord and/or tenant has the option to renew; (3) how the renewal
shall be exercised; (4) the rent terms for the new lease term; (5) the
length of the new term; and (6) when the renewal must be exercised.
Damages
There are two general theories with respect to damages that can
be awarded to landlords in the event of a default by a tenant.
56
The first
is the conveyance theory, whereby Landlord “conveys” the property to the
tenant for a set period of time and the tenant is responsible for the
payment for the conveyance.
57
The payment by monthly payments is
convenient for the tenant, and under the conveyance theory analysis, if
the tenant breaches the lease, the tenant is responsible for paying all of
the rent.
58
Tennessee does not abide by this conveyance theory.
59
Rather,
Tennessee utilizes, the contract theory to determine what damages are owed
to whom.
60
Under the contract theory, upon a breach of the lease by the
55
Id.; see also Four Eights, LLC v. Salem, 194 S.W.3d 484 (Tenn. Ct. App. 2005)
(holding that lease which contained an option to renew which did not require the lessee
do anything to renew, combined with the lessee’s continued possession of the premises
and payment of rent after the expiration of the term – effectively exercised option to
renew).
56
See 49 AM. JUR. 2D Landlord and Tenant § 19 (2015).
57
Michael Madison, The Real Properties of Contract Law, 82 B.U. L. REV. 405, 410 (2002).
58
Id.
59
Kahn v. Penczner, 2008 WL 2894827, at *4 (Tenn. Ct. App. 2008).
60
Id.
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tenant, the landlord is entitled to damages to compensate it for what it
expected to receive.
61
The Court of Appeals has stated Tennessee's position on this
issue well:
It is well settled that the measure and elements of
damages upon the breach of a lease is governed by the
general principles that determine the measure of damages
on claims arising from breaches of other kinds of
contracts. The general rule of contracts, to the effect that
the plaintiff may recover damages only to the extent of its
injury, applies to leases. Damages for breach of a lease
should, as a general rule, reflect a compensation
reasonably determined to place the injured party in the
same position as he or she would have been in had the
breach not occurred and the contract been fully
performed, taking into account, however, the duty to
mitigate damages. In addition, damages resulting from a
breach of a lease must have been within a contemplation
of the parties; must have been proximately caused by the
breach; and must be ascertainable with reasonable
certainty without resort to speculation or conjecture.
62
Unlike the conveyance theory, under contract theory the landlord
has an obligation to mitigate its damages, in that the landlord has the
obligation to try to find a replacement tenant.
63
What effort the landlord
must exert is largely dependent on the circumstances.
64
Under the
doctrine of mitigation of damages, an injured party has a duty to exercise
reasonable care and due diligence to avoid loss or minimize damages
after suffering injury.
65
61
Id.
62
Kahn, 2008 WL 2894827, at 4 ( citing 49 AM. JUR. 2D Landlord & Tenant § 96 (2003).
63
49 AM. JUR.2D Landlord and Tenant § 87 (2015).
64
Action Ads, Inc. v. William B. Tanner Co.,592 S.W.2d 572, 575 (Tenn. Ct. App.
1979).
65
See Cook & Nichols, Inc. v. Peat, Marwick, Mitchell & Co., 480 S.W.2d 542, 545
(Tenn. Ct. App. 1971); Gilson v. Gillia, 321 S.W.2d 855, 865 (Tenn. Ct. App. 1958).
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Generally, one who is injured by the wrongful or
negligent act of another, whether by tort or breach of
contract, is bound to exercise reasonable care and
diligence to avoid loss or to minimize or lessen the
resulting damage, and to the extent that his damages are
the result of his active and unreasonable enhancement
thereof, or due to his failure to exercise such care and
diligence, he cannot recover.
66
In determining whether an injured party has fulfilled its duty to mitigate,
a court must examine “whether the method which he employed to avoid
consequential injury was reasonable under the circumstances existing at
the time.”
67
Despite this duty, an injured party is not required to mitigate
damages where such a duty would constitute an undue burden.
68
Attorney Fees
Like most states, Tennessee follows the “American rule” for
awarding attorney fees.
69
The American rule provides that “a party in a
civil action may recover attorney fees only if: (1) a contractual or
statutory provision creates a right to recover attorney fees; or (2) some
other recognized exception to the American rule applies, allowing for
recovery of such fees in a particular case.”
70
In the context of a
contractual provision, a party may recover its attorney fees “only when a
contract specifically or expressly provides for the recovery of attorney
fees.”
71
Therefore, “[i]f a contract does not specifically or expressly
provide for attorney fees, the recovery of fees is not authorized.”
72
66
Cook & Nichols, Inc., 480 S.W.2d at 545.
67
Action Ads, Inc., 592 S.W.2d at 575.
68
Cummins v. Brodie, 667 S.W.2d 759, 766 (Tenn. Ct. App. 1983).
69
Cracker Barrel Old Country Store, Inc. v. Epperson, 284 S.W.3d 303, 308 (Tenn.
2009) (citations omitted) (emphasis in original).
70
Id.
71
Id. at 309 (citing House v. Estate of Edmondson, 245 S.W.3d 372, 377 (Tenn. 2008)).
72
Id. at 309 (noting that the Tennessee Supreme Court “has adhered strictly to the
guiding principle that the American rule, prohibiting an award of attorney fees, will
apply unless a contract specifically and expressly creates a right to recover ‘attorney
fees’ or some other recognized exception to the American rule is present.”) (citation
omitted).
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 29
Applying this “bright line rule,”
73
Tennessee courts have held that parties
were not entitled to recover attorney fees under contractual language
providing for the recovery of the following: “all costs and expenses of
any suit or proceeding,”
74
“any loss,”
75
all “expenses,”
76
or “any cost,
loss, damage, or expense”
77
because such language did not “specifically
and expressly provide[]” for attorney fees.
78
The Tennessee Supreme
Court has stated that “[t]he only way parties to a contract have been able
to specifically and expressly create a right to recover attorney fees has
been by incorporating the phrase ‘including reasonable attorney fees’ or
some other similar, yet equally specific, contractual language.”
79
Assuming that the parties’ agreement “specifically and expressly”
provides for the recovery of attorney fees, the next questions to consider
are who is entitled to recover attorney fees under the contract provision
and under what circumstances can they recover.
80
Depending upon the
scope of an attorney fees provision, which will likely be the product of
contract negotiations, a party to the contract may or may not be entitled
to recover its attorney fees.
81
For example, the scope of the attorney fees
provision may be one-sided, providing that, in the event Party A to the
contract is required to bring a legal action against Party B in order to
enforce the terms of the contract, Party B shall be obligated to pay Party
A’s attorney fees, even if Party A is not the prevailing party, and
providing no reciprocal right to Party B.
82
Courts in Tennessee have
73
Id. at 311.
74
Id. at 309-10.
75
Kultura, Inc. v. S. Leasing Corp., 923 S.W.2d 536, 540 (Tenn. 1996).
76
Cracker Barrel, 284 S.W.3d at 310 (holding that “the term ‘expenses,’ without more,
also does not include an award of attorney fees.”).
77
Holcomb v. Cagle, 277 S.W.3d 393, 397 (Tenn. Ct. App. 2008).
78
Cracker Barrel, 284 S.W.3d at 310.
79
Id.
80
See generally BKB Prop., LLC v. SunTrust Bank, 2010 WL 200750, at *3-5 (M.D.
Tenn. 2010).
81
Id. at *5.
82
Id. at *3.
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upheld such one-sided attorneys’ fee provisions; particularly where the
contract involved sophisticated parties on both sides.
83
Perhaps the most common type of contractual attorneys’ fee
provision is a “prevailing party” provision. As a general matter, this type
of provision states that if one party to the contract brings a lawsuit
against another party to enforce the terms of the contract, then the
“prevailing party” is entitled to recover its attorneys’ fees from the non-
prevailing party.
84
The question of which party is the prevailing party is
not always clear-cut, and there are no bright line rules in Tennessee for
making the prevailing party determination.
85
The Tennessee Supreme
Court has noted that “a party need not attain complete success on the
merits of a lawsuit in order to prevail,” but instead “a prevailing party is
83
See, e.g., BKB Properties, 2010 WL 200750, at *3–5 (where the plaintiff BKB challenged
as unconscionable the “one-sided” attorneys’ fee provision in the parties’ loan
agreement, which “obligate[d] BKB to pay and all of SunTrust’s reasonable attorneys’
fees and expenses incurred in litigation related to the loan transaction, even if BKB is
the prevailing party in the litigation” and “[did] not impose a reciprocal obligation on
SunTrust,” the district court held that the provision was not unconscionable under
Tennessee law, reasoning that BKB was a “sophisticated corporate entity” that “entered
into the contract containing the [attorneys’ fee] provision willingly, while represented by
counsel, after many months of negotiation”), aff’d 453 Fed. App’x. 582, 588–89 (6th Cir.
2011); Guesthouse Intern. Franchise Systems, Inc. v. British American Properties
MacArthur Inn, LLC, 2009 WL 792570, at *8 n. 4 (M.D. Tenn. 2009) (where the
defendants challenged the enforceability of a “one-sided” attorneys’ fee provision that
only provided for an award of attorneys’ fees to the plaintiff if it prevailed and no
award to the defendants if they prevailed, the district court noted that “the defendants
can direct the court to no law that states that such attorneys’ fee provisions are
unenforceable,” and that, “[w]hile the court could certainly envision a circumstance
where such a clause, combined with other factors could be problematic, it is not so
here, where . . . sophisticated businesspeople were present on both sides”); Carrington
v. W.A. Soefker & Son, Inc., 624 S.W.2d 894, 897 (Tenn. Ct. App. 1981) (upholding a
one-sided contractual attorneys’ fee provision and an award of attorneys’ fees
thereunder and holding that “courts do not re-write contracts merely because a party
was unwise to agree to a term therein” and that although the one-sided attorneys’ fee
provision was “burdensome” to the appellant, it was “not unconscionable.”).
84
E.g., Isaac v. Ctr. for Spine, Joint, & Neuromuscular Rehab., P.C., 2011 WL 2176578,
at *8 (Tenn. Ct. App. 2011).
85
Williams v. Williams, 2015 WL 412985, at *13 (Tenn. Ct. App. 2015) (citing RCK
Joint Venture v. Garrison Cove Homeowners Ass’n, 2014 1632147, at *5 (Tenn. Ct.
App. 2014)) (“[T]here are no bright-line rules in a prevailing party determination; as
such, these determinations are necessarily fact-intensive and fact specific.”).
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 31
one who has succeeded ‘on any significant issue in litigation which
achieves some of the benefit the parties sought in bringing suit.’”
86
Overall, “[t]he ‘prevailing party’ determination is necessarily fact-
intensive.”
87
After determining the issues of whether attorneys’ fees are
recoverable under the contract and, if so, which party is entitled to
recover attorneys’ fees, the next step is determining the amount of
attorneys’ fees that will be recovered.
88
Where a contract provides for
attorneys’ fees, “the amount of the fee must be reasonable, even if the
contract does not so require.”
89
The determination of whether an award
of attorneys’ fees is reasonable is within the discretion of the trial court.
90
“There is no fixed mathematical rule in [Tennessee] for determining
reasonable fees and costs.”
91
In determining the reasonableness of
attorneys’ fees , courts “must consider the factors enumerated in Connors
v. Connors . . . ,) and in Tennessee Supreme Court Rule 8,” and “ the
circumstances of the particular case in light of the relevant factors.”
92
A
86
Fannon v. City of Lafollette, 329 S.W.3d 418, 431 (Tenn. 2010) (quoting Hensley v.
Eckerhart, 461 U.S. 424, 433 (1983)). For recent cases conducting a “prevailing party”
analysis under a contractual attorneys’ fee provision, see Williams, 2015 WL 412985, at
*13 (citing Fannon and noting that “the ‘prevailing party’ is the party ‘who obtains some
relief on the merits of the case or a material alteration in the legal relationship of the
parties.’” (quoting Isaac, 2011 WL 2176578, at *8)) (emphasis added); RCK Joint
Venture, 2014 1632147, at *5 (relying upon Fannon and holding that the question of
prevailing party in that case would be “determined by the outcome of the primary issue
or the primary relief requested).
87
Fannon, 329 S.W.3d at 432.
88
First Peoples Bank of Tennessee v. Hill, 340 S.W.3d 398, 409 (Tenn. Ct. App. 2010).
89
First Peoples Bank, 340 S.W.3d at 410 (noting the Beech Concrete case where “the
contract at issue provided a right to fees but did not state that the fees must be
reasonable,” but the court of appeals held that the trial was required to determine a
“reasonable fee” under the contract provision).
90
Killingsworth v. Ted Russell Ford, Inc., 104 S.W.3d 530, 534 (Tenn. Ct. App. 2002).
91
Id.
92
Chafflin v. Ellis, 211 S.W.3d 264, 290–91 (Tenn. Ct. App. 2006) (citations omitted);
see Ferguson Harbour Inc. v. Flash Market, Inc., 124 S.W.3d 541, 553 (Tenn. Ct. App.
2003) (“Where the attorney’s fee is based upon a contractual obligation expressly
providing for reasonable attorney’s fees, the award must be based upon the guidelines
by which a reasonable fee is determined.” (citations omitted)); see also Fell v. Rambo, 36
S.W.3d 837, 852 (Tenn. Ct. App. 2000) (“A fee is clearly excessive if, ‘after a review of
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trial court’s award of attorneys’ fees will generally be upheld on appeal
unless the trial court abused its discretion.
93
A comprehensive attorneys' fee provision might look like the
following:
ATTORNEYS’ FEES. If any action or proceeding
between the Parties arises related to this Lease
Agreement, whether to enforce the obligations of the
Parties hereto or to interpret the provisions contained
herein, the prevailing party in such action or proceeding
shall be entitled to recover from the non-prevailing party,
in addition to damages or other relief, all attorneys’ and
other fees from the non-prevailing party therein. The
term “attorneys’ and other fees” shall mean and include
reasonable attorneys’ fees, accountants fees, expert
witness fees, and any and all consultants and other similar
fees incurred in connection with the action or proceeding
and preparations therefor, including all expenses through
all appellate levels. The term “action or proceeding” shall
mean and include actions, proceedings, claims, suits,
arbitrations, appeals, and other similar proceedings. As
used herein, the term “prevailing party” shall mean the
party that obtains the principal relief it has sought,
whether by compromise, settlement, or judgment. If the
party which commenced or instituted the action or
proceeding shall dismiss or discontinue such action or
proceeding without the concurrence of the other party,
such other party shall be deemed the prevailing party.
the facts, a lawyer of ordinary prudence would be left with a definite and firm
conviction that the fee is in excess of a reasonable fee.’” (citations omitted)).
93
Killingsworth, 104 S.W.3d at 534 (citations omitted); see also First Peoples Bank, 340
S.W.3d at 410 (quoting Ferguson Harbour, 124 S.W.3d at 553) (“Where a trial courts
awards a fee, but there is nothing in the record to indicate that the trial court actually
evaluated the amount of the fee to see if it is reasonable in light of the appropriate
factors, the correct approach is to vacate the award and ‘remand [the] case to the trial
court for a new determination of an attorney’s fee award under [Supreme Court Rule 8
and RPC 1.5] [sic] and the applicable case law.”).
2015] NINE TENNESSEE COMMERCIAL LEASING ISSUES 33
Conclusion
Tennessee courts are significantly deferential to the intent
of the parties as evidenced by the written lease agreement. When
we say, "say what you mean and mean what you say,” it is not a
cliché, but a practically relevant and necessary analysis in any
written document, as Tennessee courts will interpret the plain
meaning of what is in writing. Thus, careful drafting of lease
documents should eliminate unwanted surprises, and the
imposition of unexpected burdens to either party.
