Decided December 6, 1937.
Landlord and tenant — Amendment of terms of twenty-year lease — Reduction of rent — Consideration — Application of irregular rental payments — Provision for abatement of rent after fire loss.
1. Where a lease for a term of twenty years at an annual rental of $10,000, payable in nine equal installments of $1,111.11, is subsequently, by an agreement of the parties, reduced to $7,200 annually, payable in nine equal installments, the inability of the lessee to pay the higher rent, his imminent insolvency, and the desire of the landlord to retain the lessee as a tenant, constitutes a valid consideration for such reduction, and the trustee of the landlord, who has become a bankrupt, may not repudiate the contract for such reduction.
2. Where the tenant, within a period of nine months, has paid in accordance with custom, and with consent of the landlord, at irregular times and in irregular amounts, a sum aggregating the rental for nine months, the first installment of which rental was not paid until the lapse of the first three months of the term, the trustee may not so apply the installments as to make it appear that the rent for the first three months of the term is unpaid, and apply such rental to the last three months of the annual term.
3. Where the lease provides that the annual rental shall be paid in nine equal installments and in harmony with prior custom, payments, aggregating the amount due for the lapsed time, were made in the first nine months, such payments should be applied to the discharge of the rent for that period.
4. Where the lease provides that in the event the property is rendered unusable on account of fire, the rent thereafter should abate and a fire occurs after the payment of nine lapsed months rent, the rent for the succeeding three months is abated, and the trustee may not recover for such unexpired three months, either on the theory that the entire annual rental should have been paid in the first nine installments, or on the theory that he may so apply the payments made that the rent for the first three months of the annual term shall remain unpaid, and the irregular installments of rent be applied to rent for the last three months.
APPEAL: Court of Appeals for Franklin county.
Messrs. Connor Nester, for appellee.
Mr. Hugh M. Bennett, for appellant.
This cause is before this court upon appeal on questions of law and fact.
The record contains the second amended petition, the amended answer, and the reply of the plaintiff.
It is alleged in the amended petition that on April 21, 1928, the realty company executed to plaintiff a lease for twenty years, commencing on August 15, 1928, and ending on August 14, 1948, for certain real estate situate in the city of Columbus; that the lease provided for payment of yearly rental of $10,000 in nine installments during each and every year as follows: $1,111.11 on the 15th day of August of each year, and on the same day of each month thereafter of each year to and including the 15th day of March of each year, and $1,111.12 on the 15th day of April, the first installment to begin on the 15th day of August, 1928.
It is alleged that on November 16, 1934, the lease was modified so that the rent reserved was reduced to the sum of $7,200 for the year beginning August 15, 1934, and ending August 14, 1935, payable in nine equal monthly installments beginning September 15, 1934, and ending on May 15, 1935, being payable on the 15th day of each month between the months of September and May inclusive.
All the other conditions of the lease were to remain unchanged.
The lease further provided, in substance, that if the premises, without fault of the lessee, should be destroyed or so injured by fire as to be unfit for occupancy, the lessee might surrender possession, and thereupon the lease should terminate, unless the damage was repaired within six months following the time the damage occurred. The lease further provided that: "Rent shall be abated during such period of time that said premises are unfit for occupancy due to any of said causes occurring without the fault or neglect of lessee."
It is further alleged that a portion of the building so leased was totally destroyed by fire on May 16, 1935, without fault of plaintiff; that the time within which the defendant was to restore the premises has expired; and that the lease is terminated.
On November 23, 1935, defendant was adjudged a bankrupt, and its claim against the plaintiff was listed at $2,102.10.
Plaintiff alleges that it is indebted to the trustee in bankruptcy only in the sum of $352.73 and no more.
It is alleged that the action of defendant and its trustee in refusing to accept the amount of $352.73, and in refusing to execute a release to the insurance company, has rendered it impossible for the plaintiff to collect its loss, and the plaintiff prays that the insurance company be required to interplead and deposit with the clerk an amount agreed upon by the defendant and the plaintiff for the loss from fire, and that the defendant and the trustee be required to set up any claim they have.
To this petition Paul A. Griffith, as trustee in bankruptcy, of the defendant realty company, filed an amended answer, denying that the rent was reduced to $7,200, denying that it was payable in nine monthly installments, denying that the realty company claims it is interested in the amount to be paid on the insurance policy only to the extent of $2,102.10, and makes other denials, and avers that the plaintiff is indebted to the defendant in the sum of $4,902.10, as the balance due for rent and heating under the lease for the year ending August 14, 1935.
For amended cross-petition the defendant alleges that by the terms of the lease the plaintiff agreed to pay an annual rental to the realty company (now bankrupt) in the sum of $10,000 in nine installments, to be paid between the 15th day of August and the 15th day of April of each year; that the plaintiff has failed to pay the rent for the year beginning August 15, 1934, except for partial payments, aggregating $5,650, and that there is due to the defendant the balance of the rent for the year ending August 15, 1934, in the sum of $4,350, and that the balance claimed is due for heating.
To this the plaintiff replied, denying the indebtedness in the sum claimed, and for further defense makes certain admissions as to the execution of the lease for a yearly sum of $10,000, but denies that the terms requiring the payment were in force for the year beginning August 15, 1934; and denies that the plaintiff was obligated to pay the defendant for the year beginning August 15, 1934, any sum in excess of $7,200; and sets up the modification of the lease executed as of November 16, 1934, whereby the rental reserved in the original lease was reduced to $7,200, upon which it has paid the sum of $5,650, and that by reason of the fire on May 16, 1935, the rent was thereafter abated and that in consequence the rental due has been fully paid.
The reply makes further allegations with reference to the destruction of the premises by fire.
The cause was tried before the Court of Common Pleas, "a jury being waived by agreement of the parties hereto." The Court found in favor of plaintiff on all issues.
The defendant trustee assigns twenty different errors of which he makes complaint.
In substance, the complaint is made that the findings of facts and conclusions of law, are contrary to law, and not sustained by the evidence, but are contrary to the manifest weight thereof; and that the findings should have been in favor of the defendant.
The other errors assigned are either repetition of prior assignments, or relate to matters which we do not feel are of consequence.
We have arrived at the conclusion that the court's findings of facts were justified by the evidence presented, leaving only for our further consideration two questions, as follows:
(1) Was the agreement to modify the lease fixing an annual rental of $7,200, instead of the $10,000 provided for by the original lease, a valid contract binding upon the parties?
(2) Both the lease and the modification thereof providing that the yearly rental should be paid in nine monthly installments, and a fire having occurred on May 16, 1935, the day after the expiration of the nine payment periods provided for in the modification of the lease, was the lessee entitled to a rebate for the last three months of the annual period, or was it chargeable with the annual rental for the whole period of the lease?
The defendant has filed herein a very interesting and impressive brief, in which he has presented at length the authorities and arguments therefrom, which he claims sustain his position.
The original lease was executed by the parties on the 21st day of April, 1928. It set out the original terms and conditions, and subsequent modifications thereof, as alleged in the petition, are shown by the memoranda endorsed on the original. In addition to the modification set out in the pleadings, it appears that there was a prior modification executed on the 29th day of September, 1932, reducing the rent to $5,000 for the year beginning August 15, 1932, and ending August 14, 1933, and also reducing the rent for the year beginning August 15, 1933, and ending August 14, 1934, to the sum of $7,200, the same rental as reserved by the modification now in question.
It is urged by counsel for the trustee that there is no consideration moving between the parties for the reduction of the rent from $10,000 to $7,200.
It is not denied by counsel for plaintiff that a mere agreement by the lessor to accept less rental than that provided in the lease, is without consideration and, therefore, not binding. Such an agreement must be supported by a valid and sufficient new and independent consideration.
It is not disputed that the payment of a part of an obligation is not regarded in law as a satisfaction of the whole, unless it is by virtue of an agreement supported by sufficient consideration. A promise to do that which the promisor is legally bound to do is an unreal consideration. But any consideration for the new or modified undertaking, however insignificant, satisfies the rule, and the test is whether there is an additional consideration, adequate to support the contract, consisting of something the debtor was not legally bound to do or give.
A very interesting discussion of this principle may be found in the early Ohio case of Harper v. Graham, 20 Ohio, 105, in which the opinion was written by Justice Ranney. This involved the validity of a contract by which a judgment debtor, who was insolvent, agreed to, and did, pay a sum less than the judgment. The court held that under the facts of the case the agreement was valid, and that the judgment for a greater amount than that paid should be canceled.
What the court said, in relation to the attempt of one entering into such an agreement to collect the original debt, is of interest, and some principles announced may here be of value.
It was pointed out that "it was very early settled as rule of the common law, that the payment of less than the sum due upon a liquidated demand, although agreed to be received in full satisfaction, could not be insisted upon as such, because there was no valuable consideration to uphold the agreement to relinquish the balance. But if the party to whom the money was coming executed a release, under seal, for the same debt, he was effectually barred, although he should have received nothing upon it."
The court states the rule and says that "the rule and the reason were purely technical, and often fostered bad faith. The history of judicial decisions upon the subject has shown a constant effort to escape from its absurdity and injustice."
The court quotes with approval, from the case of Kellogg v. Richards, 14 Wend. (N.Y.), 116, the following:
"The rule that the payment of a less sum of money, though agreed to be received in full satisfaction of a debt exceeding that amount, shall not be so considered in contemplation of law, is technical, and not very well supported by reason. Courts, therefore, have departed from it on slight distinctions."
The court also quotes with approval the case of Brooks v. White, 43 Mass. (2 Met.), 283, 37 Am. Dec., 95:
"This rule, which may obviously be urged in violation of good faith, is not to be extended beyond its precise import; and whenever the technical reason for its application does not exist, the rule itself is not to be applied."
Justice Ranney says:
"A moment's attention to the cases taken out of the rule, will show that there is nothing of principle left in the rule itself."
He points out many decisions in which slight variations from the original contract will furnish a consideration for its modification, and says:
"It may seem to some persons, not having a great veneration for those institutions of antiquity, for which no reason can be given, that a rule so effectually undermined, and having neither rhyme nor reason to support it, ought to be at once overruled and the whole matter placed upon the footing of reason and common sense."
Without deciding the general question, the court there holds that the case under investigation was one taken out of the rule for reasons which the court holds constitute a consideration.
In the case of C., M. St. P. Ry. v. Clark, 178 U.S. 353, 44 L. Ed., 1099, 20 S. Ct., 924, the Supreme Court held that the rule that payment of a less sum in satisfaction of a larger sum is not binding for want of consideration "only applies when the larger sum is liquidated, and when there is no consideration whatever for the surrender of part of it; and while the general rule must be regarded as well settled, it is considered so far with disfavor as to be confined strictly to cases within it."
Quoting a number of the cases cited by Justice Ranney in Harper v. Graham, supra, Chief Justice Fuller refers, with approval to Hager v. Thomson, 66 U.S. (1 Black), 80, 17 L. Ed., 41:
"Much the largest number of controversies between business men are ultimately settled by the parties themselves; and when there is no unfairness, and all the facts are equally known to both sides, an adjustment by them is final and conclusive."
Was there a valid consideration for the reduction of the rent? During the period of the depression the reduction of rent, reserved in leases made during the high price period, was a common occurrence, and many leases were modified on account of the depression, and the parties continued for the remainder of the term to pay and receive, without question or thought of repudiation, reduced rent, to the benefit of both parties.
This court is not disposed to endorse a rule by which such contracts made between business men, when both sides were facing a possible calamity, can be repudiated, unless there is a very cogent reason therefor.
In the case at the bar the evidence discloses that the lease was made during the high price period for a long term, but that as the "depression" began the parties entered into a mutual agreement by which, for the period of two years preceding the modification now in question, the rent was substantially reduced and was paid and accepted in full discharge of the obligation of the tenant to the landlord.
In the fall of 1934, when the prior modification terminated, the parties again approached the question as to the amount of rent to be charged and paid for the twelve months from August 15, 1934, to August 14, 1935. Numerous conferences were held between the landlord and his representative and the representative of the tenant, in which the situation was canvassed and the tenant displayed to the landlord books showing loss during the prior years, and financial inability to pay the original rent of $10,000 a year. The tenant told the landlord frankly that it was insolvent, and that if compelled to pay the larger rental it would have to go out of business, and that the premises would be vacated. There was evidence introduced, over the objection of the trustee, that in case of vacancy the property could not be rented for over $2,000 a year.
The parties were confronted with a situation that demanded their serious attention. On the one side the landlord was in danger of losing his tenant and having a vacant building, a very disastrous situation during the depression, as many landlords know from experience. On the other hand the tenant was in danger of having the mortgage upon its equipment foreclosed unless substantial payments were made upon it, and was in danger of losing its business and the money that it had invested for the improvement of the property, all of which would be to the detriment of the landlord and the tenant.
Facing this situation, and, evidently, after a thorough consideration, the parties consummated their agreement and began to pay and accept rent under its terms.
Cases have been cited by counsel for the trustee supporting his claim that such an agreement entered into between the landlord and tenant is without consideration, the most pertinent of which is Levine v. Blumenthal, 117 N.J. Law, 23, 186 A. 457, decided July 15, 1936, in which it was held that the tenant's inability to pay the rental designated in a lease because of a trade depression was not sufficient consideration to support an agreement reducing such rental.
It was also held in that case that the payment and acceptance of rent designated in the agreement, not supported by consideration, which modified the lease, did not preclude the landlord's recovery of the unpaid balance of rent designated in the lease.
This case is quoted largely in counsel's brief and in the opinion of the court. See also Seymour v. Hughes, 105 N.Y. Supp., 249.
Supporting the other view may be cited Ten Eyck v. Sleeper, 65 Minn. 413, 67 N.W. 1026, wherein it is held that a lease contract could be legally modified by the agreement of the parties to accept a reduced rental on account of the insolvency of the tenant and the hard times then existing, and that such was a valid agreement binding upon the landlord.
It is true that in this case it appears that insolvency was established, and that certain other facts existed.
In Jaffray Co. v. Greenbaum, 64 Iowa 492, it was held that there was a valid consideration for the reduction of rent and the lessors were bound thereby, where the lessee had become embarrassed and the lessors, believing that a failure would be detrimental to them, and with the view of assisting the lessee, endorsed upon the lease a reduction of the rent.
The court states:
"In our opinion a consideration was not wanting. We regard the case essentially the same as if the original lease had been surrendered, and a new lease substituted * * *. A lease which provides for too high a rent may be less valuable to the landlord than one providing for a proper rent * * *."
It was held that this lease could not be avoided by the landlords.
It is held in Hastings v. Lovejoy, 140 Mass. 261, 2 N.E. 776, 54 Am. Rep., 462:
"In an action for the rent reserved in a written lease, the lessee may prove, in defense, that, after the delivery of the lease, the lessor, for a good consideration, entered into an oral agreement that for the future the rent should be reduced."
See Ossowski v. Wiesner, 101 Wis. 238, 77 N.W. 184; Lamb v. Rathburn, 118 Mich. 666, 77 N.W. 268; Bowman v. Wright, 65 Neb. 661, 91 N.W. 580.
In the case of Levine v. Blumenthal, supra, relied upon by counsel for the trustee, the following comment is made after the court stated that a debt may not be satisfied by a payment of less than the debt.
"The cases to the contrary either create arbitrary exceptions to the rule, or profess to find a consideration in the form of a new undertaking which in essence was not a tangible new obligation or a duty not imposed by the lease, or, in any event, was not the price `bargained for as the exchange for the promise' * * *. They exhibit the modern tendency, especially in the matter of rent reductions, to depart from the strictness of the basic common law rule and give effect to what has been termed a `reasonable' modification of the primary contract."
We are not in accord with the court's statement that these cases are a departure from the common-law rule. They are only an application of old principles such as are commented upon in Harper v. Graham, supra, decided in 1851.
Many cases may be found in which modification of contracts are permitted where the contract is still executory. We think these principles would apply to this case.
We, therefore, arrive at the conclusion that the parties to the lease executed a valid contract by which they mutually agreed to a modification of the terms of the lease for the year beginning August 15, 1934, and ending August 14, 1935, and that the rent reserved under that modification was $7,200 for the year, instead of $10,000, as originally written in the lease.
For purposes of brevity, we will regard the annual rental as $7,200, without consideration of the smaller amounts that altered it somewhat, considering the sum payable monthly at $600, if paid each month for 12 months, and $800 monthly, if paid in 9 months instead of 12.
The first problem is to determine when the rent was due. The lease was peculiar in that the annual rental of $7,200 was to be paid in nine monthly installments, the last of which was due and payable on the 15th day of May, 1935. The amount paid was $5,650, practically nine months at $600 per month, with some additions for heat.
Counsel for the trustee claims that, inasmuch as the rent was never paid for any given month, or in any regular amount, the trustee may now apply the payments to such portion of the rental year as he may wish. He points out that the installments due during the first three months were never received at either the rate of $800 or $1,111.11 per month, and were never applied to the payments of the installments due in either of these months, the first payment being made November 23; that this leaves the installments of rent due and payable for the first three months wholly unpaid; and that the payments made by the plaintiff were all applied toward payment of the rent for the months beginning November 15, 1934, and thereafter, with the result that the rental was all paid for the last nine months of the lease year ending August 14, 1935.
The trustee makes his estimate of the amount due as though the rental was $10,000 a year, instead of $7,200, as provided for by the modification. But the same argument will apply to the lesser annual payment which is, in effect, that the trustee has a right to apply the same as he may see fit, and that, inasmuch as the total $5,650, paid during the rental year, paid for nine months at $600 per month, he may apply some of the sum so paid to the last nine months of the term, so as to leave the rental for August, September, and October still unpaid, in the sum of approximately $1,550, even under the modification, and a still larger sum under the rent originally reserved.
Counsel then seeks to apply the rule laid down in Felix v. Griffiths, 56 Ohio St. 39, 45 N.E. 1092, that rent paid in advance cannot be recovered back under the fire clause in this lease.
He advances the ingenious argument that by so applying the partial payments paid by the lessee in current months, he may produce the result that the months subsequent to the fire are paid in advance, while the months prior to the fire are not paid in full, and by the application of the rule in Felix v. Griffiths, as he interprets it, the rent for the months which succeeded the fire, thus paid in advance of rent actually earned by application of apportioned payment, cannot be recovered back, and the trustee, therefore, holds a just claim against plaintiff for an unpaid balance of rent for the first three months of the lease year.
As opposed to this the plaintiff takes the position that over a long course of years it has been the custom of the lessee to pay the rent as he had available funds; that the same were applied upon the current unpaid rent; that, if the funds so paid by it during the lease year were thus applied, the rent to May 16, 1935, the day of the fire, was fully paid; and that the balance of the rent is abated under the fire clause of the lease.
Without further comment upon this matter, we are of the opinion that the custom of the parties had established the rule for the application of the money paid to the rent currently earned.
While counsel has cited the case of Felix v. Griffiths, supra, to support his view that he may now claim as paid and not recoverable the last three months rent, the case may well be considered in solving the other question we have under consideration, namely, was the entire $7,200 earned at the expiration of nine months and at the time of the fire, or was only that portion of it earned which covered the elapsed time?
In the Felix case the lease was for a total annual rent of $1,500, payable $125 a month, in advance. The rent was paid on the 9th day of January, and on the 13th day of January, the premises were destroyed. The tenant sought to recover a payment of $112.63, covering that portion of the advanced payment that would apply to the portion of the rental month subsequent to the fire.
The court held that he could not do so.
The court considered only the unearned portion of the current month, and no claim was asserted on the theory that, because the lease called for $1,500 for the year, the whole amount was due, but it was conceded that the only amount due was the month for which payment was required in advance.
We are of the opinion that, where a lease calls for an annual rental, payable monthly, the amount payable is to be determined by the monthly payments and not by the annual payments, and the amount due is to be computed only on the monthly payments. This would apply where there are twelve monthly payments. The question still remains whether, when a lease provides for the payment of the annual rental in nine installments instead of twelve, as usual, and those nine dates for payment have passed, the entire annual rent is due, or whether only nine months thereof is due.
We are of the opinion that under the established custom between the parties, the rental that becomes due is on the basis of monthly payments, one-twelfth of the annual payment, and not on the basis that the rent for the entire year is to be paid in nine months, so as to make each monthly payment one-ninth of the annual rental instead of one-twelfth.
The very fact that there is a provision in the lease for the abatement of the rent, in the event of a destructive fire, is an indication that the parties had in contemplation that the rent was to be earned over the entire year, one-twelfth of which was to be earned and paid for in each month of the year.
If this were not so it is apparent that in the case at bar, had the entire rent been paid at the end of the nine months, as provided in the modification, the abatement provision would have been of no value during the three months during which the rent was prepaid. This could not have been the contemplation of the parties, would not have been reasonable, and is not an interpretation which the court can give. Whatever a strict interpretation might require, a long observed custom has established the rule to govern.
We are of the opinion that all the rent earned until May 15 was paid, and that, therefore, there remains three months to which the parties would be entitled to use the premises had they not been destroyed by fire, on payment of rent as thereafter currently accruing. The fire clause abated this.
This brings us to the interpretation of the fire clause.
Section 8521, General Code, provides:
"The lessee of a building which without fault or neglect on his part, is destroyed or so injured by the elements, or other cause, as to be unfit for occupancy, shall not be liable to pay rent to the lessor or owner thereof, after such destruction or injury, unless otherwise expressly provided by written agreement or covenant. The lessee thereupon must surrender possession of the premises so leased."
This is a re-codification of the original act passed March 30, 1868, 65 Ohio Laws, 35. There have been no other decisions interpreting it save that of Felix v. Griffiths, supra.
The provision in the lease is not identical with the statute, so that the interpretation in that case is not controlling. The lease provides:
"Rent shall be abated during such period of time that said premises are unfit for occupancy due to any of said causes occurring without the fault or neglect of lessee."
It seems to us quite clear that the provision that rent shall be abated means what it says, that is, the rent shall stop upon the occurrence of the fire. It does not mean as counsel urges that the rent, by a bookkeeper's figure, shall be considered as paid in full for the last three months of the lease, all subsequent to the fire.
We are of the opinion that the court was correct in his interpretation of this matter, and we hold that the court committed no error, either in the finding of facts or of law.
We are of the opinion that there was consideration for the modification of the lease, and that, due to long custom, the rental, although paid in irregular amounts and at irregular times, was to be applied to the current rental as paid, and that that which was paid at the rate provided in the modification discharged the obligation until May 15, 1935, and, the fire having occurred on the 16th day of May, no further rent accrued. It follows that all the rent has been paid and that the plaintiff is entitled to a distribution of the funds in the hands of the court, as ordered by the trial judge.
We wish to say that we have been much impressed with the clarity of the court's decision in this matter, and endorse it in full so far as it relates to the issues herein.
BARNES, P.J., HORNBECK, J., concur.