Real Estate Litigation

Important New Tennessee Case Regarding the Transferability of Express Easement Rights

Published on: January 9, 2023 | by J. Ross Pepper

The Court of Appeals of Tennessee recently issued an opinion in an easement case involving an issue of first impression in Tennessee regarding the transferability of an express easement. Here are the key facts:

In 1980, Mahaffey acquired a tract known as the “Holt Farm”
Holt Farm was 107 acres
Holt Farm was landlocked
A lane (“Holt Lane”), ran along the eastern section of Holt Farm
Before connecting to a public roadway, known as Horse Mountain Road, Holt Lane ran across property adjoining Mahaffey’s which was not owned by Mahaffey
The adjoining property which Holt Lane ran across was owned by Robertson-Magill
Robertson-Magill sued Mahaffey in the Bedford County Chancery Court to prevent Mahaffey from using the part of Holt Lane on the Robertson-Magill property
In 1983, the Chancery Court in the Mahaffey/Robertson-Magill lawsuit ordered that Mahaffey had an easement for ingress and egress to use the portion of Holt Lane located on the Robertson-Magill property
The order of the Chancery Court was filed with the Bedford County Register of Deeds
After the order was entered, Mahaffey acquired an additional 640 acres which adjoined the 107-acre Holt Farm Mahaffey owned
In 2007, Mahaffey sold the Kelloggs a 9.76-acre tract
The 9.76 acre tract was not part of the 107 acres originally owned by Mahaffey, but was derived from the additional 640 acres purchased by Mahaffey
In a document, Mahaffey granted what was called a “permanent right-of-way easement” to the Kelloggs, which grant purported to give an easement to the Kelloggs to use the same portion of Holt Lane to which Mahaffey had been granted an easement for ingress and egress by the Chancery Court
The Robinsons (“Plaintiffs”) purchased the Robertson-Magill property
Heated disputes arose between the Robinsons and the Kelloggs regarding the Kelloggs’ use of the portion of Holt Lane located on the Robinsons’ property
The Robinsons filed a lawsuit against the Kelloggs
The trial court ruled that the easement granted to Mahaffey in the 1983 Chancery Court order amounted only to an easement in gross. Therefore, the trial court held that the easement did not run with the land and did not benefit the Kelloggs.

The two broad categories of easements in Tennessee are easements in gross and easements appurtenant. In Tennessee, easements appurtenant are favored over easements in gross. An easement in gross is a personal right to use the land of another. Easements in gross do not run with the land as there is almost never a dominant estate where there is an easement in gross. Easements appurtenant benefit a dominant estate and burden a servient estate. Critically, easements appurtenant run with land and may be enforced by subsequent purchasers of the dominant estate.

The Court of Appeals started its opinion with an excellent summary of the difference between easements in gross and easements appurtenant. It then held that the easement granted by the 1983 Chancery Court order was not an easement in gross, but was an easement appurtenant.

The Duty of Commercial Landlords to Mitigate Damages Under Tennessee Law

Published on: October 17, 2022 | by J. Ross Pepper

Tennessee commercial landlord/tenant (lessor/lessee) law requires a lessor of a commercial property to act fairly and reasonably, under the circumstances, to mitigate its lost rental income resulting from a lessee/tenant abandoning the property before the expiration of the lease term or notifying the lessor that it no longer intends to comply with the lease. Obviously, this requirement means that the lessor must try to secure a new tenant for the subject property. However, what steps on the part of the lessor satisfy its obligation to act fairly and reasonably to find a new tenant to mitigate its damages necessarily must be decided on a case-by-case basis given the varying interpretations that can be applied to the “fair and reasonable” standard.

Since there are no bright lines to apply to determine whether a landlord has satisfied its obligation to mitigate its damages, it is helpful to look at a few cases on the subject to understand what factors might be important to a Tennessee court faced with an argument from a lessee that what it owes to the lessor should be reduced because the lessor’s attempts to find a new lessee fell short of satisfying the reasonable and fair standard.

Loans Yes v. Kroger Limited Partnership (Tenn. Ct. App. 2020): In this case, the court rejected the tenant’s argument that the landlord had failed to mitigate its damages. The tenant stopped paying rent six months before the lease expired. Within about one month after receiving the tenant’s notice that it wanted to terminate the lease early, the landlord signed a listing agreement with a commercial broker who agreed to undertake re-leasing the property. The broker, promptly thereafter, sent out an email blast to about 335 other brokers notifying them of the availability of the property. The broker also listed the property on several websites known to be used by brokers and by prospective tenants. Moreover, the broker placed the property on his company’s availability report which was accessible by about 500 other brokers.

Kahn v. Penczner (Tenn. Ct. App. 2008): In this case, the trial court determined that the landlord’s lost rental income damages should cut in half because it failed to mitigate its damages.

Recent Partition Case: A Reminder of How Tennessee Courts Divide the Proceeds of Jointly Owned Real Estate

Published on: July 31, 2022 | by J. Ross Pepper

In a recent partition case between former domestic partners, the Court of Appeals of Tennessee set forth some good reminders of the factors Tennessee courts are to consider when dividing up the interests of joint owners of real estate. While the case involved former domestic partners, the principles laid out in the opinion are equally applicable to cases involving joint owners other than those who are former domestic partners.

Although the case was not filed as a partition case, it should have been, and the Court of Appeals treated it as a partition case. The case is remarkable, not only because it contains a clear and concise review of partition principles, but also, because, in reversing the trial court, the Court of Appeals showed what is not a proper way for a trial court to adjudicate a partition case.

Here are the basic facts:

The man (“Man”) and woman (“Woman”) involved were domestic partners, but never married
The Man and Woman bought a home (“Property”) together in 2013 for $223,000
The Property was deeded to the Man and Woman as joint tenants with a right of survivorship
The Man paid a $50,000 down payment from the Property using proceeds from another property that Man and Woman had owned together
Woman testified that Man had received $200,000 from the sale of the other jointly owned property, but had never given her any of those proceeds
The Man and Woman financed the $171,000 purchase price balance
The Woman testified that she consistently paid $1,000 a month towards the mortgage loan for the Property
The Man denied that she had consistently paid $1,000 a month, but admitted that she may have paid around $7,000 in total over the course of the years
In 2015, Woman bought a home in Washington state
Man sent Woman a $5,000 check for the down payment on the Washington home and wrote “loan” on it
There was proof that Woman had, through her employer, provided valuable medical insurance benefits to Man for many years
Woman also testified that she had put a lot of work into the Property

The trial court described the circumstances as a “crazy mess.” It then took a simplistic approach to resolving the dispute. It found that the equity in the Property was $229,000 and that it should be divided equally except Man should receive $10,000 from Woman’s one-half for the money paid for the down payment for the Washington home and for attorneys’ fees.

Setting Aside a Default Judgment in Tennessee

Published on: June 20, 2022 | by J. Ross Pepper

A plaintiff may obtain a judgment against a defendant under Tennessee law, and under federal law, if the defendant does not file a responsive pleading within the required time. Under the Tennessee Rules of Civil Procedure, a defendant must file a written response to a complaint within thirty (30) days of being served with the complaint. If you are a defendant against whom a default judgment has been entered, be aware that it can be set aside. With frequency, default judgments are set aside by Tennessee courts.

There are several different grounds on which a default judgment may be set aside. First, if a defendant was not properly served, then a default judgment may be set aside on the grounds that it is void. Service of process on a defendant can be tricky, and, even the validity of personal service by an officer or private process server may be successfully challenged.

Second, a default judgment may be set aside, even where there was valid service on the defendant, if the defendant was not given adequate written notice that the plaintiff had filed a motion for a default judgment. Under the Tennessee Rules of Civil Procedure, in most cases, a defendant is entitled to receive written notice of the motion for default judgment at least five (5) days before the motion is heard.

Third, a default judgment may be set aside for “mistake, inadvertence, surprise, or excusable neglect.” In my experience, these grounds are the ones most frequently used to support a motion to set aside a default judgment. Under Tennessee law, the party moving to set aside a default judgment has the burden to prove that it should be set aside. However, Tennessee appellate courts have said, time and time again, that the law does not favor judgments by default, and, if there is any doubt as to whether one should be set aside, it should be.

The Non-Existence of Liability for Libel of Title for Filing a Lien Lis Pendens

Published on: April 7, 2022 | by J. Ross Pepper

In Tennessee real estate litigation, frequently, a plaintiff will obtain a liens lis pendens at the time the complaint initiating the action is filed. Once recorded with the register of deeds in the county where the subject property is located, a lien lis pendens can effectively prevent the transfer of the property, its lease, or its use as collateral to secure a loan. Such liens may, in some cases, prevent the refinancing of a loan on the subject property. (For more on the basics of liens lis pendens, see my blog of January 21, 2018.)

Our firm has, over the years, had many clients against whose real estate liens lis pendens were obtained at the outset of litigation and against which those liens remained through the conclusion of our clients’ cases (months or years later). A defendant/property owner can move the court, before a decision on the merits of the case, to have a lien lis pendens dissolved and removed. Motions to dissolve liens lis pendens, when they are filed before decisions on the merits, are most often filed soon after the liens were obtained.

To succeed on a motion to dissolve a lien lis pendens, the defendant/property owner must prove that the plaintiff’s claims, as set forth in its complaint, are unrelated to any claim to an interest in the real estate. (In my previous blog on the subject, I gave some examples of cases where the claims did not relate to any interest in the real estate at issue and where courts found the lien lis pendens improper).

Even where a defendant, like some we have represented, is ultimately successful on the merits in real estate litigation and the lien lis pendens placed on its property is dissolved and becomes ineffectual, it can suffer a monetary loss. How can such a defendant/property owner seek financial compensation for such a loss? Is it possible to recover via a lawsuit for libel of title? The short answer is almost certainly “no.” A lien lis pendens is protected by an absolute privilege.

First Material Breach by Seller Causes it to Lose Breach of Contract Case

Published on: March 13, 2022 | by J. Ross Pepper

I have written at least a couple of blogs about the first material breach rule and how it works (and doesn’t work) in Tennessee. Nevertheless, here is another blog on that subject which discusses a very recent breach of contract case handed down by the Court of Appeals of Tennessee. Since the first material breach rule is very often applicable in commercial litigation, it is hard to give it too much attention, analysis, review and thought. Also, the case which is the subject of this blog is unique in that it is one in which the defense was used successfully.

The first material breach rule, to review, holds that a party cannot recover damages for a breach of contract if it committed the first material breach of the contract. Once a party to a contract materially breaches it, the other party to it is relived from rendering further performance and cannot be held liable for damages flowing from any breach by it which occurred after the other party’s prior material breach.

The case involved an asset purchase agreement whereby the Seller agreed to sell the assets of a meal preparation business to the Buyer, which was also in the same business. The purchase price was $310,000. The asset purchase agreement (the “Agreement”) required that the Buyer pay $150,000 within two days of the closing, and, thereafter, that it pay monthly installments of $11,333 before the last day of each month.

The Agreement also required the Seller to tender to the Buyer its recipes for meals and snacks. Moreover, in the Agreement, the Seller made promises not to compete with Buyer and not to solicit customers of Buyer.

Using Promissory Estoppel to Recover Damages in Tennessee

Published on: January 8, 2022 | by J. Ross Pepper

Promissory estoppel may be used offensively as a cause of action to recover damages, unlike equitable estoppel, which may only be used to defend. It is a useful cause of action in those situations in which a promise was made to the plaintiff, but the promise does not rise to the level of an enforceable contract.

To prove a promissory estoppel claim, a plaintiff must prove that (1) the defendant made a promise; (2) the promise was definite enough and unambiguous enough to be enforced; and (3) that the plaintiff reasonably relied on the promise. A plaintiff does not have to prove that there was an express contract between it and the defendant to prove a promissory estoppel case.

A review of Tennessee cases wherein courts have adjudicated promissory estoppel claims reveals a couple of important points. First, plaintiffs who assert it are not often successful with it. That is not a surprise since our courts have stated it is only appropriate to allow recovery for promissory estoppel in “exceptional cases.” Second, it is a cause of action that will be won or will be lost based on the unique equities of each case.

There are many Tennessee cases discussing why the courts in those cases found that plaintiffs were not entitled to recover under a promissory estoppel cause of action. What is more helpful, in my opinion, than looking at one of those many cases is to consider one of the “exceptional cases” in which a plaintiff recovered on a promissory estoppel claim. One such case is Engenius Entertainment, Inc. v. W.W. Herenton, 971 S.W.2d 12 (Tenn. Ct. App. 1997). The facts of that case are extensive, but necessary to discuss as they established equities strongly favoring the plaintiff and resulting in the plaintiff’s success. Here are the key facts: Continue reading

Foreign Corporations and LLCs: Registering to do Business and Use of Tennessee Courts

Published on: June 15, 2021 | by J. Ross Pepper

A “foreign” corporation or “foreign” limited liability company (“LLC”) is one that is organized under the laws of a state other than Tennessee. A foreign corporation or foreign LLC does not have to obtain a certificate of authority from the Tennessee Secretary of State (i.e., register to do business) to engage in certain types of business activities within Tennessee: For other types of business activities, a foreign corporation or foreign LLC must obtain a certificate of authority.

Significantly, foreign corporations and foreign LLCs which were required to register to do business in Tennessee, but did not, cannot use Tennessee courts until they have registered. See, T.C.A §48-25-102 and T.C.A §48-246-601. Federal courts in Tennessee have held that the same statutes apply to lawsuits in Tennessee federal courts. The rule in these statutes applies only when an unregistered foreign corporation or LLC asserts a claim in a Tennessee court. It does not apply to prevent another party from bringing a lawsuit against an unregistered foreign corporation or LLC in a state or federal court located in Tennessee.

Any time a lawsuit is filed in a Tennessee court by a foreign corporation or LLC, at the outset, the lawyer for the defendant, or defendants, should check to determine if the foreign entity obtained a certificate of authority from the Tennessee Secretary of State. This can be done on-line via the Tennessee Secretary of State’s website and takes just a few minutes. If the foreign entity was required to obtain a certificate of authority, but did not, defense counsel should file a motion to dismiss or to stay the action. In my experience, courts always elect to stay the proceedings to give the foreign entity a chance to register. (In one case our firm had in federal court, the action was stayed for several months while the plaintiff foreign LLC went through the steps to obtain its certificate of authority.)

Sometimes, a motion to stay a proceeding because the foreign entity did not register in Tennessee will end the proceeding because of the expense of obtaining a certificate of authority. Under Tennessee law, the penalties for doing business in Tennessee without registering are steep. When a foreign corporation has transacted business in Tennessee without a certificate of authority, to obtain a certificate of authority, it must pay triple the amount of fees, penalties, and taxes and interest on the same, for all the years it transacted business in Tennessee without being registered. See, T.C.A. §48-25-102. A foreign LLC which was required to register to do business in Tennessee, but did not, “shall be fined and shall pay the secretary of state three (3) times the otherwise required filing fee for each year or part thereof” during which it transacted business in Tennessee.

Agreement to Agree on Price in the Future Makes Agreement Unenforceable

Published on: May 19, 2021 | by J. Ross Pepper

In a recent case, the Court of Appeals of Tennessee concluded that an option agreement for the purchase of 12 acres of land in the Wedgewood-Houston area of Nashville (“Property”) was nothing more than an unenforceable “agreement to agree” since the parties did not agree to a price for the Property, but only agreed to negotiate about price after the optionee exercised its option. (As a matter of full disclosure, Pepper Law represented the prevailing party, the defendant, Freeman Investment, LLC (“Freeman”)).

The plaintiff in the case, LVH, LLC (“LVH”), and Freeman signed an Option Agreement. The Option Agreement gave LVH a period of time to conduct due diligence to determine if the Property was suitable for development. The Option Agreement contained some language, which, standing alone and without reference to any of the other language in it, could be used to calculate a definite purchase price. The most critical paragraph in the Option Agreement with respect to the issues in the case was paragraph 2 which provided:

Option Price. To be mutually agreed upon by Buyer and Seller within thirty (30) days following the expiration of the Option Period, at a price of $20,000 per residential unit (upon project completion) that can reasonably be developed on the property ….

Another paragraph provided that the earnest money paid by LVH “shall either be refunded to [LVH] in the event [LVH] terminates this agreement or [LVH] and [Freeman] cannot agree to an Option Price or partnership terms.”

What Damages May a Tenant of Commercial Space Recover in Tennessee?

Published on: April 19, 2021 | by J. Ross Pepper

A couple of Tennessee cases lay out pretty well the kinds of damages a tenant of commercial space may be able to recover in the event the tenant’s landlord breaches the lease agreement by not making repairs or evicts the tenant without grounds. Keep in mind that an eviction can be constructive. A constructive eviction occurs when the premises become untenantable. With some frequency, commercial buildings become untenantable because landlords neglect to make repairs or make inadequate repairs. (A tenant of a commercial building should be very careful about concluding, at least without the input of experienced legal counsel, that a failure of its landlord to make a repair rises to the level of a constructive eviction which would permit it to terminate the lease lawfully.)

In the recent case of Pryority Partnership v. AMT Properties, LLC (Tenn. Ct. App. 2020), the landlord of a commercial building failed to repair a leaky roof on the warehouse it rented to the plaintiff tenant. The tenant was very patient and gave the landlord several months to make the repairs, which repairs the landlord promised from the beginning of the lease it would make. While the tenant was waiting on the landlord to make the repairs, it could not install several machines that weighed several tons each.

After waiting several months for the repairs to be made to no avail, the tenant terminated the lease. The trial court, which was affirmed in all respects by the Court of Appeals of Tennessee, found that the tenant had been constructively evicted and that the defendant landlord had breached the lease by not repairing the leaking roof.

The trial court awarded the tenant almost $200,000 in damages. Those damages consisted of rent paid by the tenant to the defendant landlord, expenses the tenant incurred to renovate the building, as well as expenses it incurred in relocating to another building. The court of appeals affirmed this award. The court of appeals noted that a tenant may recover all damages it sustains because of its landlord’s breach which the tenant can prove with reasonable accuracy. Although the tenant in the Pryority case did not request lost profits, the court of appeals pointed out that it could have and that lost profits may be recovered by a tenant in a breach of commercial lease case.