Opinion
No. COA10-729
Filed 5 April 2011 This case not for publication
Appeal by Defendant from orders entered 27 April and 13 February 2009 and from judgments entered 20 July and 29 September 2009 by Judge Richard W. Stone in Superior Court, Guilford County. Heard in the Court of Appeals 13 December 2009.
Gordon Law Offices, by Harry G. Gordon, for Plaintiff-Appellee. The Law Office of Herman L. Stephens, by Herman L. Stephens, for Defendant-Appellant.
Guilford County No. 08 CVS 7912.
Henry James Bar-Be-Que, Inc., (Plaintiff) filed a complaint on 4 June 2008 seeking to recover damages from Jeanette Davis Gilmore (Defendant) for breach of a commercial lease in the amount of $866,515.64. Plaintiff also sought attorneys' fees in the amount of $129,977.35, as well as costs. This matter was tried before the trial court judge at the 27 April 2009 Civil Session of Superior Court, Guilford County. The trial court entered judgment in favor of Plaintiff on 20 July 2009. The trial court entered an amended judgment on 29 September 2009 nunc pro tunc 20 July 2009, ordering that Plaintiff recover (1) the principal sum of $687,298.22, (2) pre-judgment accrued interest in the amount of $303,617.65, and (3) interest at the rate of eight percent per annum from 20 July 2009 until paid. The trial court also ordered Defendant to pay Plaintiff's reasonable attorney's fees in the amount of fifteen percent of the amount owed, from the date the action was commenced, which amount was $127,438.06. Defendant appeals.
The pertinent unchallenged findings of fact by the trial court tend to show that Plaintiff operated a sports restaurant under the name "Cheap Seats" (the restaurant), located in a building at 3404 Whitehurst Road (the property) in Greensboro. Plaintiff leased the property from Starmount, Inc. (Starmount). Plaintiff and Starmount entered into a lease (the Starmount lease) which contained a provision that prohibited Plaintiff from entering into an assignment or sublease without the written consent of Starmount. Plaintiff also executed a "LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING" (the security agreement) in favor of FNB Southeast (FNB) as beneficiary. The security agreement also contained a provision that prohibited Plaintiff from subleasing or assigning the property without the written consent of FNB.
Jerry Gilmore, IV (Mr. Gilmore) and Monica Gilmore Lassiter (Ms. Lassiter), doing business as Off the Hook Entertainment, Inc., approached Plaintiff's vice-president, Carl Wrenn (Mr. Wrenn), with a proposal to purchase the restaurant operation and Plaintiff's interest in the building, furniture, fixtures and equipment. Prior to closing, the attorney for Mr. Gilmore and Ms. Lassiter indicated that a limited liability company, JJ Premier Investments, LLC (JJ), would take over his clients' role in the sublease. Plaintiff and JJ executed a three-year commercial sublease agreement (the sublease) on 2 June 2005. Defendant was present at the closing and signed a "guaranty of lease agreement[,]" whereby she agreed to serve as guarantor of the sublease. During the term of the sublease, JJ was required to pay: (1) rent in the amount of $20,000.00 per month, (2) all property taxes, (3) all property insurance, and (4) all repairs. The sublease also provided that late payments "shall include interest at the rate of one and one-half (1 1/2)% per month with a minimum late payment penalty fee of four percent (4%) of the outstanding payment due."
JJ failed to pay its October 2005 rent, and also failed to pay "any rent, late fees, or . . . required expenses or taxes after September of 2005." JJ also failed to pay its insurance premium in September 2005. This failure resulted in a loss of insurance coverage in October 2005, during which time a fire occurred at the restaurant. Plaintiff changed the locks on the restaurant on 19 October 2005. Plaintiff wrote JJ on 28 November 2005, and declared JJ to be in default on the sublease and demanded that JJ pay its outstanding financial obligations. A copy of Plaintiff's demand was sent to Defendant on 19 December 2005. Neither JJ nor Defendant paid the outstanding balance during December 2005. Plaintiff was able to re-let the property for a portion of the remainder of the sublease. Plaintiff gave Defendant an $80,000.00 credit for the time the property was re-let.
Defendant filed an answer dated 18 August 2008. Defendant argued that: (1) Plaintiff failed to mitigate its damages; (2) Plaintiff's claims were barred because of failure to "comply with any required administrative procedure or any applicable limitations period[;]" (3) Plaintiff's claims were barred by "the equitable doctrines of waiver and estoppel[;]" (4) Plaintiff's claims were barred "by the equitable doctrine of unclean hands[;]" (5) Plaintiff's claims "may be barred and/or reduced by the after-acquired evidence doctrine[;]" and (6) "Plaintiff['s] claims may be barred by any or all of the affirmative defenses contemplated by Rule 8 of the North Carolina Rules of Civil Procedure." Defendant, without altering her affirmative defenses, filed an amended answer dated 28 August 2008.
The trial court conducted a bench trial during the 27 April 2009 session of Superior Court and then recessed for consideration of the issues. Defendant submitted a memorandum of law dated 19 May 2009. The record does not reflect a memorandum filed by Plaintiff. The trial court entered a judgment dated 20 July 2009 concluding, inter alia, that Plaintiff was owed back payments of rent, that Plaintiff had taken reasonable steps to mitigate its damages, and that Defendant was liable as guarantor. Defendant moved to amend the judgment on 30 July 2009, and the trial court entered an amended judgment on 29 September 2009, nunc pro tunc 20 July 2009. In its amended judgment, the trial court made additional findings of fact and conclusions of law, which will be discussed in more detail below. Defendant appeals.
I. Standard of Review
We review the results of a bench trial to determine whether the trial court's findings of fact were supported by competent evidence and whether its conclusions of law were supported by the findings of fact. In re Schiphof, 192 N.C. App. 696, 700, 666 S.E.2d 497, 500 (2008). This Court reviews a trial court's conclusions of law de novo. Id. Findings of fact not challenged by the appellant are binding on appeal. Id. In the present case, Defendant does not challenge any of the trial court's findings of fact; therefore, all of the findings of fact in the trial court's order are binding on appeal. The trial court's order contains unchallenged findings of fact in accordance with the facts set forth above.
II. Illegality
Defendant argues that the trial court erred in granting judgment in favor of Plaintiff because "[t]he [s]ublease, as modified by [an] addendum and as implemented by . . . Plaintiff and JJ, required, initiated and effectuated unlawful" conduct. Defendant contends that, at the 2 June 2005 closing, Plaintiff and JJ altered the sublease, including an addendum regarding an arrangement between them to accommodate JJ's alleged failure to obtain a permit to operate under North Carolina Alcoholic Beverage Control (ABC) laws. Defendant contends that the amended sublease rendered the entire contract unenforceable because "this court will not enforce an illegal contract." Plaintiff counters that Defendant waived this defense by failing to plead illegality in either her answer or her amended answer.
We must determine whether the affirmative defense of illegality is properly before our Court. Reviewing the record, we find that, although Defendant's initial answer does plead five specific affirmative defenses, it does not plead the affirmative defense of illegality. Defendant also asserted a "sixth defense," in which she pleaded that "Plaintiff['s] claims may be barred by any or all of the affirmative defenses contemplated by Rule 8 of the North Carolina Rules of Civil Procedure." Defendant stated that she "reserve[d] the right to assert any additional defenses based upon evidence obtained during the course of discovery." Defendant filed an amended answer dated 28 August 2008, but she did not alter her pleadings regarding affirmative defenses.
N.C. Gen. Stat. § 1A-1, Rule 8(c) provides:
In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, truth in actions for defamation, usury, waiver, and any other matter constituting an avoidance or affirmative defense. Such pleading shall contain a short and plain statement of any matter constituting an avoidance or affirmative defense sufficiently particular to give the court and the parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved.
N.C. Gen. Stat. § 1A-1, Rule 8(c)(2009) (emphasis added). In the present case, Defendant failed to "set forth affirmatively" the defense of illegality in either her answer or amended answer. Id. "Failure to raise an affirmative defense in the pleadings generally results in a waiver thereof." Robinson v. Powell, 348 N.C. 562, 566, 500 S.E.2d 714, 717 (1998). When an affirmative defense has not been properly pleaded, a defendant is prevented from raising it on appeal. Id. at 567, 500 S.E.2d at 717 (The "[d]efendant's failure to assert ratification as an affirmative defense bars that issue being raised by him, or by the Court of Appeals, on appeal.").
There are exceptions to the general rule that an unpleaded affirmative defense is waived. "Although the failure to plead an affirmative defense ordinarily results in its waiver, the parties may still try the issue by express or implied consent." Duke University v. St. Paul Mercury Ins. Co., 95 N.C. App. 663, 673, 384 S.E.2d 36, 42 (1989); see also Robinson, 348 N.C. at 566, 500 S.E.2d at 717 ("Under certain circumstances this Court has permitted affirmative defenses to be raised for the first time by a motion for summary judgment."). In Duke University, our Court reviewed the record and determined that there was evidence presented at trial regarding the affirmative defense at issue therein. Id. We concluded that the evidence presented was not sufficient to support the affirmative defense. Id. Implicit in the Duke University analysis is a conclusion that the unpleaded affirmative defense was tried by the consent of the parties.
Thus, though Defendant did not plead the affirmative defense of illegality in her answers, the issue may properly be before us if it was tried by the consent of both Plaintiff and Defendant. We note that Defendant filed an answer and an amended answer without raising the affirmative defense of illegality. Defendant also filed a motion for summary judgment dated 19 February 2009, but she did not raise the issue of illegality therein, either. In a pre-trial order dated 27 April 2009, the trial court enumerated the issues each party wished to address at trial. In the pre-trial order, Defendant listed eight contested issues, the first of which was "[w]hether a valid and enforceable agreement exists between Plaintiff and Defendant[.]" There is no indication that the underlying issue was the illegality of the agreement.
Defendant filed a memorandum of law dated 19 May 2009, setting out proposed findings of fact and conclusions of law. In her memorandum, Defendant included an argument under the heading: "Unenforceable Guaranty of Lease Predicated, In Part, Upon Unlawful Purpose." Thus, the first document that referred to the affirmative defense of illegality was filed with the trial court after the trial had concluded.
The trial court entered a judgment dated 20 July 2009, which did not contain findings of fact or conclusions of law related to the defense of illegality. Defendant filed a motion to amend the judgment on 30 July 2009. Defendant requested that the trial court make findings of fact and conclusions of law in accordance with her memorandum, and specifically referenced paragraphs that referred to a defense of illegality. The trial court filed an amended judgment on 29 September 2009, nunc pro tunc 20 July 2009, and included the following finding of fact:
Plaintiff's testimony at trial was that at or about the time of the June 2, 2005 closing, [P]laintiff's offices [sic] envisioned that JJ Premier Investments, LLC would promptly apply for its ABC permit and obtain the permit within 24 to 48 hours. However, when no one from JJ Premier Investments, LLC took the necessary action to secure the ABC permit, ultimately [P]laintiff contacted a former employee who took the necessary action and assisted and caused officers of JJ Premier Investments, LLC to do what was necessary to obtain the ABC permit.
The trial court then made the following conclusion of law:
The conduct of [P]laintiff in closing in escrow to address ABC license requirements was not such as to allow JJ Premier Investments, LLC, who participated in the escrow arrangement and delayed in getting its ABC permit, to have the lease deemed unenforceable.
Plaintiff filed a supplement to the record on appeal and included a letter, dated 16 September 2009, addressed to the trial court. Plaintiff's attorney wrote the letter in opposition to the amended judgment proposed by Defendant. In the letter, Plaintiff's attorney argued that the legality of the ABC permit was not an issue "until Mr. Stephens [Defendant's new attorney] came somewhat belatedly to this case."
In reviewing the transcripts, we find that Defendant did question witnesses concerning the ABC permit, but such questioning appears to be relevant to an argument that the ABC permit was a condition precedent. At the close of Plaintiff's evidence, Defendant moved to dismiss, citing three reasons: (1) failure of condition precedent with respect to the written consent of Starmount required by the Starmount lease; (2) illegality; and (3) a typo in the guaranty agreement. The trial court denied Defendant's motion "as to the second and third cause" and allowed Plaintiff to be heard only as to the "first cause." Defendant did not renew her motion to dismiss at the close of all the evidence.
Defendant argues that the trial court erred, "despite [her] repeated argument for dismissal . . . at the end of Plaintiff's evidence, in her [m]emorandum of [l]aw, . . . and in the iteration thereof in Defendant's [m]otion to [a]mend [j]udgment[.]" However, in reviewing the timing of Defendant's arguments, it appears that the first mention of illegality as a defense came in Defendant's motion to dismiss at the close of Plaintiff's evidence. Plaintiff did not object to this motion nor argue against it, but we note that the trial court immediately ruled on "the second and third cause" and only allowed Plaintiff to be heard as to the first cause — the condition precedent. We also consider the following: (1) Defendant's memorandum of law, which was the first filing in the record to argue illegality, was filed almost a month after the trial concluded; (2) the trial court's original judgment did not contain findings of fact or conclusions of law related to illegality; (3) the trial court's amended judgment contained findings of fact and conclusions of law that obliquely related to the "dry closing," but none that explicitly ruled on the lawfulness of the actions of the parties; and (4) Plaintiff argued against amending the judgment on the grounds that the defenses had not been raised in a timely fashion.
In light of the record in this case, we cannot say that Plaintiff consented, either implicitly or explicitly, to trial of the affirmative defense of illegality. As Defendant did not properly plead that defense, she waived her right to pursue it. Because it was not tried by consent, it cannot properly be raised by Defendant or this Court. See Robinson, 348 N.C. at 567, 500 S.E.2d at 717 (The "[d]efendant's failure to assert ratification as an affirmative defense bars that issue being raised by him, or by the Court of Appeals, on appeal."). We, therefore, overrule Defendant's argument concerning the alleged illegality of the sublease.
III. Failure of Condition Precedent
Defendant also argues that the trial court erred in awarding Plaintiff judgment on the guaranty because the sublease between Plaintiff and JJ was invalid. Though the affirmative defense of failure of a condition precedent was also not pleaded by Defendant, a review of the transcript reveals that evidence was presented at the bench trial on this issue. Further, when Defendant argued failure of condition precedent as to the Starmount lease, the trial court allowed Plaintiff to be heard in response. Plaintiff made its argument without objecting that the defense was unpleaded. Thus, it appears that the issue was tried by the implied consent of the parties and was, therefore, not waived by Defendant for failure to plead. See Duke University, 95 N.C. App. at 673, 384 S.E.2d at 42.
Defendant contends that the sublease was invalid because Plaintiff never obtained the consent of Starmount, which was required by the Starmount lease. Defendant argues that, "[w]ithout the written consent of Starmount, the [s]ublease to JJ was invalid because . . . Plaintiff did not have the right to make a sublease to JJ without the written consent and the [s]ublease itself incorporates and makes the requirement of Starmount's written consent a pre-condition of the sublease."
"A condition precedent is a fact or event that must exist or occur before there is a right to immediate performance, before there is a breach of contract duty." Mosely v. WAM, Inc., 167 N.C. App. 594, 600, 606 S.E.2d 140, 144 (2004). "Conditions precedent are not favored by the law." Id. Therefore, we will not interpret the provisions of a contract as a condition precedent "in the absence of language clearly requiring such construction." Id. "`The weight of authority is to the effect that the use of such words as "when," "after," "as soon as," and the like, gives clear indication that a promise is not to be performed except upon the happening of a stated event.'" Id. (citation omitted).
The Starmount lease contained the following provision:
10.1 Tenant shall not assign or in any manner transfer this Lease or any estate, interest or benefit therein or sublet the Premises or any part thereof or permit the use of the same or any part thereof by anyone other than Tenant without prior written consent of Landlord, which consent shall not be unreasonably withheld. . . . If Landlord consents to any transfer, assignment or subletting, that consent shall not be effective unless and until Tenant gives written notice of the assignment and a copy of the assignment agreement or sublease to Landlord along with such information as to the financial responsibility of the proposed assignee or subtenant as Landlord may reasonably require, and the transferee, assignee or sublessee delivers to Landlord a written agreement in form and substance satisfactory to Landlord pursuant to which such transferee, assignee or sublessee assumes all of the obligations and liabilities of Tenant under this Lease.
The sublease contains the following language: "Tenant acknowledges Landlord is bound by the terms and conditions contained in the over-lease with Starmount Company a copy of which Tenant hereby acknowledges has been made available to Tenant for review prior to signing this Lease. Tenant agrees to comply in all respects with the said over-lease."
We note that the language of the Starmount lease provides that Plaintiff "shall not" assign without the written consent of Starmount, and that any such consent "shall not be effective unless and until" Starmount takes certain further steps. Thus, the Starmount lease does not explicitly state that Starmount's consent is a condition precedent to an assignment or sublease. However, the use of the language, "unless and until[,]" suggests that the written consent itself has a condition precedent to becoming effective. Thus, the questions before us are: (1) whether a requirement in a lease preventing assignment without the written consent of the landlord amounts to a condition precedent to a sublease or assignment of that lease, and (2) whether the tenant's failure to obtain written consent of the landlord is a defense to the enforceability of the sublease available to the subtenant.
It appears that this issue has not yet been directly addressed by our Courts. However, we consider the following instructive case dealing with landlord consent. In Realty Co. v. Spiegel, Inc., 246 N.C. 458, 98 S.E.2d 871 (1957), our Supreme Court addressed a landlord's right to object to an assignment of a lease which contained the following provision:
The Lessee may without the consent of the Lessor, assign or sublet, in whole or in part, the demised premises to any successor corporation without restrictions or to any subsidiary or affiliate upon the express condition that Lessee shall remain primarily liable for the performance of the conditions, agreements and terms of this indenture including the payment of both minimum and additional rents, and Lessee may assign or sublet in whole or in part, the demised premises to any other person, persons or corporation, with the approval of the Lessor, which approval shall not be unreasonably withheld.
Id. at 460, 98 S.E.2d at 873. The Supreme Court held that the provision was "a restriction on lessee's right of alienation. It does not purport to be a covenant on the part of lessee." Id. at 465, 98 S.E.2d at 877 (internal citation omitted). In Realty Co., the defendant-tenant assigned the lease to the co-defendant-subtenant without obtaining the consent of the plaintiff-landlord. Id. at 459-61, 98 S.E.2d at 872-74. After accepting payment of rent for more than a year, the plaintiff-landlord filed an action seeking a declaration as to the rights of all the parties regarding whether it could object to the assignment. Id. at 465, 98 S.E.2d at 877. Our Supreme Court held that, by accepting rent payments for over a year, the plaintiff-landlord had waived its right to declare forfeiture under the lease. Id. at 468, 98 S.E.2d at 879. The Court further held that the trial court "should have concluded that plaintiff had waived its right to object to the assignment, that the contractual relationship created by the original lease, with the obligations there assumed by [defendant-tenant] and plaintiff[-landlord] continued in full force and effect." Id.
Though the question before us is different from that considered by the Supreme Court in Realty Co., we find the analysis therein informative. Importantly, under the facts of Realty Co., the landlord's consent was required by the lease to relieve the defendant-tenant of its obligations under the lease, but was not a condition precedent to the formation of a sublease. Our Supreme Court discussed the right of the landlord to object to the assignment and held that such a right could be, and in fact was, waived by the landlord's failure to exercise that right. Thus, though the landlord could have objected to the assignment, its failure to do so amounted to waiver. Therefore, the provisions of the lease operated to render the assignment effective, but the tenant remained liable under the terms of the lease.
The lease before us expressly prohibits any sublease or assignment without the consent of the landlord and, unlike the lease in Realty Co., does not contain a provision that authorizes the tenant to sublease without the consent of the landlord. However, as with the provision in Realty Co., we interpret the lease before us as reserving to Starmount, as landlord, the right to object to an assignment and to pursue an action against Plaintiff, as tenant, for breach of a lease provision. We do not interpret the provision as allowing a subtenant a means of avoiding its obligations under a sublease.
In seeking to have the sublease declared invalid, Defendant is attempting to exercise a right belonging to Starmount. We note that the trial court found that Starmount was made aware of the sublease and "only cared that the facilities be used for a restaurant." It appears that Starmount waived its right to object to the sublease pursuant to Realty Co., though this issue is not before us. Thus, Defendant is seeking to enforce a right belonging to Starmount, while Starmount itself appears to have waived that right.
At least one other jurisdiction has addressed a situation where a tenant sought to terminate a sublease and argued that the sublease was invalid for lack of the consent of the original landlord. In Capri Operating Corporation v. Bluestone, 217 So. 2d 770 (La. App. 1969), the Louisiana Court of Appeals for the Fourth Circuit addressed a lease containing the following provision: "`Lessee is not permitted to rent or sub-let or grant use or possession of the premises to any other party without the written consent of the Lessor, and then only in accordance with the terms of this lease.'" Id. at 772. The court recited the following rule:
[T]he absence of approval by the owner of a sublease under these circumstances does not invalidate the sublease contract between the original lessee and his sublessee unless the owner does something to enforce the prohibition. The provisions in the contract of lease between the owner and the original lessee prohibiting the lessee from subleasing the property without the consent of the owner is solely for the protection and benefit of the owner and if the owner does not take action to enforce it no one else can.
Id. at 773. We find the rule stated in Capri to be well-reasoned, helpful, and persuasive in the case before us.
We therefore hold that, on the facts before the trial court, the provision set forth in the Starmount lease does not render Starmount's consent a condition precedent to the establishment of a sublease or assignment between Plaintiff and JJ. We do not determine what effect the provision in the lease has on the relationship between Starmount and Plaintiff, nor do we address whether Starmount might have an action against Plaintiff as a result of any violation of the terms of the lease, as those issues are not before us. Rather, we address only those causes of action and defenses available to the parties before us. We hold that Defendant cannot avoid her obligations as guarantor by arguing the rights of Starmount where Starmount itself has not come forward to enforce and argue them.
IV. FNB
Defendant next contends that the consent provision of the security agreement with FNB prevented Plaintiff from entering the sublease. The security agreement contains a provision stating that Plaintiff "will not hereafter sublease, assign or grant licenses with respect to any portions of the [p]roperty without the prior written consent of[FNB]." We note that the FNB agreement was not incorporated by reference into the sublease, and Defendant's argument is not related to a condition precedent as above, but rather, she argues that Plaintiff was without authority to execute a sublease. Defendant cites no authority for the proposition that a security agreement, with a provision such as the one at issue here, could be used by a subtenant as a defense to challenge the right of a tenant seeking payment of rent. As the positions of Starmount and FNB are similar, we find the analysis above applicable. For the foregoing reasons, we overrule Defendant's argument.
V. Damages
Defendant next contends that, because the sublease was unenforceable, the trial court erred by awarding damages pursuant to the provisions thereof. As we have affirmed the trial court's holding that the sublease was enforceable, Defendant's argument is without merit.
Affirmed.
Chief Judge MARTIN and Judge ERVIN concur.
Report per Rule 30(e).