Hull v. Gafill Oil Co. , 263 Mich. 650 ( 1933 )

On July 15, 1922, defendant Gafill Oil Company, as lessee, entered into a written lease with A.S. Lindenfeld and wife, lessors, for property in Benton Harbor adjoining the right of way of the C. C. C. St. Louis Railway. The lease was for a term of five years, with the option of three successive renewals of five years each at increased rentals. Defendant planned the erection of a bulkhead reservoir and oil filling station on the premises. Shortly after the execution of the lease, it was discovered that the premises were not large enough to accommodate the needs of defendant unless it also secured an adjoining strip of land belonging to the railroad company. Lindenfeld agreed to bear any expense to which defendant might be put during the life of the lease in obtaining the use of this strip of land, and on August 4, 1922, gave defendant a memorandum, reading as follows:

"Benton Harbor, Mich., Aug. 4/22.

"I will agree to refund all expenses during the life of the lease given by me to the Gafill Oil Co. of So. Bend which they incur with the strip of land leased from the Big Four Railroad Co.

"(Sgd.) A.S. LINDENFELD."

Defendant recorded its lease without the memorandum, and later exercised its first option of renewal.

Defendant was obliged to pay the sum of $75 a year to the railroad company for the use of its land, and in turn it deducted this amount from the payments due the lessors, without any objection on their part. Such deductions were made for seven consecutive years, during five of which the Lindenfelds owned the property. Defendants remained in continuous possession of the property and made extensive improvements. On September 24, 1928, Lindenfeld and wife sold the property to May Graham Hull. Before concluding the purchase, her husband obtained an abstract of title to the property. It disclosed the written lease with defendant but not the modification contained in the memorandum hereinbefore set forth. Plaintiff objected to the deductions of $75 per year made by defendant after she had acquired the property, and brought the instant suit to recover these amounts.

The trial judge found in plaintiff's favor solely upon the ground that, as the possession of defendant appeared to be consistent with the instrument it had caused to be recorded, possession was not constructive notice of any collateral or subsequent unrecorded agreement under which defendant claimed rights inconsistent with the recorded lease. The correctness of this ruling is the sole question raised on appeal. The trial judge adopted the rule laid down in Pomeroy on Equitable Jurisprudence (4th Ed.), § 616, from which he quoted as follows:

"The decisions may be regarded as agreeing upon the conclusion, which also seems to be in perfect harmony with sound principle, that where a title under which the occupant holds has been put on record and his possession is consistent with what thus appears of record, it shall not be constructive notice of any additional or different title or interest to a purchaser who has relied upon the record and has had no actual notice beyond what is thereby disclosed."

This rule has been generally followed in the United States and there are many cases in this State that support it. See Hammond v. Paxton, 58 Mich. 393; Reynolds v. Ruckman, 35 Mich. 80; Hooper v. DeVries, 115 Mich. 231. However, in the case of Russell v. Sweezey, 22 Mich. 235, this court refused to apply the rule in a case where defendant in possession held both by virtue of a recorded tax title and an unrecorded patent. Plaintiff purchased the property without actual knowledge of defendant's unrecorded patent, although possession of the latter was open, visible and continuous for a period beginning long before plaintiff purchased the property. Plaintiff invoked the rule as hereinbefore stated. Mr. Justice GRAVES, however, in speaking for the court, said:

"We think this view wholly inadmissible, and have no hesitation in saying that the actual public and visible possession of Sweezey for a period beginning some time before and continuing up to the grant to Russell, was of itself notice to the latter of all of Sweezey's right, interest, claim, and title, whether of record or otherwise, or whether founded on tax sales or deeds, or on agreements, or deeds of any kind."

We are fully in accord with the rule laid down by Pomeroy as hereinbefore quoted. We believe, however, that the ruling should not be so rigidly adhered to as not to permit of an exception when the land-lord-tenant relationship is involved, due to the great frequency with which collateral or subsequent agreements are entered into in forms that do not meet the requirements of recording laws. Agreements modifying the terms of written leases are extremely common. Frequently, alterations, improvements, and repairs have been made by the lessee in consideration of a reduction in the rent, extension of the term, or some other change or modification of the lease. Owing to present economic conditions, many concessions have been made by lessors, resulting in partial abandonment of the terms of their written and recorded leases. Such concessions have been made orally as well as in writing, and frequently are neither witnessed nor acknowledged.

In the instant case, plaintiff knew that defendant was in possession, and that there were valuable improvements on the premises, specially adapted to defendant's uses. It was no hardship for her to inquire as to whether there were any other modifications or changes in the lease. Ordinary business prudence should have prompted her to do so. Although the rule as quoted by the trial court from Pomeroy and followed by the great weight of authority is the correct one, an exception should be made in the case of leases where the lessee is in open and visible possession of improved property. Prospective purchasers should inquire of the tenant in possession as to whether there have been any modifications of the recorded lease or any other collateral or subsequent agreements affecting it. Notwithstanding much authority to the contrary, we believe that the correct rule is set forth in the case of Dengler v. Fowler,94 Neb. 621 (143 N.W. 944), wherein Dengler was lessee under a recorded lease for a term of five years and secured an option to purchase the property. The purchaser of the property relied upon the record and was unaware of the existence of the option when he made his purchase. The court, in holding that possession was sufficient notice, said:

"Defendants were not innocent purchasers. They knew before they accepted lessor's deed that plaintiff had been in possession of the lot for many years, and that in buildings which he had erected he was conducting a store on the premises. * * * His possession was notice to the world of his interests in the lot. * * * The notice imparted by a recorded lease for a five-year term does not put an end to inquiry as to the rights of a tenant who, for a long period of years, has been in possession of the demised premises, where he is conducting a store in buildings erected at his own expense."

To like effect are Collum v. Sanger Bros., 98 Tex. 162 (82 S.W. 459); Toland v. Corey, 6 Utah, 392 (24 P. 190); Ayres v.Jack, 7 Utah, 249 (26 P. 300). Possession is constructive notice of the rights of tenants in possession claiming under a valid collateral or subsequent unrecorded agreement, despite the existence of a prior, recorded lease. The trial court should have found in favor of defendant.

The judgment should be reversed, with costs to defendant, and the case remanded to the lower court with instructions to render a judgment in favor of defendant.

McDONALD, C.J., and CLARK and FEAD, JJ., concurred with BUTZEL, J.