Arthur Kahn v. Paul J. Penczner ( 2008 )

IN THE COURT OF APPEALS OF TENNESSEE
AT MEMPHIS
January 23, 2008 Session
ARTHUR KAHN, ET AL. v. PAUL J. PENCZNER, ET AL.
Direct Appeal from the Circuit Court for Shelby County
No. CT-004617-04 John R. McCarroll, Jr., Judge
No. W2006-02527-COA-R3-CV - Filed July 24, 2008
Lessees/Appellants filed suit against Lessors/Appellees for breach of a commercial lease after
Lessors/Appellees refused to approve Lessees/Appellants’ proposed subtenants. The trial court
found that Lessors/Appellees had failed to fully mitigate damages, and granted Lessor/Appellees
only 50% of rents as damages, along with damages for taxes and insurance. Lessees/Appellants
appeal the trial court’s award of rents, and the judgment for taxes and insurance. Lessors/Appellees
raise additional issues concerning the trial court’s award of only a portion of its claimed attorneys
fees, and the judgment based upon damage to the demised Building by Lessees/Appellants. Finding
no error, we affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed; and
Remanded
DAVID R. FARMER , J., delivered the opinion of the court, in which ALAN E. HIGHERS, P.J., W.S.,
joined. W. FRANK CRAWFORD , J., did not participate.
Glen Reid, Jr., Hal Gerber, and Douglas Black, Memphis, Tennessee, for the appellants, Arthur
Kahn, Louis Loeb, Larry Bloch and Peggy E. Burch.
William H. Fisher, III and Valerie Fisher, Memphis, Tennessee, for the appellees, Paul J. Penczner
and Jolanda Penczner.
OPINION
This action arises from a dispute over a commercial lease (the “Lease”) of a two-story
building at 964 June Road in Memphis (the “Building”). Arthur Kahn, Louis Loeb, and Larry Bloch
are the partners who comprise the Tennessee general partnership known as Cellermasters, d/b/a
Arthur’s Wine & Liquor ( together with Peggy Burch, Arthur Kahn’s ex-wife and signatory to the
Lease, “Arthur’s,” “Lessee,” or “Appellant”). Paul J. Penczner and Jolanda Penczner (together, the
“Penczners,” “Lessor,” or “Appellee”) are the owners of the Building.
The business relationship between these parties began in 1985 when Arthur’s entered into
the Lease with the Penczners. The original lease term began on April 1, 1985 and ran for a period
of six years. Over time, the parties negotiated three extensions of the Lease, the last of which
expired on March 31, 2006. From the beginning of its occupancy, Arthur’s occupied only the first
floor of the two-story building.
In 2003, Arthur’s desired to relocate to a newly-constructed building, which directly fronted
Poplar Avenue. In December 2003, Arthur’s notified the Penczners of its intention to relocate in the
spring of 2004, and to sublet all or part of the Building for the balance of the Lease term. To that
end, Arthur’s hired a realtor and sought the Penczners cooperation in marketing the Building to
prospective tenants. Ultimately, Arthur’s presented two prospective tenants, both of whom the
Penczners rejected.
On August 10, 2004, Arthur’s filed a “Complaint for Breach of Contract, Fraudulent
Misrepresentation, and Damages” (the “Complaint”) against the Penczners.1 In its Complaint,
Arthur’s specifically avers that the Penczners “arbitrarily and unreasonably rejected” the prospective
tenants in violation of the Lease. Consequently, Arthur’s contends that the Penczners “violated their
duty of fair dealing and acting in good faith.”2 In its prayer for relief, Arthur’s asks the court, inter
alia, to declare the Lease null and void effective August 15, 2004, for damages including its real
estate agent’s fees, and for attorney’s fees.
On April 22, 2005, the Penczners filed their answer, in which they deny the material
allegations of the Complaint. Concurrently with their answer, the Penczners filed a counter-
complaint, asserting that Arthur’s had failed to comply with Paragraph 13 of the Lease by not
supplying the required information on the proposed subtenants. The Penczners further contend that,
based upon the information that they did receive, the prospective tenants were not financially sound,
or were otherwise undesirable for the space. In their counter-complaint, the Penczners assert, inter
alia, that Arthur’s remains liable for all obligations under the original Lease, that the Penczners had
taken steps to mitigate their damages (i.e., they took possession of the building, and retained a real
estate agent in order to find a suitable subtenant). The Penczners further contend that Arthur’s is
obligated to pay the “annual realty taxes and hazard insurance premiums” on the Building, and that
they had failed to make such payments in breach of the Lease. The Penczners also claim that
Arthur’s damaged the demised premises when it abandoned same.
The matter was tried to the court, sitting without a jury. On October 2, 2006, the trial court
entered its Final Judgment, which reads, in pertinent part, as follows:
1
The original Com plaint w as brought by Plaintiff Arthur Kahn only. However, the Complaint was later
amended to add the additional Plaintiffs set out above.
2
Arthur’s claim for fraudulent misrepresentation was voluntarily non-suited by Order of April 6, 2006.
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[T]he Court found that the Penczners were entitled to recover from the Plaintiffs the
following expenses incurred by them in satisfying the Plaintiffs’ obligations under
the lease:
$740.00– Repair and replace facia on roof damaged by the Penczners’
[sic] sign.
340.00– Paint facia
270.00– Clean first floor and cart away debris
650.00–Clean second floor and cart away debris
150.00–Repair ceiling panels damaged by water resulting from
damage to the roof caused by Plaintiffs’ sign.
290.00– Replace and/or repair ceiling tile damaged by water from
leaking roof.
730.00–Roof repair related to damage caused by Plaintiffs’ sign.
3,840.00– Replacement of ceiling tile grid and tiles removed by
subtenant for which Plaintiffs admitted liability.
$7,010.00– TOTAL
The Court denied the Penczners[’] other counter-claims for expenses,
including expenses incurred in rendering the property suitable for reletting.
The Court made written findings and rendered what was referred to in the
findings as a “preliminary” opinion, a copy of which is attached hereto and made a
part hereof by reference. The Court invited Counsel to supply briefs and/or argument
concerning these findings; and, following the submission of briefs by Counsel, the
Court issued the following written ruling:
It is the Court’s opinion that the Penczners should recover fifty
percent (50%) of the unpaid portion of the unpaid rent from July 1,
2004, through March 31, 2006. No discretionary costs will be
awarded. Statutory court costs will be divided equally.
The Penczners are the prevailing party. The lease states that “The
losing party shall pay all reasonable attorneys’ fees of the prevailing
party.” If the parties cannot agree on what is a “reasonable attorney
fee, I will conduct a hearing to determine the issue.”
The parties were unable to agree on fees for the Penczners’ attorneys, with the
result that a hearing was conducted by the Court to determine the amount of the
attorneys’ fees to which the Penczners would be entitled. Prior to the hearing,
affidavits concerning fees were submitted by William H. Fisher, III, and Valerie
Fisher, the Penczners’ attorneys, and counter affidavits were submitted by Glen Reid
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and Hal Gerber, attorneys for the Plaintiffs. William Fisher then submitted a rebuttal
affidavit. No proof was offered at the hearing other than these affidavits and exhibits
thereto. Based on these affidavits and exhibits, the Court found that the Penczners
should be awarded attorneys’ fees of $45,000.
During the pendency of this cause, the Plaintiffs, by agreement, paid into an
escrow account the 20-months rent, which became due from August 1, 2004, until
the term of the lease ended on March 31, 2006. By agreement, the attorneys for
Plaintiffs and Defendants have joint control of this account, and the agreement
provides that at the conclusion of the litigation, the balance of this account, including
all accretions, must be paid in a manner provided in an order of this Court. There is
a balance in the account currently in the approximate amount of $140,000.00, and the
balance in the account should be paid to the Penczners for which the Plaintiffs should
be given credit on this judgment.
IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED:
1. That the Plaintiffs’ claims for relief against the Penczners, which are
enumerated in the prayer for relief of the...original Complaint...are without merit and
are hereby denied . . . .
2. That the Plaintiffs’ contention that the Penczners’ counter-claim for rent
due them should be reduced due to their failure to mitigate damages is meritorious
and that they are therefore entitled to only 50% of the rent claimed by them.
3. That the [Penczners] be, and they are hereby, granted judgment against the
Plaintiffs . . . jointly and severally, for the following sums:
a. $22,569.45–City Tax Increases ‘98 thru ‘06
b. 25,806.08–County Tax Increases ‘98 thru ‘06
c. 4,808.67–Insurance Increases ‘98 thru ‘06
d. 7,010.00–Expenses for which Plaintiffs are responsible
e. 74,250.00–50% of rent and late charges from 8/1/04 thru 3/31/06
f. 45,000.00–Attorneys’ Fees
$179,444.20–TOTAL
4. The Penczners’ request for prejudgment interest on the amounts found to
be due them for rent, taxes and insurance be, and it is hereby, denied.
5. That the funds currently held in escrow, controlled by the attorneys for the
parties together with all accretions thereon, be paid to the Penczners for which the
Plaintiffs are to be given credit on this judgment.
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Arthur’s appeals and raises four issues for review as stated in its brief:
1. In light of lease provisions expressly permitting a Tenant to sublease all or
part of the leasehold, did the trial court err in failing to hold that a Landlord’s
refusal to allow prospective sub-tenants constitutes either (I) a breach of the
lease by Landlord that offsets the Landlord’s claim for unpaid rent, or (ii) a
failure by the Landlord to mitigate damages that precludes Landlord’s claim
for unpaid rent?
2. After finding that a Landlord failed to market the leasehold in a commercially
reasonable manner and otherwise failed to mitigate damages, did the trial
court err in awarding damages to Landlord for unpaid rent?
3. Did the trial court err in awarding a Landlord damages for many years of past
tax and insurance escalations that Landlord waived, that were never billed to
Tenant, and which were excluded from the agreed rent by oral modifications
of the lease?
4. In light of the foregoing errors, did the trial court err in awarding Landlord
attorneys’ fees and in failing to award attorneys’ fees to Tenant?
In the posture of cross-appellant, the Penczners raise the following, additional issues
for review:
1. The court erred in holding that the Penczners had a duty to mitigate damages.
2. The court’s holding that the Penczners failed to mitigate their damages by not
negotiating further to the sleep proposal, and that their recovery of rent
should, therefore, be reduced is contrary to the law and a preponderance of
the evidence.
3. The court’s holding that the Penczners failed to mitigate their damages
because there was “significant variance” between the listing agreement and
[Arthur’s] lease and that the Penczners’ recovery of rent should, therefore, be
reduced on account thereof is contrary to law and the preponderance of the
evidence.
4. The court erred in holding that the attorney[s’] fees allowed the Penczners
should be limited to a percentage of the fees claimed equal to the percentage
which the amount recovered by them bears to the total amount claimed by
them, thereby disallowing fees for the successful defense of Plaintiffs’ claims
vs. the Penczners[’].
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5. The court erred in allowing recovery of only those repair expenses thought
to be allowable under the “good condition” clause and disallowing repair
expense[s] necessary to render the premises tenantable or due under other
clauses of the Lease.
6. The court erred in disallowing all prejudgment interest.
Because this case was tried by the court sitting without a jury, we review the case de novo
upon the record with a presumption of correctness of the findings of fact by the trial court. Unless
the evidence preponderates against the findings, we must affirm, absent error of law. See Tenn. R.
App. P. 13(d).
Breach of Lease, Mitigation of Damages, and Damages
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. See 49 Am.Jur.2d Landlord & Tenant § 96 (2003).
In the instant case, Arthur’s contends that the trial court erred in awarding damages to the
Penczners in light of its finding that the Penczners had failed to mitigate their damages. Specifically,
Arthur’s asserts that the Penczners’ refusal to approve the proposed subtenants constitutes a breach
of the Lease under Paragraph 13 thereof. This paragraph reads:
13. ASSIGNMENT AND SUBLETTING: It is expected that Lessee, from time to
time, may sublet a portion of the premises, or portions or all of the premises, to
which sublet(s) Lessor agrees, provided, however, that: a) Lessee shall remain
primarily responsible for the performance of all of the terms and conditions of this
Lease; and b) no subtenant shall be allowed whose presence or business would be
detrimental to the value of the premises to Lessor by virtue of the character of the
person(s) or business. Establishments serving food and/or alcoholic beverages are
not per se detrimental to the value of the premises. Lessee agrees to provide Lessor
with notice in writing, thirty days in advance of any proposed sublet or assignment,
of Lessee’s intention to sublet; and the notice shall include a copy of the assignment
or sublet agreement, the proposed subtenant’s financial statement and business
background, and a description of the proposed use, all for the purpose of informing
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Lessor under the terms of part “b” of this paragraph. Lessee and Lessor agree to act
in full good faith, each toward the other, in the implementation of this paragraph.
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. 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)). 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. Cook & Nichols, Inc., 480 S.W.2d
at 545. 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.” Action Ads, Inc. v. William B. Tanner Co., Inc., 592
S.W.2d 572, 575 (Tenn. Ct. App.1979) (quoting Tampa Electric Co. v. Nashville Coal Co., 214 F.
Supp. 647, 652 (M.D.Tenn.1963)). Despite this duty, an injured party is not required to mitigate
damages where such a duty would constitute an undue burden. Cummins v. Brodie, 667 S.W.2d 759,
766 (Tenn. Ct. App.1983).
From our reading of the plain language of Paragraph 13 of the Lease, it appears that, although
the parties acknowledge Arthur’s right to sublet the Building, the Penczners retain the right to
approve any proposed tenants. To that end, the paragraph requires Arthur’s to provide written notice
of its intent to sublet, along with a “copy of the assignment or sublet agreement, the proposed
subtenant’s financial statement, and business background, and a description of the proposed use.”
The Penczners’ authority to approve or reject proposed tenants is very broad under our reading of
this paragraph. While required to “act in full good faith,” the sole criterion for the Penczners’
decision hinges upon the question of whether the proposed subtenant’s “presence or business would
be detrimental to the value of the premises to Lessor by virtue of the character of the person(s) or
business.” The parties herein disagree as to the definition of the word “character,” same being the
sole basis for the Penczners’ approval of proposed subtenants. In short, the term is subjective and
the power of that subjectivity lies with the Penczners. Consequently, our determination of whether
the Penczners failed to mitigate their damages in rejecting the two subtenants proposed by Arthur’s
becomes a question of whether the Penczners breached their obligation to act in good faith in
rejecting the two proposals. The trial court’s finding on this question is one of fact and we will not
reverse that determination unless the evidence in the record preponderates against same. Tenn. R.
App. P. 13(d).
In the instant case, Arthur’s proposed two subtenants for the Building. There were two
proposals submitted on behalf of Chef Jose Gutierrez, and one proposal on behalf of MEDIAS Sleep
Diagnostic Services, an entity involved in sleep therapy. The sleep therapy sublease proposal is
contained in trial exhibit ten. This exhibit consists of a June 4, 2004 letter from Mr. Kahn to Mr.
Penczner, which letter references the following attachments: (1) Sublease Agreement; (2) Business
Description; (3) Financial Statements. The sublease proposal is in the form of a letter from Arthur’s
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agent, Gary Myers, and is not the actual sublease agreement to be entered between Arthur’s and the
sleep clinic. The sublease proposal states that the terms of the original Lease will be honored except
for five enumerated exceptions. This proposal lists “Arthur’s Wine and Liquor” as “sublessor,” and
lists “Camden McLaughlin, Innovative Sleep Management” as “sublessee.” The provided business
description states:
MEDIAS, Sleep Diagnostic Services, is dedicated to providing the highest quality,
cost effective sleep and pulmonary services to its customers, while promoting patient
education in a caring environment.
At MEDIAS, we believe that:
• Excellence of services provided will direct the success of the organization.
• Provision of quality services is the responsibility of each member of the MEDIAS
team.
• Our customers are our most important resource and we will strive to exceed
expectations while being fair and honest.
Any further information can be found at www.midassleep.com
The “financial statements” provided consist of a “Medias, Inc. Balance Sheet as of April 30,
2004,” and a “Medias, Inc. Profit & Loss YTD Comparison April 2004.” Neither of these
documents are signed. According to the balance sheet, Medias, Inc. showed a net worth of
$7,354.71.
We first note that the name of the proposed subtenant is not consistent. The sleep therapy
entity is referred to as MEDIAS, Inc., MEDIAS Sleep Diagnostics Services, Midassleep, and
Camden McLaughlin, Innovative Sleep Management. From the record, not only is there insufficient
evidence from which to determine the exact name of the proposed subtenant, but there is also
evidence to suggest that this entity was not (as of the date of the proposal) financially secure enough
to take on the Lease. Consequently, we cannot find that the evidence in this record preponderates
against the trial court’s finding that the Penczners did not breach the terms of the Lease by failing
to accept this proposed subtenant based upon the information provided by Arthur’s. However, in
finding that the Penczners had failed to mitigate their damages to the extent necessary to recover all
rents, the trial court found that the Penczners had a duty to negotiate the terms of the sublease
further, as did Arthur’s. From our review of the record, we cannot find that the evidence
preponderates against this finding. Pursuant to both parties’ duty, under Paragraph 13, to act in good
faith, Arthur’s should have provided a more thorough business description, and should have provided
actual financial statements, as well as the proposed sublease agreement rather than a bullet-form
letter outlining the changes to the original Lease. When the Penczners were not satisfied with the
proposal as submitted, in the interest of good faith, they should have discussed the shortcomings with
Arthur’s and any remedies that could allow the proposal to go forward. This is particularly true in
light of Mr. Penczner’s testimony that they would have accepted the sublease had they had a
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guaranty, and Mr. Kahn’s testimony that either of his partners would have provided that guarantee.3
That being said, what the record shows is that the lack of communication between the parties
resulted in a stalemate, which may have been easily remedied through negotiation.
Concerning the proposals offered on behalf of Jose Gutierrez, both take the form of letters
from Scott Barton, Jose Gutierrez’ agent, to the Penczners’ agent, Gary Myers. The first, dated May
14, 2004, is called a “Letter of Intent.” This correspondence indicates that the new lease term will
be “[t]wo [y]ears of Sublease from current Tenant (Arthurs), followed by Five Year new lease and
Three 5 yr. options.” The proposed rent for the two-year remainder of the Lease is listed as $5,500
per month (with Arthur’s being entitled to $1,250 worth of food sales each month). The rent for
years three through seven is proposed at $7,500 per month; rent for years eight through 12 is set at
$7,750 per month; for years thirteen through seventeen, rent is established at $8,000 per month; and
for years eighteen through twenty-two, rent is proposed at $8,250 per month. Neither of the two
letters are signed by Mr. Gutierrez, nor his agent. We note that the Gutierrez proposals contain
significant changes from the terms of the original Lease. In rejecting the Gutierrez proposal, the
Penczners indicate (in their letter of May 31, 2004) that they would agree to a sublease to Mr.
Gutierrez that was more in compliance with the original Lease; however, as with the sleep therapy
proposal, neither of the parties attempted meaningful negotiations concerning changes to the
Gutierrez proposal. Because of the significant variance between the Gutierrez proposals and the
original Lease, we cannot conclude that the trial court erred in holding that the Penczners’ rejection
of same was reasonable. However, because of the parties’ mutual duty to act in good faith, we also
cannot conclude that the trial court erred in finding that the Penczners breached this duty to the
extent that they failed to negotiate or otherwise compromise.
Concerning the Penczners’ duty to mitigate damages related to the unexpired term of the
original Lease, following Arthur’s notice of its intent to vacate the Building, the Penczners hired
Larry Alexander to find a replacement tenant. To that end, the Penczners and Mr. Alexander entered
into a Rental Agency Agreement (“RAA”). This RAA was admitted as Exhibit 48C at trial. Under
the terms of the RAA, the monthly rent is listed at $15,000.00 or whatever the Penczners agree to
accept. In addition, the RAA calls for a longer lease term. In material aspects, the RAA significantly
differs from the original Lease. The Penczners’ duty to mitigate requires them to exercise due
diligence in protecting themselves from the immediate results of Arthur’s vacating the Building.
From the plain language of the RAA, it appears that the Penczners were not concerned with
obtaining a tenant to take over where Arthur’s left off, but rather that they were concerned with
obtaining significantly more rents, and a longer lease term.
The trial court did not find that the Penczners had completely failed to mitigate their
damages. In fact, the trial court affirmed the Penczners’ decision in rejecting the two proposals
offered by Arthur’s. Rather, the Penczners’ breach was based upon their duty to act in good faith
concerning any sublet of the Building. As discussed above, the Penczners failed in this duty based
3
We note that Mr. Kahn’s partner Laurence Bloch stated that he would have guaranteed the sublease of the
sleep therapy entity.
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upon their failure to further negotiate terms of the proposals with Arthur’s; however, Arthur’s too
failed in this regard and thus breached its own duty of good faith. However, because the Penczners
overreached in their RAA, choosing to solicit for more rents and longer terms than they were entitled
to under the original Lease, we agree with the trial court that this alleged effort to mitigate their
damages was unreasonable and, as such, constitutes a breach of their duty of good faith.
Turning to the issue of damages, the trial court allowed the Penczners to recover 50% of the
rents from the time that Arthur’s vacated the Building until the end of the Lease term. On appeal,
Arthur’s contends that the trial court’s finding that the Penczners failed to mitigate their damages
should result in a forfeiture of all rents. The Penczners assert that, based upon the trial court’s
determination that they did not err in rejecting the subtenant proposals, they should recover all rents
due under the Lease. Based upon the foregoing discussion, Arthur’s argument is not well grounded.
In effect, the trial court found that the Penczners failed to act in good faith (based on the RAA) in
mitigating their damages. The Penczners’ argument is also on narrow footing based upon our
discussion above that, in rejecting said proposals, the duty of good faith required the parties to at
least entertain discussion about modifications thereto. Because both parties failed in this regard,
neither should recover on this basis. Arthur’s failed to provide the required information concerning
its proposed subtenant, and failed to take steps toward meaningful negotiation of the proposals. The
Penczners also failed to negotiate in good faith, and further breached this duty by overreaching in
the RAA. Based upon the evidence before us, and the particular facts of this case, we cannot
conclude that the trial court erred in fashioning the remedy for these mutual shortcomings at 50%
of the total rents due.
Taxes and Insurance
The Lease provides, in relevant part that:
36. TAX AND INSURANCE ESCALATOR: As additional rent, Lessee agrees to
pay Lessor a sum equal to the amount by which city and county realty taxes on the
premise for any period during the term hereof are increased by virtue of an increase
in the assessment of the premises over that established for the year 1984, or by virtue
of an increase in the assessment of the demised premises over that established for the
year 1984 which reassessment is made pursuant to a city-wide or county-wide
reassessment of real estate. This escalator provision also applies to any hazard
insurance premiums now in effect on the premises. Additionally, Lessee agrees to
pay any increased insurance premiums for hazard occasioned solely by any
alterations or additions to the premises made by Lessee.
Pursuant to this clause, the trial court awarded the Penczners $22,569.45 in City Tax
increases 1998 through 2006, $25,806.08 in County Tax increases 1998 through 2006, and $4,808.67
in insurance increases from 1998 through 2006. Arthur’s asserts that these awards were erroneous,
and specifically contends that the Penczners’ failure to “bill” Arthur’s for these monies constitutes
a waiver. We have reviewed the testimony and conclude that same does not preponderate in favor
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of a finding of waiver. In fact, the respective testimonies of Messrs. Kahn and Penczner are
disputed. Mr. Kahn testifies that the Penczners stopped billing for increases in taxes and insurance
after 1996. Furthermore, Mr. Kahn stated that, upon questioning Mr. Penczner about whether
Arthur’s owed under Paragraph 26, Mr. Penczner stated that Arthur’s would not have to pay so long
as it had not found a subtenant for the upper floor of the Building. In contrast, Mr. Penczner testified
that, from the outset, he had difficulty collecting for increased taxes and insurance. In support of this
statement, Mr. Penczner stated that the dispute over taxes and insurance had resulted in the execution
of a Memorandum of Understanding dated June 25, 1986, which Memorandum was admitted as
Exhibit 28. The Memorandum states, in pertinent part, that “[i]t is understood and agreed that any
increases in taxes or hazard insurance premiums over and above stated stipulated amounts will be
paid by Lessee to Lessor as additional rent.” At the hearing, Mr. Penczner testified that, even after
the execution of the Memorandum, he had difficulty collecting these monies from Arthur’s. Mr.
Penczner testified that he never agreed that Arthur’s would be relieved from this obligation pending
sublease of the second floor. Moreover, Mr. Penczner stated that he had written Arthur’s numerous
times, seeking payment of these monies, but that his requests were ignored. Based upon Arthur’s
failure to comply, Mr. Penczner testified that he did stop billing after 1996, but that he never agreed
to forfeit these payments.
The trial court resolved this dispute in favor of the Penczners. It is well settled that, when
the resolution of the issues in a case depends upon the truthfulness of witnesses, the trial judge who
has the opportunity to observe the witnesses in their manner and demeanor while testifying is in a
far better position than this Court to decide those issues. See McCaleb v. Saturn Corp., 910 S.W.2d
412, 415 (Tenn.1995); Whitaker v. Whitaker, 957 S.W.2d 834, 837 (Tenn. Ct. App. 1997). The
weight, faith, and credit to be given to any witness's testimony lies in the first instance with the trier
of fact, and the credibility accorded will be given great weight by the appellate court. See id.; see
also Walton v. Young, 950 S.W.2d 956, 959 (Tenn.1997). From our reading of the record and the
relevant paragraph of the Lease, we cannot conclude that the evidence preponderates against the trial
court’s finding that the Penczners did not waive their right to these monies.
Recovery of Damages based upon damage to the Building
In addition to rents, the trial court awarded the Penczners $7,010.00 in damages for
necessary repairs to the Building as set out above. On appeal, the Penczners assert that the trial court
erred in allowing only a portion of the claimed expenses. We disagree. Paragraph 19 of the Lease
provides, in relevant part:
Lessee may remove trade fixtures affixed by Lessee, provided, however, that Lessee
shall forthwith repair any damage to the premises caused by such removal. All other
fixtures installed by Lessee may be removed by Lessee only if Lessee restores the
portion of the premises affected by said removal to its condition prior to the
installation of the fixtures.
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The trial court’s finding concerning the nature and extent of damage caused to the Building
by Arthur’s removing its fixtures is one of fact. Consequently, we will not reverse the trial court on
this issue unless the evidence in record preponderates against this finding. Tenn. R. App. P. 13(d).
Having reviewed the record before us, we find that the specific damage to the Building enumerated
in the trial court’s order, as set out above, and for which the trial court granted damages to the
Penczners are well founded in the record. Although the Penczners assert that they are entitled to
recover for other alleged damages to the Building over and above those allowed by the trial court,
we disagree. Pursuant to the Paragraph 19 of the Lease, Arthur’s is responsible for those damages
arising from the removal of its fixtures from the Building. In the instant case, the proof shows that
certain damage occurred to the facia of the Building, and to the interior stemming from the removal
of Arthur’s sign. The Penczners also suffered damages based upon having to haul away debris left
by Arthur’s. In reviewing this record, including the testimony of Mr. DeLuca, the general contractor
hired by the Penczners to make the repairs, we cannot conclude that the evidence preponderates
against the trial court’s finding as to damages for repairs. Paragraph 11 of the Lease provides that:
Lessee agrees to deliver to Lessor physical possession of the premises upon the
termination of the Lease, in good condition, excepting ordinary wear and tear . . . or
damage from any other cause, unless such cause is attributable to the negligence of
the Lessee.
From our reading of the record, the damages disallowed by the trial court could fall under either the
ordinary wear and tear, or the more broad damage from any other cause [save Lessee’s negligence]
exceptions set out in Paragraph 11. Because the evidence does not preponderate against the trial
court’s decision to disallow certain claimed damages, we must affirm. Tenn. R. App. P. 13(d)
Attorney’s Fees
We now turn to the Penczners’ issue regarding the trial court’s award of attorney’s fees.
The Lease provides, in relevant part, as follows:
39. ATTORNEY FEES: In the event of any case or controversy arising under the
terms of this Lease whereby it becomes necessary for either or both parties to hire an
attorney, it is agreed hereby between the Lessor and the Lessee that the losing party
in the case or controversy shall pay all reasonable attorney fees of the prevailing
party.
The combined fees submitted by Mr. Fisher and Ms. Fisher, the Penczners’ attorneys, were
$148,000. This amount was supported by affidavits and corresponding time sheets. Arthur’s
attorneys argued that much of the claimed work was “unnecessary and irrelevant.” Following a
hearing, the trial court allowed the Penczners to recover $45,000 in attorneys’ fees. On appeal, the
Penczners contend that, under Paragraph 39 of the Lease, they are entitled to recover all of their
attorneys’ fees due to the trial court’s statement, in its Order, that “[t]he Penczners are the prevailing
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party.” Arthur’s contends that the Penczners are entitled to none of their attorneys’ fees based upon
the trial court’s determination that they failed to mitigate their damages.
Based upon our determination that both parties were at fault to some degree in this matter,
and that damages in the amount of 50% of the rents was just, it would be inequitable for the
Penczners to recover the full amount of attorney’s fees claimed in this case. That being said, the
Penczners did prevail to a greater extent than Arthur’s in that they were awarded damages for taxes
and insurance increases and for damage to the Building. Consequently, under the Lease, Penczners
should recover some of their attorney’s fees as the, for lack of a better term, more prevailing party.
We have reviewed the record and we conclude that the trial court did not abuse its discretion in
awarding $45,000. In light of the trial court’s ruling, this amount was reasonable. Finally, we
conclude that the trial court did not abuse its discretion in failing to award pre-judgment interest.
For the foregoing reasons, we affirm the Order of the trial court. Costs of this appeal are
assessed one-half to the Appellants, Arthur Kahn, Louis Loeb, Larry Bloch and Peggy E. Burch, and
their respective sureties, and one-half to the Appellees, Paul J. Penczner and Jolanda Penczner.
___________________________________
DAVID R. FARMER, JUDGE
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