NO. 82-459 

IN THE SUPPSME COURT OF THE STATE OF MONTANA 

1983 

BUNKE, INC., a Montana corporation, 

plaintiff and Appellant, 

BOB JOHNSON and HARLAN CARPENTER, d/b/a 

the JOCAR Partnership, 

Defendants and ~espondents. 

Appeal from: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone 

Honorable Robert Wilson, Judge presidina. 

Counsel of Record: 

For Appellant: 

James R. Carlson, Hysham. Montana 

For RespondentsRalph L. Herriott, Billinqs, Montana 

-- 

Submitted on briefs: March 24 1983 

Decided: July 18 , 19 8 3 

Filed: JUL 1 8 1983 

Clerk 
Mr. Justice Fred J. Weber delivered the Opinion of the Court. 

Plaintiff Bunke, Inc. (Bunke) appeals from a decision of 

the Thirteenth Judicial District Court, Yellowstone County, 

in this declaratory judgment action arising out of the lease 

of The Rails Inn Motel in Forsyth, Montana. We affirm the 

District Court. 

Bunke raises the following issues on appeal: 

1. Does section 70-26-203, MCA, justify the tenant, 

Bunke, vacating the premises and discharge it from further 

payment of rent a.nd other obligations under the lease? 

2. Does the landlord's retaking of possession and 

operation of the motel terminate the lease and with it all of 

the obligations under the lease? 

Plaintiff Bunke is a family corporation based in Miles 

City, Montana, which operates several motels in the area. 

Defendants Bob Johnson (a contractor) and Harlan Carpenter 

formed a partnership (Jocar) in fall of 1980 for the purpose 

of building the Rails Inn Motel in Forsyth, Montana. Their 

decision to build was based in part upon their ongoing 

negotiations with Burlington Northern Railroad (BN) for the 

use of the facility by a guaranteed number of BN employees, 

at that turn-around point on the line. 

Letters from BN's Tom Jarnigan indicate that BN did not 

promise a long-range contract, but at first contemplated a 

guaranteed 35 rooms per day. The agreement finally entered 

into by Jocar and BN on March 31, 1981 guaranteed 20 

occupancies per day at a reduced rate of $17 each. The 

contract was terminable upon thirty days' written notice or 

24 hours' notice in the event of certain contingencies. No 

mention was made in the agreement of cafe or bar facilities. 

Bunke contends the restaurant and bar were essential to the 

BN lease, while Jocar's position is that those facilities 
were to be installed if and when suitable operators could be 

found. 

In spring of 1981, while Jocar was proceeding with the 

construction of the Rails Inn, Bunke expressed an interest in 

leasing and operating the facility. During subsequent 

negotiations between Bunke and Jocar, Garry Bunke, who is an 

officer of the corporation and an attorney, represented 

Bunke; Jocar was not represented by counsel. The record 

suggests that numerous matters were discussed which were not 

included in the lease agreement drafted by Garry Bunke and 

signed by the parties April 21, 1981. 

The term of the lease was from May 1, 1981, to April 30, 

1982. The monthly rental payment was $13,295, payable on the 

fifth day of the following month. The lease provided that 

Bunke would pay $11,400 or the actual property taxes, 

whichever was less, and $2,400 as its share of the insurance. 

Bunke would be liable for utilities, and would not involve 

Jocar in any expense or liability. Bunke had a one-year 

option to purchase the entire facility, including "the 

restaurant and bar portion," for $850,000; the price did not 

include "fixtures, furniture and equipment nor liquor 

license. " In the event Bunke chose not to exercise the 

option to purchase, all lease payments were to be considered 

rental. Jocar had the right to terminate the lease upon 30 

days' written notice for Bunke's failure to perform the 

conditions of the lease or failure to conduct its business 

properly. 

The lease contained no provisions regarding: 

a. The railroad occupancy agreement; 

b. Installation and operation of a bar and cafe; 

c. Responsibility for repairs and maintenance; 

d. Responsibility for correcting flaws in construction 

and supplying furnishings; 
e. Responsibility for complying with sanitary and 

licensing standards and getting a license. 

f. The cost of signs; 

g. Termination by Bunke; 

h. Effect of termination upon the option to purchase 

and rental payments. 

Bunke took possession of the Rails Inn on May 1, 1981, 

installed a manager, and opened for business May 4, 1981. In 

the weeks prior to Bunkels taking possession, Bunke's 

president, Paul Bunke, had visited the site numerous times. 

He was familiar with the progress of construction, and the 

fact that the Rails Inn was not completely finished at the 

time Bunke took possession, and could only enjoy limited 

occupancy at first. He also had read the BN agreement and 

was familiar with its terms. 

Numerous problems arose between Bunke and Jocar from the 

outset, partly because the facility was newly constructed and 

was just starting up, partly because the lease failed to 

establish the responsibility of Jocar for certain equipment, 

adjustments and corrections demanded by Bunke. 

Jocar did not finish the bar/cafe section; nor did Jocar 

find anyone to operate a bar/cafe during Bunkels occupancy, 

although the Rails Inn sign advertised "The Beanery Cafe'' and 

"The Sidetrack Lounge." Jocar refused to finish and open the 

bar/cafe section unless a suitable operator could be found 

who was willing to pay the $3,000 or $4,000 monthly rental. 

Bunke claims many prospective clients turned away upon 

learning the facility lacked a bar and cafe. Bunke also 

claims the lack of a bar and cafe led to BN's reduction of 

its guaranteed occupancy from 20 to ten rooms per day, 

effective December 1981. 

In the beginning of May when the Rails Inn opened, the 

bedspreads and color TV's had not yet arrived; the beds' 
headboards did not match the mattresses; the parking lot was 

not paved; room key tags, checkout cards, and other small 

items were not provided; there was no ice machine; light 

fixtures in the restaurant portion and the basement were 

missing; security lights and door, certain handrails, 

electrical panels and fire extinguisher boxes were not 

finished. Loose bricks at the front entrance caused water to 

pool and seep into the lobby when it rained. In the weeks 

that followed, Bunke and Jocar could not agree as to which 

was responsible for finishing certain items, which items 

amounted to wear and tear, and how responsibility and 

expenses for signs, utilities and compliance with codes 

should be allocated. 

During the summer of 1981, the Rails Inn was inspected 

by the Rosebud. County Department of Public Health and the 

Montana Building Codes Divison. Certain deficiencies were 

found requiring correction before the Rails Inn could be 

licensed. These corrections included handrails on certain 

stairways, laundry chute sprinklers, laundry room fans, and 

basement sprinklers. Certain of the deficiencies were 

corrected by Jocar--the laundry chute was closed off and fans 

were relocated. Handrails were installed in October 1981. 

The last letter from the Rosebud County Department of Public 

Health is dated October 22, 1981. The letter indicated that 

further information was required from the Montana Building 

Codes' Division before the motel could be licensed. 

During the summer of 1981, Bunke and Jocar negotiated a 

substantial reduction of rental payments based upon the above 

deficiencies. They agreed to reduce the rent for May and 

June to 40% of actual income rather than the $13,295 monthly 

figure specified in the lease. The rent for May was $4,904; 

the rent for June was $8,760. Bunke and. Jocar agreed that 
the rental for July, August, and perhaps September, would be 

$12,500 per month. 

Many deficiencies were actually corrected by Jocar. The 

parking lot was paved in July 1981; the TVs, proper 

headboards, and bedspreads were received and installed by 

mid-May. Jocar installed rain gutters, replaced bricks, and 

closed off the laundry chute to conform to building code 

requirements. Bunke supplied its own ice machine and 

repaired door locks. Certain matters remained unresolved, 

including the cost of signs and the absence of the bar/cafe. 

On September 15, 1981, Paul Bunke sent Bob Johnson of 

Jocar the following letter: 

"This is to confirm our conversation at the Blue 

Spruce today, September 15, 1981. It is my 

understanding that the lease for the Rails Inn will 

remain at $12,500.00 for the month of September, 

less $1,886.03 for amounts due by JOCAR to Bunkes, 

Inc . It is further my understanding that the 

October rental is to be negotiated at that time. 

Further, and also pursuant to our conversation, we 

intend on setting November 1, 1981 as a termination 

date for the lease in exchange for releasing the 

option to purchase. We are willing to continue the 

lease if we can mutually agree with you as to terms 

for the month of November and subsequent months." 

No reference is made to specific deficiencies or the overall 

incompleteness of the Rails Inn. 

Jocar responded in writing on October 9, 1981, stating 

that full rental payments were expected. On October 16, 

1981, Garry Bunke wrote to Jocar setting out a schedule of 

past payments. He mentioned the $4,904 May payment, which 

was only 40% of the gross income, "due to the fact that the 

motel was not completed on May 1." He also referred to the 

$8,760 June payment, also only 40% of the June gross, because 

"the motel still was not complete in many respects." Bunke 

stated that Jocar's failure to install the bar/cafe was the 

major problem with the lease. He stated that the motel was 

"still not complete in many respects," asserting that defects 

in the laundry room would have to be corrected before the 
State would issue a license. On October 20, 1981, Jocar sent 

Bunke a letter which included a list of amounts due and 

stated: 

"Jocar will look to your corporation for the 

payments set forth in the written lease until the 

same expires of its own terms." 

This intention was reiterated in a letter from Jocar to Bunke 

dated November 6, 1981. 

On November 1, 1981, Bunke moved out of the Rails Inn. 

Bunke made no rental payments or other payments after October 

1, 1981. Jocar operated the Rails Inn from November 1, 1981 

to May 1, 1982, netting $36,758.83. 

On November 25, 1981, Bunke filed its complaint, seeking 

a declaratory judgment that Jocar had breached the "terms and 

provisions, warranties and representations that they made to 

enter into the lease agreement," and seeking damages in the 

amount of $23,000 for that breach. Jocar cross-complained, 

alleging damages arising from Bunke's unilateral termination 

of the lease and its failure to make the remaining rental 

payments and other payments required by the lease agreement. 

Trial was held on July 13-14, 1982, before the District 

Court sitting without a jury. On August 10, 1982, the 

District Court filed its findings and conclusions; judgment 

in favor of Jocar was entered August 24, 1982. The court 

held that Bunke was liable to Jocar for $54,572.98 plus 

costs; the amount represented adjusted damages less 

mitigation resulting from Jocar's operation of the Rails Inn 

between November 1, 1981 and May 1, 1982. Bunke appeals. 

Bunke argues that the District Court ignored section 

70-26-203(1), MCA, which states: 

"If within a reasonable time after notice to the 

lessor of dilapidations which he ought to repair, 

he neglects to do so, and if the cost of such 

repairs does not require an expenditure greater 

than 1 month's rent of the premises, the lessee may 
perform such repairs himself and deduct the 

expenses of such repairs from the rent, or the 

lessee may vacate the premises, in whichcase 

he is discharged from further paymenFof -- rent or 

performance - of other conditions." (Emphasis added). 

Bunke cites cases in which this Court recognized that the 

lessor's failure to repair "dilapidations" justified the 

lessee's choosing either of the options stated in 

70-26-203(1), MCA, and similar earlier code sections. 

Lowe v. Root (1975), 166 Mont. 150, 531 P.2d 674; 

Noe v. Cameron (1922), 62 Mont. 527, 205 P. 256. 

The lessee's right to "repair and d.eductW or vacate the 

premises if a lessor fails to make repairs he ought to make 

is well-settled in Montana. Lowe, supra; Lake v. Emigh 

(1946), 118 Mont. 325, 167 P.2d 575; (SS42-401, 402, R.C.M. 

1947; S(S7741, 7742, R.C.M. 1935; section 70-26-203 (I), MCA. 

This right arises under contract law and involves the 

presumption that a person would not agree to lease a 

residential facility which was unfit for human habitation. 

In Lowe, 166 Mont. at 159, 531 P.2d at 679, this Court 

recognized that the presumption extends to commercial 

residential facilities, such as hotels, stating: 

"Beyond a doubt a hotel is 'a building intended for 

the occupation of human beings' and thus within the 

scope of sections 42-201 and 42-202, R.C.M. 1947." 

It does not follow, however that a lessee may vacate 

without liability, or repair and deduct, where the needed 

repairs do not significantly affect the leasehold or 

compromise the purposes for which the property is leased. In 

Lake, 118 Mont. at 332, 167 P.2d at 579, this Court noted 

that sections 7741 and 7742 of the 1935 Revised Codes of 

Montana (forerunners to section 70-26-203, MCA) "relate only 

to dilapidations rendering the premises untenantable" or 

"unfit for habitation." Section 42-201, R.C.M. 1947, 

required that the lessor of a building intended for human 

occupation "must, in the absence of an agreement to the 
contrary, put it into a condition fit for such occupation, 

and repair all subsequent dilapidations thereof which render 

it untenantable . . . " Section 42-202 R.C.M. 1947, allowed 

a lessee to vacate, or repair and deduct up to one month's 

rent, as to dilapidations which the lessor "ought to repair." 

Section 42-201, R.C.M. 1947, was repealed in 1977. 

Section 42-202 was reenacted substantially intact into 

section 70-26-203 (1) , MCA, applicable to commercial 

residential leases. The repeal of section 42-201 leaves in 

some doubt the character of those dilapidations which a 

landlord ought to repair under section 70-26-203, MCA. If 

the dilapidations must be so extensive as to render the 

premises untenantable, they would probably also be so 

extensive that the cost of repairing them would exceed a 

month Is rent. This would leave the tenant with the 

unsatisfactory options of (1) remaining in premises, which 

while not untenantable are significantly affected by serious 

defects; (2) vacating at risk of liability under the lease; 

or (3) repairing at his own expense. On the other hand, 

the statute can hardly be intended to burden the landlord 

with making the most trivial repairs or facing a broken 

lease. Clearly, the dilapidations that a landlord ought to 

repair under section 70-26-203, MCA, are those which 

significantly diminish the enjoyment of the premises or 

substantially interfere with the purposes for which the lease 

premises are intended. 

The record here establishes that the building 

"deficiencies" listed by Bunke were not such as to adversely 

affect rentals, thus compromising the purpose of the lease. 

Indeed, Bunke rented the rooms in the Rails Inn continuously 

from the first week of its possession of the facility. Bunke 

has not demonstrated that the deficiencies that existed were 

substantial enough to have an adverse financial effect. 
Bunke relies upon Lowe, supra, to support its assertion 

that Jocar's failure to comply with all code requirements is 

sufficient to justify Bunke's abandonment of the Rails Inn in 

November, 1981. In Lowe, 166 Mont. at 159, 531 P.2d at 679, 

we stated: 

" [Lessee] had the choice of making the repairs 

called for by the letter of the fire marshal and 

deducting the cost from the rent payments, to the 

extent of one month's rent payment, or to vacate 

the premises." 

In Lowe the deficiencies noted in the fire marshal's letter 

were sufficient to warrant the condemnation of the building 

as a fire hazard and a public nuisance. 

In the case at bar the record supports the District 

Court's conclusion that Jocar took steps to remedy the 

deficiencies and bring the building up to code requirements 

so it could be licensed. Communications in the record from 

the Rosebud County sanitarian express the county's 

recognition of Jocar's correction of several problems. The 

remaining problems were obviously minimal; the record shows 

that Jocar obtained the city business license for the Rails 

Inn without difficulty. It appears that Jocar has not yet 

applied for a motel license from the State. During the 

summer months, the Rails Inn has been operating at about 83% 

of capacity, which Jocar considers successful. 

This Court also must consider the negotiated agreement 

between Bunke and Jocar to reduce the May rent by $8,000 and 

the June rent by $4,500 because of deficiencies which existed 

when Bunke assumed occupancy of the Rails Inn. Such a 

substantial reduction in rent suggests that the parties 

settled the question between them, and that Bunke assumed the 

responsibility for correcting deficiencies. In effect, the 

negotiated reduction suggests an agreement to "deduct and 

repair. " Section 70-26-203, MCA, is phrased in the 

disjunctive; a tenant is not granted the right to deduct for 
the repairs of a building's flaws, - and to vacate the premises 

because of the flaws. 

The record also establishes that Bunke entered into the 

lease agreement and took possession of the Rails Inn knowing 

the facility was not finished, and that completion would take 

some time. Bunke may not fairly argue the delay in 

completion to justify a decision to abandon only a few months 

after taking possession. 

In light of the evidence that (1) the deficiencies in 

the Rails Inn were not significant enough to have an adverse 

financial impact upon the motel's operation; (2) Jocar had 

taken some steps to conform to code requirements prior to 

Bunke's departure; (3) the rent reductions suggest an agreed 

settlement of Bunke's claims of incomplete construction, we 

find substantial evidence to support the District Court's 

conclusion that Bunke was not entitled to vacate without 

further obligation under the lease pursuant to section 

70-26-203, MCA. 

We note in passing that those "promises" which Bunke 

claims induced it to enter into the lease--the BN guaranteed 

occupancy agreement and the operation of a bar/cafe on the 

premises--are not dispositive here. First, and most obvious, 

they are not pertinent to the issues raised by Bunke. 

Section 70-26-203, MCA, is not applicable; the absence of a 

bar/cafe can hardly be considered a "dilapidation" which the 

landlord ought to repair. Second, if Bunke had intended to 

hold Jocar to any "promises", those promises could have and 

should have been incorporated into the lease agreement which 

Bunke's attorney drafted. This was not done. Where the 

contract is clear and unequivocal on its face, we will not 

consider par01 evidence to modify its terms. Spraggins v. 

Elvidge (1981), Mont . , 625 P.2d 1151, 38 St.Rep. 

493. Evidence of negotiations which preceded the written 
contract may have been admissible at trial to support Bunke's 

theory of fraud, under section 72-11-304(2), MCA. But the 

District Court found no fraud, and, as Bunke notes, fraud is 

not raised as an issue on appeal. Bunke may not use that 

evidence on appeal to seek to modify the terms of the 

contract, which is clear and unambiguous on its face, and 

which simply does not provide for Jocar's operation of a bar 

and cafe on the premises. Third, the record establishes that 

Bunkes had read and were familiar with the terms of the BN 

agreement. The agreement made no reference to a bar/cafe; it 

contained a 30-day termination provision. Bunke could not 

reasonably claim to have relied on assurances by Jocar that 

the bar/cafe was "necessary" to the BN agreement, or that the 

Rails Inn was certain to enjoy a long-term occupancy 

guarantee from BN. Finally, there is testimony from Bob 

Johnson that Jocar agreed to install a bar/cafe only if a 

suitable operator could be found, who could pay the monthly 

rental of $3,000-$4,000. Johnson testifed that he was unable 

to find such an operator, although a number of prospective 

operators were interviewed. There is substantial evidence 

to support the District Court's conclusion that Jocar was not 

obliged under the contract or otherwise to establish an 

operating bar/cafe within the Rails Inn. 

We hold that Bunke was not entitled to vacate the Rails 

Inn under section 76-20-203, MCA, and that Bunke unilaterally 

breached the terms of the lease agreement by abandoning the 

premises on November 1, 1981, and failing to make the agreed 

monthly rental payments and other payments. 

11. 

Runke argues that by reentering and taking possession of 

the Rails Inn on November 1, 1981, Jocar impliedly consented 

to Bunke's surrender of the premises, thereby extinguishing 
Bunke's further obligations under the lease agreement. Bunke 

quotes from the American Law of Property subsection 3.99: 

"A lease may be terminated by surrender, a 

'yielding up' to the owner of the reversion or 

remainder. The surrender ordinarily will not 

affect any interest third persons may have acquired 

in the leasehold. It extinguishes the lessee's 

liability for future rent, but not for accrued rent 

or for past breaches of other covenants. 

"The situation that has given rise to most 

litigation is that where the tenant abandons the 

premises and refuses to pay rent. The courts 

usually hold that the lessor may let the premises 

lie idle and collect the rent. There are 

statements in some cases that the lessor has a duty 

to mitigate damages, as for breach of contract, but 

most of the decisions are simply that if the lessor 

reenters for the purpose - - of reletting for the 

lessee he must use reasonable diligence in so 

doing. Generally, however, the courts -- hold that 

the lessor who reenters may relet -- for the lessee's 

benefit, hoIdinq the lessee for any deficiency, 

provided - he gives the lessee notice." (Emphasis 

added) 

Bunke also relies upon Knight v. OM1 Corp. (1977), 174 

Mont. 72, 568 P.2d 552. In Knight, the landlord cancelled 

the lease agreement for non-payment of rent. We found that 

the landlord's cancellation and reentry terminated the lease 

agreement, and absent an explicit saving clause in the lease 

agreement establishing the tenant's further obligations, 

there were none. 

Bunke also refers this Court to Bonnet v. Seekins 

(1952) , 126 Mont. 24, 29, 30, 243 P. 2d 317, 320 (cited in 

Knight, supra), wherein this Court stated: 

"The obligation to pay the agreed rental continues 

until the lease is legally terminated. (citation 

omitted) 

"A lease for a fixed term may not be terminated by 

the act of the tenant in abandoning the property 

before the end of the term in the absence of 

consent on the part of the landlord. (citation 

omitted) The landlord's consent to the surrender 

or abandonment may be either express or implied. 

(citation omitted) 

"'A surrender cannot be effected by the act of only 

one party; the concurrence, in some way, of both 

lessor and lessee is necessary in order to 
accomplish a surrender.' 3 Thompson on Real 

Property, p. 750, sec. 1491. 'The surrender of 

leased premises b~ the tenant before the - expiration 

----- of the term is not effective unless there is -- an 

acceptance 2 the landlord. Any act equivalent to 

- an aareement L-- on the art of the tenant to abandon 

-- and <he landlord to resume possession is sufficient 

- to constitute surrender. ' Id., p. 751." (~mphasis 

added) 

We have no quarrel with Bunke's statement of the law, 

but we do not find it applicable here, where Jocar expressly 

rejected Bunke's surrender and refused to terminate the 

lease, but operated the Rails Inn for the purpose of 

mitigating damages. 

In the case at bar, the lease agreement was not legally 

terminated by express consent, or by forfeiture or 

cancellation, as in Knight; in fact, Jocar expressly refused 

to consent to Bunke's vacating the Rails Inn. In three 

letters to Bunke dated both before and after November 1, 

1981, Jocar warned Bunke that Bunke would be held to "strict 

compliance" with the terms of the lease agreement, and would 

be held liable for payments set forth in the lease agreement 

"until the same expires of its own terms." Jocar's position 

also was communicated to Bunke during personal meetings 

between the parties prior to Bunke's vacating the premises. 

It is true that Jocar was present at the Rails Inn on 

November 1, 1981, to assist in inventorying certain motel 

furnishings for which Bunke was credited and that there was 

no particular acrimony between the parties at that time. 

Bunke relies upon this peaceable transfer to support its 

claim that Jocar impliedly consented to Bunke's departure. 

These facts are not dispositive. It is not necessary that 

parties come to blows or break off all dealings with each 

other to establish that their positions are legally 

irreconcilable. Jocar had made its position clear. Its 

presence the day of Bunke ' s abandonment of the premises was 

solely to facilitate the continued operation of the Rails Inn 
for the purpose of mitigating the damages caused by Bunke's 

abandonment. 

We hold, therefore, that where a tenant unilaterally 

terminates the lease of commercial residential premises and 

vacates, without justification under section 70-26-203, MCA, 

and the landlord expressly refuses its consent to the 

tenant's withdrawal, and subsequently operates the facility 

for the tenant in order to mitigate damages, the tenant is 

liable for the net damages. The District Court's findings 

to that effect are supported by the record and by the law. 

Affirmed. 

We concur: 

.an-% ~.&d 

Chief Justice 

Mr. Justice Frank B. Morrison, Jr., will file a written 

dissent later.