MEASURE OF COMPENSATION TO TENANT DISPOSSED BY FORECLOSURE.

Court of Appeals for Lucas County.

#### Michigan Mutual Life Insurance Co. v. Sheridon et al.

Decided, November 18, 1918.

*Landlord and Tenant*— Leasehold *Sold in Foreclosure*— Tenant’s *Claim for Compensation Prior to Later Liens*— Measure *of Compensation.*

1. A tenant in possession, holding under a valid lease with an implied covenant for quiet and peaceable enjoyment of the premises, who is deprived of the leasehold estate by foreclosure and sale of the premises, is entitled to be compensated therefore out of the proceeds of the sale, and such right is a prior claim to that of mortgages or liens executed subsequent to the lease.

2. In such a case the amount of compensation to which the tenant is entitled is the difference between the rent reserved in the lease and the actual net value of the leasehold estate, the amount thus found to be reduced to its present worth.

(To be officially reported in 11 O. App.)

*J. A. Barber,*for plaintiff.

*Calkins <& Storey,*for Robert A. Draper and Detwiler Real Estate & Investment Company.

*Warren L. Smith*and *Thomas L. Gifford,*for Yondota Lodge, K. P.

Richards, J.

Heard on appeal.

The real estate involved in this controversy has been sold under foreclosure and the proceeds arising paid into court. This sale was made in September, 1917, for $17,500 to the defendant, Robert A. Draper, and the amount of the first mortgage, together with taxes and costs, has been paid from these proceeds, leaving, for distribution the sum of about $5,500. The matter remaining for disposition is the right of various claimants to this money still remaining in the hands of the court.

*338The facts necessary for a solution of this question are in substance as follows: In 1904, Sanford W. Cook was the owner of the real estate, situated in East Toledo, and he then mortgaged the same to the Michigan Mutual Life Insurance Co. for $10,000, his wife, Lottie Cook, joining in the mortgage. Thereafter he conveyed the property to his wife, and in 1912 she entered into a written lease of the property to Yondota Lodge, K. P., for a period of five years from June 1,1912, at $40 per month, with the privilege of renewal for another five-year term at a rental of $50 per month. The Yondota Lodge took possession of the premises and the lease held by it was duly placed on record. In October, 1914, Lottie Cook executed a mortgage on the property to the Walding, Kinnan & Marvin Co., which mortgage was subsequently assigned to the defendant, Robert A. Draper, and there remains still due on the same about $1,000. Thereafter Lottie Cook conveyed the real estate in fee simple, and it passed by mesne conveyances to the defendant, Sheridon, who, in August,. 1915, executed a mortgage on the same to the defendant, The Detweiler Real Estate & Investment Company, and on this mortgage .there still remains due about the sum of $7,500. Yondota Lodge claims an equitable interest in the money remaining in court to the extent of the loss suffered by it in being deprived of its leasehold interest in the premises by the foreclosure and sale. The second and third mortgagee claim that they are entitled to the remaining proceeds and insist that the lodge has no claim whatsoever to any part thereof. The lease held by the lodge gave it the right to sublet the premises, which it was doing to various sub-tenants through the entire period that it occupied the premises. It had elected to retain the premises for the second period of five years at the increased rental of $50 per month and was receiving during all the time large amounts of rental from its various subtenants. The terms of the lease required the landlord to heat the hall occupied by the lodge and to beep the same in reasonable and necessary repair. The lodge on taking possession under its lease, and with the consent of the landlord, remodeled the room at an expense exceeding $1,400. The lease held by the lodge contains no express covenant, but there is, of *339course, the implied covenant that the tenant would be entitled to the quiet and peaceable enjoyment of the premises during the term of the lease and for the renewal period provided by the lease.

Counsel for the mortgagees insist that if the lodge" has any claim it would be only against the original lessor, and that it has no interest in or lien on the proceeds in court, nor any equitable right to any portion of the same. This claim is based very largely on the decision in *Burr*v. *Stenton,*52 Barb. (N.Y.), 377, and on certain text-books which cite and restate the rule which they assume to be there announced; and it must be admitted that a cursory reading of that case seems to lend much support to the contention so made. A careful study, however, of the case of *Burr*v. *Stenton*shows that it has very decided limitations and must be construed and interpreted in accordance with the peculiar facts existing in the case that the court was then deciding. The lessor in that ease was not the owner of the premises at the time he executed the lease, but subsequently became the owner thereof, and the lease which he gave contained an express covenant for the quiet enjoyment of the premises without molestation or disturbance from the lessor, his successors and assigns. There was a mortgage on the premises which had been theretofore made by the former owner. The court held that by reason of the express covenant contained in the lease there was no room for any implied covenant on the same subject-matter, and that as the express covenant was limited by its terms to the acts of the lessor, his successors and assigns, and the mortgage had not been made by the lessor, but .by a former owner, therefore there was no covenant either express or implied against the same, and that for this reason, and this reason alone, the tenant was not entitled to share in the proceeds remaining for distribution after the premises had been sold under this antecedent mortgage. The case was affirmed by the court of appeals of New York in *Burr*v. *Stenton,*43 N. Y., 462. In the course of the opinion announced by the court of appeals it is stated that the case was considered upon its own merits, leaving a case where there is an express or implied covenant for quiet enjoyment in the lease to be determined when it arises. In the *340ease at bar we have found that there is an implied covenant for quiet enjoyment, and this distinguishes the case from that of *Burr v. Stenton, supra.*The case of *Burr*v. *Stenton*has been often cited, and numerous restrictions announced which must be placed upon its application to other cases.

We call attention to *Clarkson*v. *Skidmore,*46 N. Y., 297, where it was held that a lessee for years of mortgaged premises, who holds under a lease containing a covenant of quiet enjoyment, is entitled to receive out of the surplus moneys arising on foreclosure the value of the use of the premises for the remainder of his term, less the rents reserved. The court in the opinion distinguishes this case from *Burr*v. *Stenton*by pointing out that the lease in that case contained no express or implied covenant of quiet enjoyment except against the acts of! the lessor. In the decision of the lower court in *Clarkson*v. *Skidmore,*2 Lansing, 238, it is expressly stated that *Burr*v. *Stenton*does not control. It may be noted in passing that the leci'mn of the court of appeals in *Clarkson*v. *Skidmore, supra,*was rendered by the same judges who decided the case of *Burr*v. *Stenton, supra.*

The principle that a tenant having the protection of a „eneral covenant for quiet enjoyment is entitled to be compensated out of the proceeds of the sale for the loss he suffers by •easm of being deprived of the rights granted him under the lease is also announced in *Larkin*v. *Misland,*100 N. Y., 212 (3 N. E., 79) ; in *Winthrop*v. *Welling, 2*App. Div. (N. Y.), 229, and in *Ely*v. *Collins,*92 N. Y. Supp., 160.

After all these criticisms and limitations on the case of *Burr*V *Stenton*little remains of that case as an authority, and it can not be applied beyond the peculiar facts under which it •arose. It is true that in 2 Jones, Mortgages, See. 1696, the case of *Burr*v. *Stenton*is cited as announcing the doctrine generally that a lessee when his interest is cut off by foreclosure is entitled to no part of the surplus arising from the sale. This principle is so stated in the fourth edition of Jones on Mortgages and the statement is repeated in the sixth and seventh editions of that treatise, and this in spite of the peculiar facts existing in the cáse of *Burr*v. *Stenton,*which necessarily limit the scope of the *341decision, and notwithstanding the subsequent limitations put on that case by various decisions already cited rendered by the courts of the same state. The learned author of 2 Jones on Mortgages (7 ed.), Section 773, however, states that 'a lease already existing at the date of the mortgage is in no way invalidated by the giving of the mortgage, and that the lease is a paramount interest and the mortgage subject to it. He also says that the mortgagee has only the rights of the mortgagor as against the lessee. The language is directly applicable to the rights of the second and third mortgagees in the ease at bar, and is not consistent with the language used by the author in Section 1696, cited *supra.*Indeed, on a review of the situation disclosed by the record in this ease it is apparent that to adopt the contention of counsel for the mortgagees would .be in effect to hold that a subsequent lien is prior to any right of the owner of a preexisting estate in the premises. The lease held by the Yondota Lodge was on record, and the lessee was in possession, and it necessarily follows that the rights of the subsequent mortgagees are subordinate to the rights of the lessee. We are, therefore, of the opinion that the, lessee is entitled to be compensated out of the proceeds remaining in .court to the extent of the loss suffered by it in being deprived of the estate created by the lease. This compensation should be represented by a lump sum to be ascertained from the evidence, and reduced to its present worth. The amount of this compensation would be the difference between the amount of rent to be paid by the tenant and the actual net value of the leasehold estate.

No useful purpose would be served by reviewing in detail the evidence relating to the value of this leasehold estate or the rentals received by the Yondota Lodge from its sub-tenants. It is sufficient to say that the evidence discloses that during the entire period covered by the lease it had been subletting the premises to numerous tenants and had received during the term of the lease large sums of money and that there had been an increase of the amount so received, showing the enhanced value of the same as time passed. This evidence shows that the lodge-room was sublet to these various tenants at an annual rental which amounted at $5 per night for each night that the tenant *342occupied the same, the Yondota Lodge- reserving one night a week for its own use of the same. The total amount received by the lodge is clearly stated in the’ evidence. It also appears that the expense of lighting the hall was $100 per year and that janitor service amounted to $240 per year. After taking into consideration all this evidence, it is perfectly clear that the lodge had a very valuable lease and has suffered substantial damages, and on the evidence contained in the record we find that the amount of the loss suffered by the lodge is $1,035, which amount is an equitable charge on the fund now in court, and to be first paid therefrom, after the costs of court. The second and third mortgagees are entitled to receive the balance then remaining according to their respective priorities.

Decree accordingly.

Chittenden and Kinkade, JJ., concur.