### IN THE COURT OF APP EALS OF TENNESS EE A T ME MP H IS Ja nuary 23, 200 8 S es sio n ARTHUR KAHN, ET AL 

### . v. PAUL J. PENCZNE R, ET AL 

### .
Direc t Appeal from the Circ uit Court forShelb y County No. CT-004617-04 John R. Mc Carr oll, Jr., Judge

No. W2006-02527-C OA-R3-C V - Filed July 24, 2008

L essee s/Appel l ants filed suit ag ainst L essors/Appellee s for bre ach of a commer cial lea se af

ter L essors/Appellee s ref

used to approve L essee s/Appellants’ propose d subtenants. The tria l court found that L essors/Appellee s had fa iled to fully mitigate da

mag es, and g rante d L essor/Appe llees

on ly 50 % o f r e nts a s d ama g e s, a lon g wi th d ama g e s f or ta xes a nd ins ur anc e . L e sse e s/A

pp e lla nts appea l the trial court’ s awa rd of r ents, and the judgment for taxes and insuranc e. L essors/Appellee s
r a i s e a d d i t i o n a l i s s u e s c o n c e r n i n g t h e tr i a l c o urt ’ s aw ar d o f o n l y a p o rt i o no f

i t s c l a i m e d

a t t o r n e ys fee s, and the judg ment based upon da mag e to the demised B uilding by L essee s/Appellants. Finding

no e rr or , w e a ff

ir m.

Te nn. R . A pp. P . 3 App e al a s o f R igh t; Judg me nt of th e Ci r c uit

Co ur t A ff

ir me d; and Rem anded

D AVI D R. F ARMER , J., delivere d the opinion of the court, i n wh i ch A LA N E. H I G H ERS , P.J., W.S., joined. W. F R ANK C RAW FORD , J., did not participate.
Glen Reid, Jr., Ha l Gerbe r, a n d Do u g l as Black, Me mphis, Tennessee , for the a ppellants, Arthur Kahn, Louis Loe b, Larry Bloch and Peggy E. Burch.
William H. Fisher, III and Valerie Fisher, Memphis, T ennesse e, for the appe llees, Paul J. Penczne r and Jolanda

Penczne r.

OP IN ION

This action ar ise s from a dispute ove r a c ommercia l lease ( the “L ease ”) of a two-story building at 964 J une Road in Memphis (the “B uilding”) . Arthur Ka hn, L ouis L oeb, and L arr

y Bloc h

are the pa rt ne rs wh o c omp ri se the Te nn e sse e g e ne ra l pa rt ne rs hip kn ow n as Ce ller

ma ste rs , d

/b/ a Arthur’ s Wi ne & L iquor ( tog ether with Peggy

Bur ch, Ar

thur Kahn’ s ex-wife and sig natory to the L ease , “Ar

thur’s,” “ L essee ,” or “Appe llant”). Paul J. P enczner and Jol anda Penc zner (tog ether , the “P en cz n er s , ” “ L es s o r, ” o r “ Ap p el l ee ”) ar e t h e o wn er s o f t h e B u i l d i n g.T he ori gi nal C o m p l ain t w as br ou gh t by Pl ai nt i f f A r t hu r K ahn o nl y. H ow ever , t he C om pl ai nt w as l at er 1

am ended t o add t he addi t i on al Pl ai nt i f f s s et out abov e.

A r t hur ’ s c l ai m f or f

r audul ent m i s r epr es ent at i on w as vol unt ar i l y non- s ui t ed by O r der of A pr i l 6, 2006. 2

-2- Th e bu sin e ss r e latio ns hip be tw e e n th e se pa rt ie s b e g an in

19 85 whe n A rt

hur’ s e nte re d into the L ease with the P enczner s. The orig inal lease term beg an on Apr il 1, 1985 and ran f or a pe riod of six y ear s. Over time, the pa rties neg otiated three extensions of the L eas e, t h e l as t of which

e xpir e d on Marc h 31 , 20 06

. F ro m the be g inn ing of its oc c up anc y , Ar thu r’ s o c c up ie d o nly

the fi rs t floor of the two-story

building.

I n 2003, Arthur’ s desired to reloc ate to a newly -construc ted building, which dire ctly fronted Poplar Avenue . I n Dec ember 2003, Arthur’ s notified the Penczners of its intention to relocate in the spring of 2004, and to sublet all or pa rt of the Building for the ba lance of the L ease term. To that

e nd , A rt hur’ s h ir e d a

re a lto r a nd so ug ht t he Pe nc zne rs c oo pe ratio n in mark e tin g t he Bui ldi ngto prospec tive tenants. Ultimatel y , Arthur’ s prese nted two prospec tive tenants, both of whom the Penczners re

jected.
On August 10, 2004, Arthur’s filed a “Com p l ai n t fo r Brea ch of Contra ct, Fr audulent Misrep re se ntatio n, and

Da ma g e s” (t he “ Com pla int ” ) a g a ins t th e Pe nc zne rs

. In it s Co mpl a int , 1 Arthu r’s spec ifically

aver s that the Penczners “ arbitra rily and unre asonably

reje cted” the prospec tive te na nts in v iol a tio n o f t

he L e a se

. Con se qu e ntl y , Ar thu r’ s c on te nd s that th e Pe nc zne rs “ vio late d th e ir duty of fa ir dea ling a

nd actingin good f

aith.” In its pray er f

or relief , Arthur’ s asks the cour

t, inter 2 ali a , to declar e the L ease null and void effe ctive August 15, 2004, for dama g es includi n g i ts real

e state a g e nt’ s f

e e s, and fo r atto rn e y ’s fe e s. On Apri l 2 2 , 2 0 0 5 , th e Pe n c zn e r s f il e d th e ir an s w e r , in

w h ic hth e y

d e n y th e materia l alleg ations of the Complaint. Concurrently with their answe r, the Penc zners fi l ed a countercomplaint, as s erting that Arthur ’s had f ailed to comply

with Parag raph 13 of

the L ease by

not
su pp lying the re qu ir e d inf

or matio n on the pr op os e d s ub te na nts . T he Pe nc zne rs fu

rt he r c on te nd

that, based upon the information that they did r ece ive, the prospec tive tenants we re not fina ncially sound, or were otherwise undesirable for the s pace

. In their counte r-c omplaint, the Penczners asser t, inter ali a , that Arthur’ s remains liable f or all oblig ations under the or igina l L ease , that the Penczners ha d taken steps to mi tigate t heir damag es (i.e., they took possession of the building, a nd reta ined a r eal

e state a g e nt i n ord e r t o f

ind a su ita ble su bte na nt) . T he Pe nc zne rs fu

rt he r c on te nd

that A rt hur’ s is obligated to pay

the “a nnual rea lty taxes a

nd hazard insurance premiums” on the B uilding, and that they had failed to ma

ke such pay

ments in br eac h of the L ease

. The Penczners al s o cl ai m that Arthur’ s damag ed the de mised premises whe n it abandoned sa me.

The matter

was tried to the court, sitti ng without a jury

. On October 2, 2006, t he trial c ourt
e nte re d it s F ina l Judg me nt, wh ic h r e a ds , in pe rt ine nt p art , a s f

oll ow s:-3-

[T] he Court found that the P enczner s wer e entitl ed to re cover from the Plaintiffs the following expenses incurre d by them in satisfying the P l ai ntiffs’ oblig ations under the lease :
$7 40 .0 0– Re pa ir and re pla c e fa c ia on ro of

dama g e d b y

the Pe nc zne rs ’ [si c] sign. 34 0. 00 – Pa int

fa c ia 27 0. 00 – Cl e an f

ir st f loo r a nd c art awa y de br is 65 0. 00 –Cl e an s e c on d f

loo r a nd c art awa y de br is 150.00–Repair c eil i n g panels damag ed by water resulting from damag e to the roof

cause d by

Plaintiffs’ sign. 290.00– Replace and/or re pair c eiling tile damag ed by water from leakingroof. 730.00–Roof repa ir related to damag e ca used by Plaintiffs’ sign. 3,840.00– Replace ment of ce iling tile g rid and ti l es re moved by

s u b t e n an tf o r w h i c hP l a i n t i f

f s a dm i t t e d

l i a b i l i ty. $7,010.00– TOTAL

Th e Co urt d e nie d th e Pe nc zne rs [’] o the r c ounte r- c la ims fo r e xpe ns e s, i n cl u d i n g ex p en s es i n cu rr edi nre n d er i n g th e p ro p erty s u i t ab l e f o r r el et t i n g.

The C o u rt m ade written finding s and re ndere d what wa s ref err ed to in the finding s as a “ preliminary” opinion, a copy of which is attac hed her eto and made a part he reof

by ref ere nce. The Court i nvited Counsel to supply briefs a nd/or argument
conce rning these finding s; and, following the submission of briefs by Counsel, the C o u rt i s s u edt h e f

o l l o wi n g wr i t t en ru l i n g:

I t is the Court ’s op ini on tha t th e Pe nc zne rs sh ould rec ov e r f if ty perc ent (50%) of the unpa id portion of the unpaid re nt from J uly 1, 2004, t h ro ug h Marc h 31, 2006. No discre tionary costs will be

aw ar d e d

. S t a tu t o r

y c o u rtc o s t s w i l l b e d i v i d e d e qu a l l y.

The Penc zners are the pre vailing pa rty . The lea se states that “ The losing pa rty shall pay all rea sonable attorney s’ fe es of the pr evailing party .” I f the pa

rties ca nnot ag ree on what is a “ rea sonable attorney fee , Iwill conduct a he aringto determine the issue.”
The pa rties wer e unable to ag ree on fee s for the Penczners’ attorney s, with the result that a he aringwas c onducted b y t h e C ourt to determine the amount of the at t o rney s’ fe es to which the Penc zners would be entitled. Prior to the heari n g,
a ff ida vit s c on c e rn ingfe e s w e re su bm it ted b y Willi am H . F ish e r, I I I , a nd Va le ri e F ish e r, the Pe nc zne rs ’ attor ne y s, and c ounte r a ff

ida vit s w e re su

bmi tte d b y

Gl e n Re id-4-

and Ha l Gerbe r, attorne y s for the Pl aintiffs. Wil liam Fisher the n submitt ed a r ebuttal

a ff ida vit . N o p ro of

wa s of fe re d a t the he ari ng oth e r tha n the se a ff

ida vit s and e xhibi ts there to. Ba sed on these a ffidavits and e x hibits, t he Court found that the Penczners should be awa

rded attorney s’ fe es of $45,000.
During the pendenc y of this c ause, the Plaintiffs, by ag ree ment, paid into an

e sc ro w a c c ount t

he 20 -m on ths re nt, wh ic h b ecam e du e fr om Augus t 1, 20 04 , unti l the term of the lease ended on Ma rch 31, 2006. B y agr ee m en t , the attorne y s for Plaintiffs an d De fendants have joint control of this ac count, and the a g ree ment provides that at the conclusion of the litigation, the balance of this acc ount, including

a ll a c c re tio ns , mu st b e pa id in a mann e r p ro vid e d in

an o rd e r o f t

his Court . T he re is a bala nce in the acc ount curr ently in the approximate amount of $140,000.00, and the ba lanc e in the a c c ount sh ou ld be pa id t o th e Pe nc zne rs fo r whic h th e Pla int if fs sh ou ld be g ive n c re dit

on thi s ju dg me nt.

IT IS , THERE F ORE, ORDERED, ADJUDG ED AND DECREED:

1

. That the Plaintiffs’ c laims for re lief ag ainst the Penczners, whic h are

enumer ated in the prayer for relief of the...orig inal Complaint...are without mer it and

are here by

denied . . . .

2. That t he P laintiffs’ contention that the P enczner s’ counter-cla im for r ent due them should be reduc ed due to their failure to miti g ate damag es is meritorious

and that th e y are the re fo re e nti tle d to on ly 50 % o f t he re nt c la ime d b y

the m. 3. That the [Penczners] be, and they are here by , g rante d judgme nt ag ainst the Pla int if fs

. . . jo int ly

and se ve ra lly , f

or the fo llo wi ngsums: a. $22,569.45–City

Tax I ncre ases ‘ 98 thru ‘06 b. 25,806.08–County

Tax I ncre ases ‘ 98 thru ‘06 c. 4,808.67–Insuranc e Incre ases ‘ 98 thru ‘06 d. 7, 01 0. 00 –E xpe ns e s f or wh ic h Pl a int if

fs are re sp on sib le

e. 74,250.00–50% of rent and late charg es from 8/1/04 thru 3/31/06 f. 45,000.00–Attorney s’ Fe es $179,444.20–TOTAL

4. Th e Pe nc zne rs ’ re qu e st fo r pr e jud g me nt int e re st on t

he amou nts fo un d to be due the m for re nt, tax es and insura nce be , and it is hereby , denied.

5. That t he funds curr ently held i n escr ow, controlled by the attorne y s for the parties tog ether

with all acc retions there on, be p ai d t o t h e Penczner s for whic h the Pla int if fs are to b e g ive n c re dit

on thi s ju dg me nt.-5-

Arthur’ s appea ls and raise s four issues for revie w as stated in its brief :

1. I n light of le ase pr ovisions ex pressly permitting a

Tena nt to sublea s e all or part of the lease hold, did the trial court er r in failing to hold that a L andlord’s ref usal to allow prospec tive sub-tenants constitutes e ither (I ) a br eac h of the lease by L andlord that offsets the L andlord’s c laim for unpaid r ent, or (ii) a fa ilure by the L and lor d to mit ig a te dama g e s that pr e c lud e s L and lor d’ s c la im fo r u np a id r e nt?

2. Af

te r f ind ing that a L and lor d f

a ile d to mark e t th e le a se ho ld i n a c omm e rc ia lly

rea sonabl e m an n er a

nd otherwise f

ailed to mitigate damag es, did the trial

c ourt e rr in a wa rd ingdama g e s to L and lor d f or un pa id r e nt?

3. Di d the tr ia l c ourt e rr in a wa rd inga L and lor d d ama g e s f

or many y e ars of pa st ta x an d in sura

nc e e sc a latio ns that L and lor d wa ive d, that we re ne ve r b ill e d to Tena nt, and which we re e x cluded f rom the ag ree d rent by

oral modifica

tions of the lea se?

4. I n light of the fore g oing err ors, did the trial court err in a ward i n g L an d l o rd

a tto rn e y s’ fe e s and

in f a ili ngto a wa rd a tto rn e y s’ fe e s to Te na

nt?

I n the posture of

cross-a ppellant, the Penczner s raise the following , additional issues for r eview:

1. Th e c ourt

e rr e d in ho ldi ng that th e Pe nc zne rs ha d a duty to m iti g a te dama g e s.

2. The court’s hol ding that the P enczner s failed to mitigate their damag es by not neg otiating f

urther to the sle ep proposa l, and th at t h eir recove ry of re nt should, theref

ore, be red u ce dis contrar y to the law and a

preponde ranc e of the evidenc e.

3. The c ourt’s holding that the Penczners f ailed to mitiga t e their da mag es beca use there was “ signific ant var iance ” betwe en the listing a g ree ment and [Arthur’s] lease and that the Penczners’ r ecove ry of re nt should, therefor e, be reduc ed on ac count there of is contra ry to law and the pr eponde ra n ce of the evidenc e.

4. The c ourt err ed in holding that the at t o rney [s’] fee s allowed the Penc zners
s h o u l d b e l i m i t edt o a p er ce n t age o f th e fe es cl ai m edequ al t o th e p er ce n t age which the amount recove red by them b ea rs t o the total amount claimed by the m, t he re by dis a llo wi ngfe e s f

or the su c c e ssf

ul de fe ns e of

Pla int if fs ’ c la ims

v s

. th e Pe n c zn e r s [’ ].-6-

5. The c ourt err ed in allowingrec overy of only those repa ir expenses thoug ht to b e a l l o w a

b l e u n d e r th e “ g o o d

c o n d i t i o n ” c l a

u s e an d d i s a l l o w i n g r e pa ir expense[s] neces s ar y t o rende r the pre mises tenantable or due under

other clause s of the L ease

.
6. Th e c ourt

e rr e d in dis a llo wi nga ll p re

jud g me nt i nte re st.

Be cause this case wa s tried by the cour t sitt ing w ithout a jur

y , we r eview the case de novo up on the re c or d w itha

pr e sumpt ion

of c or re c tne ss o f t

he fi nd ing s o f f

a c t by the tr ia l c ourt . U nle ss the evidenc e pre ponderates ag ainst the finding s, we must a ffirm, a bsent err or of law

. SeeTe nn . R. App. P. 13(d).

Br e ac h of Le as e , M it iga ti on o f Da m ag e s, and D am ag e s

I t is we ll s e ttl e d th a t th e me a sure and e le me nts of

dama g e s u

po n th e br e a c h o f a

le a se is g overne d by

the g ener al principles that determine the me asure of dama g es on cla ims arising f rom brea ches of other kinds of contracts. The ge nera l rule of contra cts, to the effec t that the plaintiff may

re c ov e r d ama g e s o nly

to t he e xtent of it s injury , a

pp lie s to le a se s. Da

ma g e s f or br e a c h o f a

le a se sh ou ld, a s a

g e ne ra l r ule , r e fl e c t a

c omp e ns a tio n r e a so na

bly de te rm ine d to pla c e the inj ur e d p art y in the same position as he or she would have been in ha d the bre ach not oc curr ed and the contra ct bee n fully perf ormed, taking into a ccount, howeve r, the duty to mitig ate damag es. In addition, damag es resulting from a br eac h of a le ase must have been within a contemplation of t he parties; must have been pr ox imately

cause d by the brea ch; and must be asce rtainable with r easona ble ce rtainty

without

resor t to speculation or conje cture

. See49 Am.J ur.2d L andlord & Tena nt § 96 (2003).

I n the instan t ca s e, Ar t h ur’s c ontends that the trial cour t erre d in awar ding da

mag es to the P e n c z n e r s i nl i g h to f

i t s f i n d i n g t h a t t h e P e n c z n e r s h a d f a i l e d t o m i t i g a t e th e i r

d am a g e s

. S p e c i f

i c a l l y, Arthur’ s asserts that the Penc zners’ re fusal to appr ove the proposed subtenants constitutes a brea ch of the L e a se un de r P ara g ra

ph13 the re of

. T his pa ra g ra phre a ds :

13

. ASS I GN MENT AN D SUB L ET TI NG : I t is e xpe c te d that L e sse e , fr om t ime to tim e , may

su ble t a po rt ion of the pr e mis e s, or

po rt ion s o r a ll o f t

he pr e mis e s, to wh ic h s ub le t( s) L e sso r a g re e s, pr ov ide d, ho we ve r, tha t: a ) L e sse e sh a ll r e ma in pr ima ri ly re sp on sib le fo r t

he pe rf or manc e of a ll o f t he te rm s a

nd c on dit ion s o f t

his L ease ; and b) no subtena nt shall be allowed whose pre sence or business would be detrimental to the value of the pre mises to L essor by virtue of the c hara cter

of the person( s) or business. Establis hments servingfood and/or a lcoholic beve rag es ar e not per se de trimental to the value of the premises. L essee ag ree s to provide L essor wi th n oti c e in wri tin g , thir ty da y s in adv anc e of

any pr op os e d s ub le t or

a ssi g nme nt, of L essee ’s intention to sublet; and the notice shall include a c opy of the a ssignment

o r s u b l e ta g r e e m e n t , t h e p r o p o s e d s u b t e n an t ’ s f

i n an c i a l s t a t e m e n tan d

b u s i ne ss background, and a descr iption of t he proposed use, all for the purpose of infor ming-7-

L essor unde r the ter

ms of part “ b” of this parag raph. L essee and L essor a g ree to act in full good f

aith, eac h toward the other, in the implementation of this para g raph.

Un de r t he do c tr ine of

mit ig a tio n o f d ama g e s, an in jur e d p art

y ha s a duty to e xer c ise

rea sonable c are and due dilig ence to avoid loss or minim ize damag es af ter suff eringinjury

. See Cook &Nichols, Inc. v. Pe at, Marwick, Mitche ll & Co. , 480 S.W .2d 542, 545 (Tenn. Ct. App.1971); Gi lso n v . G ill ia , 321 S.W .2d 855, 865 (Tenn. Ct. App.1958)) . Gene rally , one who is i njured by the

wr on g fu l or ne g lig e nt a c t of ano the r, wh e the r by tor t or br e a c h of c on tr a c t, is bo und t o ex e rc ise

rea sonable c are and dilige nce to a void loss or t o minimi ze or l essen the r esulting da mag e, and to the

e xten t th a t hi s d ama g e s are the re su lt of his a c tiv e and unre a so na ble e nh anc e me nt t

he re of , o r d ue to his failure to e x erc ise such ca re a nd diligenc e, he cannot r ecove r. Cook &Nichols, Inc. , 480 S.W .2d at 54 5. I n det erm ini ngwh e the r a n in jur e d p art

y ha s f ulf ill e d it s d uty to m iti g a te , a

c ourt mus t
e xami ne “ wheth er the me tho d w hic h h e e mpl oy e d to avo id c on se qu e nti a l in jur y wa s r e a so na

ble under the circ umstances ex isting at the t ime.” Action Ads, Inc. v . W illiam B. T

anner Co., Inc. , 592 S.W .2d 572, 575 (Tenn. Ct. App.1979) ( quoting Tampa Electric Co. v. Nashville Coal Co. , 2 14 F. Sup p. 64 7, 65 2 ( M. D. Te nn .1 96 3) ). De sp ite thi s d uty , a n inju red part y is n ot r e qu ir e d to mit ig a te damag es whe re suc h a duty would constitute an undue bur den. Cum mi ns v . B ro die , 667 S.W .2d 759, 766 (Tenn. Ct. App.1983).

Fr o m o u r re ad i n g o f th e pl ai n l an gu age o f P ar agr ap h 1 3 o f th e L ea s e, i tap p ea rs th at , al th o u gh the pa rt ie s a c kn ow le dg e Ar

thu r’ s r ig ht t o s ub le t th e B uil din g , th e Pe nc zne rs re ta in t he ri g ht t o approve any proposed tenants. To that end, the pa ragraph r equire s Arthur’s to provide written notice of i ts inte n t t o s u

b le t, a lo n g w it

ha “ c o p y o f th e a s s ign me n t o r

s u b le t a g r e e me n t, th e p r o posed subtenant’s financial st atement, and business background, and a descr iption of the proposed use.” The Penc zners’ authority to approve or reject proposed tenants i s very broad under our rea ding of thi s p ara g ra

ph . Wh ile re qu ir e d to “act in f ull g oo d f

a ith ,” the so le c ri te ri on

fo r t he Pe nc zne rs ’ de c isi on hin g e s u po n th e qu e sti on

of wh e the r the pr op os e d s ub te na nt’ s “ pr e se nc e or

bu sin e ss w ou ld be detr imental to the value of the pre mises to L essor by virtue of the c hara cter o f t h e person(s) or business.” The pa

rties her ein disag ree as to the def inition of the word “c hara cter ,” same beingthe sole basis for the Penczners’ a pproval of proposed subtenants. In short, the term is subjective a nd the power of that subjectivity lies with the Penczners. Consequently , our deter mination of

whether the Penczners failed t o mitigate their damag es i n reje cting the t wo subtenants propose d by Arthur’ s be c ome s a

qu e sti on of wh e the r t

he Pe nc zne rs br e a ched the ir ob lig a tio n to a c t in

g oo d f a ithin reje cting the two proposals. The trial court’s finding on this que stion is one of fac t a nd we will not

re ve rs e that de te rm inatio n unle ss t he e vid e nc e in t

he re c or d p re po nd e rate s a g a ins t sa me . T e nn . R. App. P. 13(d).

I n the i n s t an t case , Arthur’ s proposed two subtena nts for the B uilding. The re w ere two proposals submitted on behalf of Chef Jose Gutierre z, and one proposal on be half of MED I AS Sleep Di a g no sti c Se rv ic e s, an e nti ty inv olv e d in

sle e p th e ra

py . T he sle e p th e ra

py su bl ease pr op os a l is contained in tri al ex hibit ten. This ex hibit consists of a June 4, 2004 letter fr om Mr. Kahn to Mr. Pe nc zne r, wh ic h le tte r re fe re nc e s th e fo llo wi nga tta c hme nts : ( 1) Sub le a se Agre e me nt; (2 ) B us ine ss Desc ription; (3) Fina

ncial Statements. The sublease proposal is in the form of a letter from Ar thur’s-8-

ag ent, Gar

y My ers, a nd is not the actual sublea se ag ree ment to be enter ed betwe en Ar thur’s and the sleep c linic. The sublease proposal states that the terms of the orig inal L ease will be honored e x cept for f ive enumer ated e x ceptions. This pr oposal lists “Ar thur’s Wine a

nd L iquor” as “sublessor ,” and lis ts “ Camde n M c L a

ug hli n, I nn ov a tiv e Sle e p M ana g e me nt” a s “su ble sse e .” Th e pr ov ide d b us ine ss de sc ri pti on

state s:
MEDIAS, Sleep Diagnostic Services , i s d e d i c a t e d t o p r o v i d i n g t h e h i g h e s tqu a l i ty, cost eff ective sleep and pulmonar y service s to its custom ers, while pr omoting patient

e du c a tio n in

a c ari nge nv ir on me nt.

At MEDIAS , w e be lie ve that:

• Ex cellenc e of se rvice s provided will direc t the succe ss of the org anization. • Provision of quality

service s is the responsibil ity of each member of the MEDI AS te am. • Our c ustomers are our most i m p ortant re source and we will strive to ex cee d

e xpe c tatio ns wh ile be ingfa ir and ho ne st.

Any fu rt he r i nf or matio n c an b e fo un d at www.midasslee p.com

The “ financ ial statements” provided consist of a “ Medias, Inc. B alanc e Sheet a s of April 30, 20 04 ,” and

a “ Me dia s, I nc . Pr of

it & L os s Y TD Com

pa ri so n Apr il 2 00 4. ” Ne ith e r of th e se documents ar e sig ned. Ac cordingto the balanc e shee t, Medias, Inc. s h o we d a net wor th of $7,354.71.

We first note that the name of the proposed subtena nt is not consist ent. The slee p thera py entity i s re fe rr ed to as MEDIAS, I nc., MEDIAS Sleep Diag nostics Services, Midasslee p, and Camden McL aug hlin, I nnovative S leep Manag ement. Fr om the record, not only is there insufficient

e viden ce fro m w hic h to de te rm ine the e xac t na me of the pr op os e d s ub te na

nt, but th e re is a lso

ev i d en ce t o s u gges tt h att h i s en t i t y wa s n o t (a s o f th e d at e o f t h e p ro p o s al ) f i n an ci al l y s ec ure en o u gh to take on the L ease . Consequently , we cannot find that the e vidence in this record pr eponder ates ag ainst the trial cour

t’s finding that the Penczners did not br eac h the terms of the L ease by failing to a c c e pt t

his pr op os e d s ub te na

nt b a se d u po n the inf

or matio n p ro vid e d b y

Ar thu r’ s. Ho we ve r, in fi nd ingthat th e Pe nc zne rs ha d f a ile d to mitig a te the ir

dama g e s to the e xten t ne c e ssa ry to r e c ov e r a ll

re nts , th e tr ia l c ourt

fo un d th a t th e Pe nc zne rs ha d a duty to n e g oti a te th e ter ms of the su ble a se further , as did Arthur’ s. Fro m o ur re view of the rec ord, we cannot f ind that the evidenc e preponde rate s ag ainst this finding. Pursuant to both parties’ duty , under Paragraph 13, to act in g ood faith, Arthur ’s should

h a v e p r o v id e d

a mo r e th o r oug h business descr iption, and should have provided actua l financia l statements, as we ll as the proposed sublea s e agr ee ment rathe r than a bullet-form letter outlining the chang es to the orig inal L ease

. When the Penczners wer e not satisfied with the p ro po sa l a s su

bmi tte d, in t

he int e re st o f g oo d f

a ith , th e y sh ou ld h ave dis c us se d th e sh or tc omi ng s w ith Ar thu r’ s and any re me die s that cou ld al low the pr op os a l to g o for wa rd

. Th is is par

tic ula rl y tr ue in light of Mr . Penczner’s te stimony that they would have a cce pted the s u b l ease had they had aW e not e t hat M r

. K ahn’ s pa r t ner Laur enc e Bl och s t at ed t hat he w oul d ha ve guar ant ee d t he s ubl ea s e of t he 3

s l ee p t her apy ent i t y.
-9- g uara nty , and Mr. Ka

hn’s testimony

that either of his pa

rtners w ould have pr ovided that guara ntee. 3 That beingsaid, what the r ecor d s h o ws is that the lack of c ommunication betwee n the par ties resulted in a sta lemate, whic h may have be en ea sily

reme died throug h neg otiation.
Concerningthe proposals offe red on be half of Jose Gutierre z, both t ake the form of le tters from Scott Ba

rton, J ose Gutierr ez’ ag ent, to the P enczner s’ age nt, Gar y My ers. The first, dated Ma y 14 , 200 4, is ca lle d a “L e tte r of I nte nt. ” Th is co rr e sp on de nc e ind ic a te s that the ne w l e a se te rm wi ll be “[t]wo [ y ]ears of Sublease from curr ent Tena nt ( Arthurs), followed by Five Yea r new lease and Three 5 y r. options.” The pr oposed rent for the two-y ear rema inder of the L ease is listed as $5,500 per month (with Ar

thur’s beingentitled to $1,250 wort h of food sa les ea ch month). The r ent for y ear s three thr oug h seven is propose d at $7,500 per month; re nt f or y ear s eig ht throug h 12 is set at $7,750 per month; for year s thirteen throug h sevente en, rent is established at $8,000 per month; and for y ear s eig hteen throu gh t we nty -two, re nt is proposed at $8,250 per month. Neither of the two le tte rs are sig ned by

Mr . G uti e rr e z, n or

his a g e nt. We n ote tha

t th e Gutie rr e z pr op os a ls c on ta in signific ant cha

ng es fr om the terms of the or igina l L ease . In reje cting the G u t i er re z p roposal, the Penczners indicate (in th ei r l et t er o f May 31, 2004) that they

would ag ree to a sublease to Mr. Gutierre z that was more in c ompliance with the orig inal L ease ; however , as with the sleep the rapy proposal, neither

of the pa

rties attempted mea

ningf ul neg otiations concer

ning c hanges to the Gutierre z proposal. Be cause of the sig nificant va rianc e bet ween the Gutierr ez proposals and the orig inal L ease , we cannot conclude t hat t he trial court erre d in holding that the Penc zners’ re jection of same wa s re a so na

ble

. Ho we ve r, be c a

us e of the pa

rt ie s’ mut ua l duty to a c t in g oo d f a ith , w e a lso cannot c onclude that the tr ial court e rre d in fin d i n g t h at t h e P enczner s brea ched this duty to the extent that they

failed to ne g otiate or other wise compromise.
Concerningthe Penczners’ duty to miti gat e d am ages related to the une x pired ter m of the orig inal L ease , following Arthur’ s notice of its intent to vacate the B uilding, the Penc z n er s hired L arr y Alexander to find a r eplac ement tena nt. To that end, the Penc zners and Mr. Ale x ander enter ed into a Rental Ag ency

Ag ree ment (“RAA” ). This RAA was admitted as Ex hibit 48C at trial. Unde r the te rm s of the RA A, the monthl y re nt is l ist e d at $1 5, 00 0. 00 or wh a te ve r t

he Pe nc zne rs a g re e to
a c c e pt. I n a dd iti on , the RA A c a lls fo r a lon g e r l e a se te rm . In mate ri a l a sp e c ts, the RA A s ig nif ic antl y differ s from the orig inal L ease . The Penc zners’ duty to miti g ate r equire s them to ex er ci s e due d i l i gen ce i np ro t ec t i n g t h em s el v es fr o mth e i m m ed i at e r es u l t s o f Ar thur’ s v ac at i n g th e B u i l d i n g. F r o mt h e p l a i nl an g u a g e o f t h e RA A , i ta

p p e ar s th a tth e P e n c z n e r s w e r e n o tc o n c e r n e d w ith ob ta ini nga

te na nt t o ta ke ov e r whe re Ar

thu r’ s left of f, but r a the r t

ha t th e y we re c on c e rn e d w ith obtaining sig nificantly

more re nts, and a long er le ase te rm.

Th e tr ia l c ourt

did no t f ind that th e Pe nc zne rs ha d c omp le te ly fai led to mit ig a te the ir dama g e s. I n f

a c t, t he tr ia l c ourt

a ff ir me d th e Pe nc zne rs ’ d e c isi on in r e jectin g the tw o p ro po sa ls of fe re d b y Ar thu r’ s. Rathe r, the Pe nc zne rs ’ b re a c h w a s b a se d u po n th e ir duty to a c t in g oo d f aith

conce rning any

sublet of the B uilding. As discussed above, the Penczners failed in this dut y based-10-

upon their fa ilure to furthe r neg otiate terms of the proposals with Arthur’ s; however , Arthur’ s too failed in this re g ard and thus br eac hed its own duty of g ood faith. Howe ver, be cause the Penczners

overr eac hed in t heir RAA, choosing to solicit for more rents and longe r terms than the y wer e entitled to u nd e r t he or ig ina l L e a se , w e agree wi th the tr ia l c ourt tha t th is a lle g e d e ff

or t to mit ig a te the ir damag es wa s unrea sonable a nd, as such, c onstitut es a br eac h of their duty of g ood faith.
Turningto the issue of damag es, the trial court allowed the Penczners to re cover 50% of the

re nts fr om t

he tim e that A rt

hur’ s v a c a te d th e B uil din g un til the e nd of the L e a se te rm . O n a

pp e a l, Arthur’ s contends that the tria l court’s fi nding that the Penczners fa iled to miti g ate their damag es should result in a forf

eiture of all rents. The Penczners assert that, based upon the trial court’ s de te rm inatio n th at th e y

did no t e rr in re je c tin g the su

bte na nt pr op os a ls, the y sh ou ld re c ov e r al l r e nts due under the L ease . Ba sed upon the foreg oing discussion, Arthur’ s argument is not well gr ounded. I n e ff e c t, t he tr ia l c ourt fo un d that the Pe nc zne rs fa ile d to a c t in g oo d f a ith(b a se d o n th e RA A) in mitigatin g their dama g es. The Penc zners’ ar g ument is also on narrow footing based upon our discussion above th at , i n re jectingsaid proposals, the duty of g ood faith re quired the pa rties to at least ente rtain discussion about modifications there to. Be cause b o t h p ar t ies failed in this reg ard, neither should re cover

on this ba sis. Arthur’ s failed to pr ovide the require d information conc erning its propose d subtenant, and f ailed to take ste ps toward mea ningf ul neg otiation of the proposals. The Pe nc zne rs a lso fa ile d to ne g oti a te in g oo d f a ith , a nd fu rt he r b re a c he d th is d

uty by ov e rr e a c hin g in the R AA. B ased upon the evidenc e bef ore us, a nd the par

ticular fa cts of this case , we c annot conclude that the trial cour t erre d in fashioning the reme dy for these mutual shortcomings at 50% of the total re nts due.

Taxes and I nsu rance

Th e L e a se pr ov ide s, in r e le va nt p art that:

36 . T AXAN D I

NSU RA NC E ESCA L AT OR : As a dd iti on a l r e nt, L e sse e a g re e s to pay L essor a sum equa l to the amount by which city

and county

rea lty taxes on the pr e mis e fo r a

ny pe ri od duri ngthe te rm

he re of are inc re a se d b y

vir tue of an in c re a se in the assessment of the premises over that established for the y ear 1984, or by

virtue of an inc rea se in the assessment of the demised pre mises over that e stablished for the y ear 1984 which re assessment is made pur suant t o a city -wide or county -wide

rea ssessment of re al estate . This esca lator provision also applies to any hazard ins ur anc e pr e miums n owin e ff e c t on the pr e mis e s. Ad dit ion a lly , L e sse e a g re e s to pay any incre ased insura

nce pr emiums for ha zard occ asioned solely by any alterations or additions to t he pre mises made by L essee

.
Pursuant to this clause , the trial cour t awar ded the Penc zners $22,569.45 in Cit y Tax incre ases 1998 throug h 2006, $25,806.08 in Co u n ty T ax in c r ease s 1998 throug h 2006, and $4,808.67 in i ns ur anc e inc re a se s f

ro m 19 98 thr ou g h 2 00 6. Ar thu r’ s a sse rt s th a t th e se awa

rd s w e re e rr on e ou s, and spec ifically

contends that the Penc zners’ fa ilure to “bill” Arthur ’s for these monies constitutes

a wa iver. W e have reviewed the testimony and conclude that same does not preponde rate in favor-11-

o f a f in d in g o f w a iv e r

. I n f

a c t, th e r e s p e c ti v e te s ti mo n ie s o f M e s s r s

. K ah n an d Pe n c zner are disputed. Mr. Kahn testifies that the Penczners stopped billing for incr ease s in tax es and insura nce afte r 1996. F urthermor e, Mr. Ka hn stated that, upon questioning Mr. Penczn er ab o u t whether Arthur’ s owed under Parag raph 26, Mr. Penczner stated that Arthur’ s would not ha ve to pa y so long as it had not found a subte nant for the upper floor of t he Building. In contra st, Mr. P enczner testified that, f ro m th e outse t, h e ha d d if

fi c ult y c oll e c tin g fo r i nc re a se d taxes a nd ins ur anc e . In su

pp or t of thi s statement, Mr. Penc zner stated that the disput e over taxes and insurance had re sulted in the execution of a Me morandum of Unde rstandingdated June 25, 1986, whi ch M em o ra n d um was admitted as Ex hibit 28. The Memorandum states, in pe rtinent part, that “ [i ]t is understood and agr eed that any incre ases in taxes or hazard insura nce pr emiums over and a bove stated stipulated amounts will be paid by L essee to L essor a s additional rent.” A t the hear ing, Mr. Penczner te stified that, even a fter the execution of the Memor andum, he ha d difficulty coll ec ting these monies from Arthur ’s. Mr. Penczner testified that he neve r ag ree d that Arthur’ s would be re lieved fr om this obl iga tion pending sublease of

the sec ond floor. More over, Mr . Penczner stated that he had written Arthur’ s numerous times, seekingpay

ment of these monies, but that his requests wer e ig nored. B ased upon A rthur’s failure to comply , Mr. P enczner testified that he did stop billing af ter 1996, but that he ne ver a g ree d to forfe it these pay

ments.

The trial court resolved this dispute in favor of t he P enczner s. I t is well settled that, when the resolution of the issues in a ca se depe nds upon the truthfulness of witnesse s, the trial judg e who has the opportunity

to observe the witnesses i n their m anner and demeanor while testifying is in a far better position than this Court to decide those issues. See M cCaleb v. Saturn Corp. , 910 S.W .2d 41 2, 41 5 ( Te nn .1 99 5) ; W hitaker v. W

hitaker , 957 S.W .2d 834, 837 (Tenn. C t

. Ap p . 1997). The weig ht, faith, and cre dit to be given to any witness' s testimony lies in the first instance w ith the trier of fa ct, and the cre dibilit y acc orded w ill be give n g reat weig ht by the appe llate cour

t. See id. ; see also W alton v. Y oung , 950 S.W .2d 956, 959 (Tenn.1997) . Fr om our rea ding of the re cord a

nd the rele vant par ag raph of the L ease , we cannot conclude t hat the evide nce pr eponder ates a g ainst the trial court’s f inding that the Penc zners did not waive their r ight to these monies.

Re c ov e r y o f Da m ag e s ba se d upon dam ag e to th e Buil ding

I n addition to rents, the trial cour t awar ded the Penc zners $7,010.00 in damag es for

nece ssary repa irs to the Building as set out above. On appeal, t he Penczner s assert that the tr ial court

e rr e d in a llo wi ngon ly

a po rt ion of the c la ime d e xpe ns e s. We dis a g re e

. Para g ra ph 19 of the L e a se pr ov ide s, in r e le va

nt p art :

L essee may remove trade fix tures affixed by L essee , provided, however, that L essee shall forthwith repa ir any

damag e to the pre mises cause d by such re moval. All other fix t u re s i n s t alled by

L essee may

be re moved by

L essee only

if L essee restore s the portion of the pre mises affe cted by s aid re moval to its conditi on prior to the ins ta llatio n o f t

he fi xtur e s.-12-

The trial c ourt’s findingconce rningthe nature and extent of da mag e ca used to the B uilding by Arthur’ s removing its fix tures is one of fac t. Consequently , we will not reve rse the tr ial court on this iss ue unless the e vidence in rec ord preponderates ag ainst this finding . Tenn. R. App. P. 13(d). Havingrevie wed the r ecor d befor e us, we find that the spec ific dama g e to t he B uilding enume rate d in t h e t ri al court’s or der, a s set out above, a nd for whic h the trial cour t gr anted damag es to the Pe nc zne rs are we ll f

ound ed in th e recor d. Al tho ug h th e Pe nc zne rs a sse rt that th e y are e nti tle d to

re c ov e r f or oth e r al le g e d d ama g e s to the B uil din g ov e r a nd a bo ve tho se a llo we d b y

the tr ia l c ourt , we disag ree . Pursuant to the Parag raph 19 of t he L ease , Arthur’ s is responsible for those da mag es arisingfrom the r emoval of its fixt ures from the Building

. In the instant case , the proof show s that

cer tain damag e occ urre d to the fac ia of the Building , and to the interior stemming from the re moval of Arthur ’s s ign. The P enczner s also suffe red damag es based upon havingto haul awa y debris lef t by Arthur’ s. I n revie wing this recor d, including the testimony of Mr. DeL uca, the g ener al contra ctor hired by the Penczners to make the repa irs, we cannot conclude that the evidence p re p o n d er ates
a g a ins t th e tr ia l c ourt ’s fi nd inga s to dama g e s fo r r e pa ir s. Para g ra ph11 of the L e a se pr ov ide s th a t:

L essee ag ree s to deliver to L essor phy sical possession of the pr em i s es upon the termination of t he L ease , in good c ondition, ex ceptingordinary wea r and te ar . . . or damag e fr om any

other c ause, unle ss such ca use is attributable to the neglig ence of the L essee

.
Fr om our rea ding of

the re cord, the damag es di sallowed by the t rial court could fall under either the ordinary wea r and te ar, or

the more broad dama g e fr om any other c ause [save L essee ’s neg lige nce] exceptions s et out in Parag raph 11. B eca use the e vidence does not preponde rate ag ainst the trial court’s de cision to disallow certa in claimed dama g es, we must affirm. Te nn. R. App. P. 13(d)

Attor ney’s F ees

We now turn to the Penczners’ issue r eg ardingthe trial cour t’s awa rd of attorney ’s fe es. Th e L e a se pr ov ide s, in r e le va nt p art , a s f

oll ow s:

39. ATTORNEY F EES: I n the eve nt of any case or controve rsy

ar i s i n g u n d er the terms of this L ease wher eby it be comes nece ssary for e ither or both par ties to hire an

a tto rn e y , it

is a g re e d h e re by

be tw e e n the L e sso r an d th e L e sse e that th e los ingpa rt y in the case or controve rsy shall pay all rea sonable attorney

fee s of the pre vailing p art y.

The combined fee s submitt ed by Mr. Fisher and Ms. Fisher , the P enczner s’ attorne y s, were $148,000. This amo u n t was supported by aff idavits and corr esponding time sheets. Arthur’ s at t o rn ey s ar g u e d

t h at m u ch o f t h e c l ai m edwo rkwa s “u n n ec es s ary an d i rr el ev an t

. ” F o l l o wi n g a hear ing, the trial court allowed t he P enczner s to rec over $45,000 in attorney s’ fe es. On a ppeal, the Pe nc zne rs c on te nd

that, u nd e r P ara g raph 3 9 o f t

he L e a se , th e y

are e nti tle d to re c ov e r a ll o f t he ir attorney s’ fe es due to the tria l court’s stateme nt, in its Orde r, that “[t] he Penczner s are the pre vailing-13-

party .” Arthur’s contends that the P enczner s are entitled to none of their attorney s’ fees base d upon the trial cour

t’s deter mination that they

failed to mitigate their damag es.

Ba sed upon our determination that both parties were at fault to some deg ree in this m atter, and that dama g es in the amount of 50% of the re nts was just, it would be inequitable for the Pencz n er s t o re cover the full amount of attorney ’s fe es cla imed in this case. That being said, the Penczners did pre vail to a g reater extent than Arthur’ s in that the y wer e awa rded da mag es for taxes and insuranc e increase s and for damag e to t he B uilding. Consequently , under the L ease , Penczners

s h o u l d r e c o v e r s o m e o f t h e i r a t t o r n e y’ s f e e s a s th e , f

o r l a c k o f a b e t t e r t e r m , m o r e p r e v a i l i n g p arty. We h ave re vie we d th e re c or d a nd we c on c lud e tha

t th e tr ial cou rt did no t a bu se its dis c re tio n in

awa rding $45,000. I n light of the trial court’ s ru l i n g, t h is amount was re asonable . Finally , we
c on c lud e that th e tr ia l c ourt did no t a bu se its dis c re tio n in

fa ili ngto a

wa rd pr e -j ud g me nt i nte re st.

For the fore g oing r easons, we aff irm the Orde r of the tr ial court. Co s t s o f this appea l are assessed one -half to the A ppellants, Arthur K ahn, L ouis L oeb, L arr y Bloc h and Peg g y

E. Bur ch, and their re spective sur eties, and one -half to the A ppellees, Paul J. P enczner and Jol anda Penc zner.

___________________________________ DAVI D R. FARMER , JUDGE