Opinion ID: 1928361
Heading Depth: 1
Heading Rank: 8

Heading: merger of lien into fee title

Text: That brings us to the fourth, last, and dispositive summarized assignment of error, that the district court erred in finding that a merger had not taken place. In this connection, Landmark asserts that under the equitable doctrine of merger, the termination of Owen's leasehold estate caused that estate and the attendant construction lien to merge into Harrisburg's fee simple estate, thereby making the construction hen enforceable against Harrisburg's interest in the property. Although a mechanic's hen when filed attaches only to an equitable estate, it may be enforced against the fee after the equitable and legal titles have merged. Franksen v. Crossroads Joint Venture, 245 Neb. 863, 515 N.W.2d 794 (1994); Watte Lumber Co., Inc. v. Masid Bros., Inc., 189 Neb. 10, 200 N.W.2d 119 (1972); Central Construction Co. v. Highsmtth, 155 Neb. 113, 50 N.W.2d 817 (1952). The general rule is that where two unequal estates vest in the same person at the same time without an intervening estate, the smaller is thereupon merged into the greater. Franksen, supra; Waite Lumber Co., supra; Central Construction Co., supra. But the doctrine of merger is not favored, and equity will prevent or permit a merger as will best subserve the purposes of justice and the actual and just intent of the parties, whether express or implied. Franksen, 245 Neb. at 873, 515 N.W.2d at 802, citing Waite Lumber Co., supra, and American Savings & Loan Ass'n v. Barry, 123 Neb. 523, 243 N.W. 628 (1932). As a consequence, merger does not always or necessarily result from a coinciding of two unequal estates. Central Construction Co., supra. We have held that in determining whether a merger has taken place, a court is to consider the circumstances of the particular case in the light of equity and good conscience. Franksen, supra; Waite Lumber Co., supra; American Savings & Loan Ass'n, supra. In Harte v. Shukert, 94 Neb. 210,142 N.W. 517 (1913), Shukert had leased a building to Hanson. Under the terms of the lease, any improvements made to the building by the lessee would revert to the owner upon expiration of the lease. Hanson hired Harte to undertake extensive expenditures to improve the building. Harte billed Hanson for $42,628.19, $27,515.11 of which Hanson paid. While the improvements were being made, Hanson did not pay rent becoming due; but Shukert did not exercise his option to cancel the lease, nor did he try to collect payment according to the terms of the lease. Shukert also allowed the improvements to continue after Hanson was in default for 2 months of rent. We ruled that under the circumstances, Shukert was estopped from declaring a forfeiture, and that by assuming to forfeit the lease and taking possession of the building, he failed to keep the fee and the leasehold estates separate; therefore, the hen merged with the fee. In Plainer Lumber Co. v. Krug Park Amusement Co., 131 Neb. 831, 270 N.W. 473 (1936), the fee owner failed to exercise his option to declare a forfeiture of the lease for nonpayment of the past-due rent while the lessee operator of an amusement park continued to make improvements to the property which were known to the fee owner. When the lessee went into bankruptcy, the fee owner allowed a former officer of the lessee to run the park, but refused to insure his possession as against the lessee or anyone else. We concluded that although the fee owner was estopped from declaring a forfeiture, it did not necessarily follow that the estoppel caused a merger of the estates and an attachment of the lien to the fee, and held that no such merger had taken place. The main distinguishing fact between Plainer and Shukert is that the landlord in Shukert took possession and appropriated the leasehold interest, including the expensive improvements erected by the lessee, to his own use and benefit, to the exclusion of a lienholder. Plainer Lumber Co., 131 Neb. at 839, 270 N.W. at 477. In Plainer Lumber Co., the fee owner did not take possession of the premises, but, rather, merely allowed a former agent of the lessee to run the amusement park on the property. In Central Construction Co., supra, the owner of the property sold to Highsmith. Highsmith mortgaged it to the Bilbys, and a mechanic's hen was placed on Highsmith's equitable interest. The owner then sold its legal title to Ehlers. Highsmith also sold his equitable interest to Ehlers. In addition, Ehlers paid for the release of the Bilbys' mortgage. Finding those facts to have established a clear intention on Ehlers' part to acquire all the titles, we concluded that the equities required a merger of the owner's legal title and Highsmith's equitable interest and, as a consequence, held that the mechanic's hen became a hen on Ehlers' fee title. But Central Construction Co. too is distinguishable from the instant case. Here, Harrisburg merely terminated the lease with Owen in order to lease the property to Drinks, Inc. The intent of the parties in the instant case was merely to allow Harrisburg to relet the property. Finally, in Watte Lumber Co., Inc. v. Masid Bros., Inc., 189 Neb. 10, 200 N.W.2d 119 (1972), Masid, the owner of the land involved, leased half a building to Verges to operate a restaurant for a 5-year term with an option to renew. The lease required that Verges undertake substantial remodeling at his own expense and that, on the termination of the lease, anything attached to the building remain a part thereof. Masid was responsible for getting utilities to the leased premises. Masid was familiar with all of the improvements required of Verges. All of the contractors working to improve the building dealt exclusively with Verges and had no contracts with Masid. Neither did Masid agree to be responsible for Verges' debts. However, although Verges was in default of rent during most of the construction period, Masid did not exercise its option to forfeit or cancel the lease. Rather, Masid stood by and let the material and labor suppliers continue on the job. In addition, Masid visited the construction site several times and spoke with the general foreman about what portion of the improvements was Masid's responsibility. After the restaurant opened, Verges suddenly abandoned the premises and Masid took immediate possession. Masid made some minor improvements to the property and then leased the building to another tenant 5 months after Verges left. Concluding that Masid clearly intended to foreclose Verges from any and all leasehold estate he had, we held that a merger resulted. In doing so, we noted that Masid now owned a building, half of which had been completely changed into a restaurant and lounge at no cost to Masid, notwithstanding the lease called for a significant portion of the improvements to be made by Masid. Under those circumstances, we wrote that [t]o allow Masid to so enrich itself at the expense of [the lienholders] would produce an unconscionable result, which equity will not permit. 189 Neb. at 20, 200 N.W.2d at 125. But as noted earlier, in the instant case, Owen entered into a lease knowing that he was required to do substantial remodeling solely at his cost. At no time did Harrisburg enter into an agreement with Landmark or promise to pay Landmark for the work done. While in Waite Lumber Co., the landlord was bound by the lease to pay for a significant portion of the improvement, id. at 19, 200 N.W.2d at 125, here, it appears that Owen made his rent payments on time while the construction was taking place and did not become delinquent until after construction was completed. In Harte v. Shukert, 94 Neb. 210, 142 N.W. 517 (1913), and Waite Lumber Co., supra, the landowners allowed construction to continue although the tenant was in default of rent. It is true that prior to the improvements Owen caused to be made, Harrisburg owned a partially unimproved building, and that space now contains $73,665 worth of improvements, for which Harrisburg paid nothing. It is also true that in determining that a merger should result in Waite Lumber Co., we observed that Masid would not be permitted to be enriched at the lienholders' expense. However, the differences, as mentioned previously, are that while here, Harrisburg was under no duty to pay for any of the improvements, the owner in Waite Lumber Co., was so obligated, and that while here, Owen did not default until construction was completed, the Waite Lumber Co., owner permitted construction to continue after he knew the tenant had defaulted. While Harrisburg has been enriched at Owen's expense, the enrichment is not the result of any wrongdoing on Harrisburg's part. Simply put, Harrisburg's tenant hired a contractor and then failed to pay the contractor in full. All Harrisburg did was to lease unimproved space to a tenant who was willing to and negotiated a lease which obligated him to personally undertake the necessary improvements. Under these circumstances, equity does not require that the leasehold estate merge with Harrisburg's fee estate.