Court Opinion

ID: 3594426
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:42:14.469932+00
Date Added: 2024-06-11T13:57:28.699828
License: Public Domain

The question at issue in this case is, whether a member of a commercial partnership, during its continuance, and without the consent or knowledge of his associate, can take a renewal of a lease of property used in the business, in his own name and for his own benefit, the partnership having a definite termination, and the renewal lease commencing at its expiration.
The general power of a partner to take a lease of such property for his own benefit, must be considered as settled in this court by the decision in Struthers v. Pearce (51 N.Y., 357). In that case the lease was taken during the exististence of the partnership, which was of indefinite duration. No notice had been given of its termination when this lease was taken. The facts presented the case of a lease taken during the existence of the partnership, and to begin in enjoyment during that time. The court expressly distinguished it from the present case, which had then been decided in the Supreme Court. (P. 362.)
The only point now open for discussion is, whether the fact that when Read took the renewal of the lease the partnership had a precise limit, and was to terminate before the lease commenced, is material. Before considering that point, it may fairly be claimed that this case comes within the precise decision inStruthers v. Pearce, on a ground not mentioned in the argument. Read, though his lease was not to commence in possession until after the expiration of the original lease, acquired an immediate interest by way of an interesse termini. This precise point was decided in Smith *Page 134 
v. Day (2 M.  W., 684, 699; 2 Platt on Leases, 60). This, it is true, is not an estate, but a right. Still it is the subject of grant before entry. (1 Steph. Com., 268; Burton's Real Property, 18, pl. 61; 2 Crabb do., 227.) If the partnership had acquired this interesse termini, it might, as the facts of the case show, have been disposed of for a large sum of money. If the doctrine of Struthers v. Pearce establishes that the partner cannot acquire a lease in his own behalf, to commence while the partnership lasts, by parity of reasoning he cannot obtain aninteresse termini under the same circumstances.
If, however, this view is not correct, the main question must be disposed of. Can a partner take a lease for himself, to commence in possession after the partnership has expired? In order to settle this point it is essential to give the subject a more full examination than was requisite in Struthers v.Pearce, and to consider more at large the principles on which this branch of the law rests. It grows out of the relation of trust and confidence between partners, and is a branch of the rule that a trustee cannot profit from the estate for which he acts. It largely has its roots in a principle of public policy, as shown in one of the early decisions. (Keech v. Sandford,
Sel. Ca. in Chan., 61; Griffin v. Griffin, 1 S.  L., 352, per Lord REDESDALE.) The general rule is so well settled that it would be a waste of time to refer to authorities. The text-writers on the law of partnership, without exception, assert the applicability of this rule of law to partnership transactions. (Lindley on Part., 495; Story on Part., §§ 174, 175; Parsons on Part., §§ 224-226; Collyer on Part., §§ 281, 282.)
The special rule that a trustee cannot take, for his own benefit, a renewal of a lease which he holds in trust, is enforced in a great number of cases. The principle on which it rests is nowhere more fully or clearly stated than in the argument of Sir FRANCIS HARGRAVE in Lee v. Vernon (5 Brown's Parl. Cases, 10 [Eng. ed., 1803]). Although the passage is somewhat long, it is quoted as shedding much light on a subject, the principle of which has, in course of time, *Page 135 
become somewhat obscure. He said: "It has long been an established practice to consider those who are in possession of lands under leases for lives or years as having an interest beyond the subsisting term, and this interest is usually termed the tenant right of renewal, which, though, according to language and ideas strictly legal, is not any certain, or even contingent estate, but only a chance, there being no means of compelling a renewal, yet is so adverted to in all transactions relative to leasehold property, that it influences the price in sales, and is often an inducement to accept of it in mortgages and settlements. This observation is more especially applicable to leases from the crown, the church, colleges, or other corporations, and, indeed, from private persons, where the tenure is of ancient date. * * * This `tenant right' of renewal, as it is termed, however imperfect or contingent in its nature, being still a thing of value, ought to be protected by the courts of justice, and when those who are entitled to its incidental advantages, whether by purchase or other derivation, are disappointed of them by fraud, imposition, misrepresentation, or unfair practice of any kind, it is fit and reasonable that this injury should have redress. Accordingly, courts of equity have so far recognized the tenant right of renewal as frequently to interpose in its favor by decreeing that new or reversionary leases gained by means orsupposition of the tenant right of renewal, should be for the benefit of the same persons as were interested in the ancient lease, and those who procured such new leases, and were legally possessed of them, should be trustees for that purpose. There is a great variety of authorities on this head, but the cases which have hitherto occurred have been principally of two kinds, some being cases of persons not having any beneficial interest in the old lease, as guardians and executors, and others being cases of persons having only partial and limited interests, as tenants for life, mortgagees and mortgagors, and in cases of both descriptions, those who have procured a new lease in such situations have been uniformly declared trustees for the persons beneficially interested in the *Page 136 
ancient lease, either wholly or in part, according to the particular circumstances, the court ever presuming that the new lease was obtained by means of a connection with and areference to the interest in the ancient one, without in the least regarding whether the persons renewing intended to act as trustees, or for their own emolument."
From this exposition, so luminous and judicial in its tone, which is fully sustained by the authorities, it is clear that the rule under consideration is not confined to crown, church or college leases, but embraces those of every kind. The same principle appertains to all. The cestui que trust has a right to the chance of renewal. Though this is termed a "tenant right" as between the lessee and the landlord, that is a mere phrase. It is a hope, an expectation, rather than a right. Such as it is, the trustee shall not take it to himself, but if it results in any substantial benefit he shall hold it for his beneficiary. (Phyfe v. Wardell, 5 Paige, 268; Bennett v.Van Syckel, 4 Duer, 162; Gibbes v. Jenkins, 3 Sand. Ch., 130; Davoue v. Fanning, 2 J. Ch., 252; Armour v.Alexander, 10 Paige, 572; Dickinson v. Codwise, 1 Sand. Ch., 226.) Some of these were instances of church or other corporation leases, and others were not. In no case has it been held that the rule is confined to these, as it certainly cannot be on principle.
The whole doctrine is extended to the case of partners inFeatherstonhaugh v. Fenwick (17 Ves., 298); Clegg v.Edmondson (8 De G., M.  G., 787); Clements v. Hall (2 De G.  J., 173); Clegg v. Fishwick (1 McN.  G., 294);Struthers v. Pierce (supra).
The principle cannot depend on the fact whether the lease is made to begin during the continuance of the partnership or at its close. Once admit the general principle, and it must result in this. While the relation lasts, one partner cannot clandestinely and exclusively profit by the trust relation. There may, perhaps, be cases where the act is openly done by the trustee and acquiesced in by the beneficiary that would admit of different considerations. It is not now necessary to decide that in no case can a partner take a lease for his own benefit. What *Page 137 
is now to be decided is, whether he can do so behind the back of his associate and without his consent. The bad consequences of making any such distinction as the defendant seeks to maintain in the present case is easily shown by a reference to the relation of a guardian and his ward. A guardian, we may suppose, holds a lease in his official character which is to expire at his ward's majority. While the relation of guardian and ward exists, he takes a lease to himself to commence at the termination of the existing lease. Could that be sustained? Has he not profited by the trust relation? When he takes a lease to himself, can a tenable distinction be taken between one commencing immediately, and one beginning at a future day, even though that day be postponed until the trust relation expires? The sound rule is, that he cannot make any profit to himself from a secret transaction initiated while the relation of trustee and cestuique trust exists, no matter when it springs into active operation. It must never be forgotten that, on general principles of the law of contracts, his right to the lease, as between him and his landlord, commences as soon as he has made his agreement for it. This is an immediate subject of sale, and if the trustee can hold it, he will be allowed to profit by the trust relation which, as has been shown, he cannot do. The cestui que trust
may accordingly say: "All the value of this lease you hold in trust for me Grant that it is not yet an estate but only a right — make it over to me in the condition in which you hold it." While no case has been found presenting the precise facts in the case at bar, the principles which should govern it may be derived from the result in Featherstonhaugh v. Fenwick (supra);Clegg v. Edmondson and Clegg v. Fishwick (supra).
In the first of these cases, the partnership was for an indefinite period, and might be dissolved at the pleasure of either party, on notice. It was dissolved November 22d 1804, the day on which the lease expired. Two of the partners, without communication with the plaintiff, had applied for a renewal of the lease, and obtained it before *Page 138 
giving notice of the dissolution of the partnership. The new lease was to run for eight years from the expiration of the old one. On October nineteenth, they gave notice to dissolve the partnership. The court held that the new lease belonged to the partnership, and was assets of the firm. Much stress was laid on the fact that the transaction was a clandestine one, and the court thought if notice had been given the case might have admitted of different consideration. The case is not in all respects parallel in its facts with the case at bar, for at the time the lease was taken, the period for the termination of the partnership had not been fixed, and only became subsequently ascertained by notice.
In the case of Clegg v. Edmondson, which was also an instance of a partnership to be dissolved at the pleasure of the parties, the effect of a notice to dissolve, preceding the execution of the renewal lease, came before the court. In that case, five managing partners had determined to dissolve their partnership, and had communicated their intent in June, 1846, and their determination to take a renewal to themselves. To this two other partners objected, claiming that the renewal should be for the benefit of all. Formal notice of dissolution was given in July, to take effect on September thirtieth. On the succeeding eleventh of December, a new lease was executed for twenty-one years to the managing partners, to take effect from September 29, 1846. The defendants endeavored to distinguish this case from that of Featherstonhaugh v. Fenwick, on the ground of the openness and fairness of the transaction. The court, however, held that the mere communication of an intent on the part of the managing partners to apply for a lease for their own benefit was not sufficient to give them an exclusive right to it. This case, on the point of time, is stronger than the case at bar, for the new lease was taken after the partnership was dissolved, though some stress was laid upon a point which does not appear here, that the act was that of managing partners.
On principle, in many cases it is of but little consequence *Page 139 
whether the partnership is dissolved or not before the renewal, since, if the former partners become tenants in common, the result is the same. (Clements v. Hall, 2 De G.  J., 173;Horne v. Fonda, 5 J. Ch., 388; Baker v. Whiting, 3 Sumn., 475, 495.) The case of Clegg v. Fishwick is still nearer to the one under consideration. In this instance, the renewal lease was obtained during the existence of the partnership, and the lease commenced at its expiration. This lease was declared to be held in trust for the firm.
Without further collation of authorities, the fair deductions from the principles on which they rest may be summed up as follows:
1. A trustee holding a lease, whether corporate or individual, holds the renewal as a trustee, and as he held the original lease.
2. This does not depend upon any right which the cestui quetrust has to the renewal, but upon the theory that the new lease is, in technical terms, a "graft" upon the old one; and that the trustee "had a facility," by means of his relation to the estate, for obtaining the renewal, from which he shall not personally profit.
3. This doctrine extends to commercial partnerships, and one of several partners cannot, while a partnership continues, take a renewal lease clandestinely, or "behind the backs" of his associates, for his own benefit. It is not material that the landlord would not have granted the new lease to the other partners, or to the firm.
4. It is of no consequence whether the partnership is for a definite or an indefinite period. The disability to take the lease for individual profit grows out of the partnership relation. While that lasts, the renewal cannot be taken for individual purposes, even though the lease does not commence until after the expiration of the partnership.
5. It cannot necessarily be assumed that the renewal can be taken by an individual member of the firm, even after dissolution. The former partners may still be tenants in common; *Page 140 
or there may be other reasons, of a fiduciary nature, why the transaction cannot be entered into.
The authorities cited on behalf of the defendant do not disprove these conclusions.
In Lee v. Vernon (supra), there was no trust. The question arose between a stranger to the lease and the claimant. The point made by the plaintiff was, that the "tenant right" of renewal had become strictly a right, so that even a stranger could not take a renewal and hold it for his own benefit. It was an extraordinary claim, having no foundation in principle, and was rejected.
In Van Dyke v. Jackson (1 E.D. Smith, 419), the party had made a special contract with his partner to abandon the place
where the business was carried on. The case turned on the special contract to leave the business in the hands of the other party.
Musselman's Appeal (62 Penn. St., 81), does not raise the question. It was not sought there to charge a partner with the value of a renewal lease which he had taken to himself during the existence of the partnership, but rather with that of the good-will as it existed after the partnership was dissolved. In fact, the place where the business was carried on was sold for the benefit of the firm, and it was held, in substance, that the good-will had been realized in the enhanced value of the property sold.
It is said, in the present case, that Read was not authorized, by the articles of partnership, to contract for Mitchell after the expiration of the firm; and that, therefore, Mitchell cannot take advantage from the renewal lease. The answer is, that he made the contract while the firm was in existence, and Mitchell may adopt and ratify it. The objection also proves too much, as it applies to all the cases in which the partner, acting clandestinely, has been declared a trustee.
In Phillips v. Reeder (18 N.J. Eq., 95), one of the partners, R., prior to the partnership, owned the lease, exclusively, of certain stone quarries. He entered into a partnership with P. for three years, and so much longer as R. should continue *Page 141 
lessee of the quarries. In the lease, there was a covenant of renewal at the option of R. He having declined to renew, it was held that the partnership expired; or, in other words, that R. was under no obligation to renew, and thus to continue the partnership. There could be no pretence in this case that the doctrine under review applied, since the original lease did not itself belong to the firm. It was the private property of one of the partners, which he was under no obligation to preserve for the firm's benefit.
In Achenson v. Fair (3 Dr.  War., 512), the point decided was, that the doctrine was not to be extended to additional
lands purchased by trustee; in other words, the rule was fully recognized, but nothing was to be governed by it except that which could be fairly regarded as a graft on the former lease.
In Nesbitt v. Tredennick (1 Ball  B., 29, 48), a mortgagee, not in possession, obtained a renewal, the original lease having been forfeited, both in law and equity, for non-payment of rent. Here there was no violation of trust. The rule under discussion was fully recognized, but its application to the existing case denied. The court said: "In all the cases upon this subject, either the party by being in possession obtained the renewal, or it was done behind the back, or by some contrivance in fraud of those who were interested in the old lease; and there was either a remnant of the old lease, or a tenant right of renewal on which a new lease could be engrafted." There could be no plainer recognition of the general principle maintained by the plaintiff.
In Maunsell v. O'Brien (1 Jones [Exch.], 184), the facts were, that there was an under-tenant who took a new lease from the original landlord without advising his own immediate landlord. The court held that there was no fiduciary relation between these parties. The principle was fully admitted, but the facts did not raise a case for its application. JOY, C.B., said: "It is admitted that there is no authority which can be produced where such a lease as the present has been declared to be a trust; and that we are now called upon *Page 142 to go further than any decision has ever gone before, and to make an authority for future decisions. We are called upon to do this on what are called the principles of a court of equity; namely, that where a person is clothed with a fiduciary character, and in that character becomes possessed of an interest in land, held under a determinable lease, any acquisition by him of a new interest in those lands is a continuation of the old lease, and a "graft" upon it. This, however, is the first time that I have heard it asserted that if an under-tenant obtains a lease of his lands from the head landlord without consulting his own immediate landlord that lease is a trust for his immediate landlord, because that person had a tenant right of renewal. Butthere is no fiduciary character imposed on an under-tenant, in reference to his landlord, by the creation of the relation of landlord and tenant which would entitle the plaintiff to the relief he seeks, on the ground of his having a tenant right of renewal. A cestui que trust is entitled to the benefit of a new lease, obtained by a trustee by means of a tenant right of renewal, which the latter became entitled to as trustee, but there is no such person in the present case." This language plainly shows that the court was but following in the wake ofLee v. Vernon; and holding that the doctrine of tenant right of renewal, and that the new lease is a graft on the old stock, are not to be extended to strangers, but confined to persons acting in a fiduciary character.
The only other case that will be noticed is Anderson v.Lemon (8 N.Y., 236), which holds, that one partner may in good faith purchase and hold, for his own use, the reversion of real estate occupied by the copartnership, under a lease for years, with the qualification that if he secretly makes such purchase in his own name while the other partner with his concurrence is negotiating with the owner to obtain the property for the use of the firm, the purchaser will be declared a trustee.
This decision carefully admits the general doctrine, but considers it not applicable to the case where one of the partners purchases in good faith the landlord's interest as *Page 143 
distinguished from taking a new lease. It is simply a case of an exception to a general rule. It can scarcely be considered, as a decision in favor of a partner's right to purchase since he was under the circumstances a trustee. Should the question be distinctly presented, it will deserve consideration whether the view in Anderson v. Lemon, that one partner may even in good faith buy the reversion for himself, is correct. There is great cogency in the remarks of Sir WILLIAM GRANT, that the partner may in this way intercept and cut off the chance of future renewals and consequently make use of his situation to prejudice the interests of his associates. (Randall v. Russell, 3 Meriv., 190, 197.) There appears to be no direct decision allowing the partner thus to purchase, and the right to do so is treated as doubtful by approved text writers. (1 Lead. Cas. Eq. [3d Am. ed.], p. 43, 44, marg. paging).
The application of the principles discussed in this opinion to the case at bar is obvious.
The plaintiff and defendant were owners, as partners, of a lease of premises in the city of New York, on which a hotel business was carried on yielding a large profit. These consisted of Nos. 1111, 1113, 1115 Broadway, and Nos. 1 and 3 West Twenty-fourth street. The leases of the Twenty-fourth street property were made directly to them, November 17th, 1866. The Broadway property, through a series of transactions not necessary to be detailed, became vested, according to the fair construction of the various agreements respecting it, in the partnership. The leases expired on the same day, May 1st, 1871, when the partnership terminated. While the partnership continued, both parties thought it necessary to provide a place for a bar room, and with this view the premises No. 3 West Twenty-fourth street were connected with the rear of the premises fronting on Broadway, known as the "Hoffman House," and the first story fitted up and used for that purpose. A considerable expenditure was made with this view, and large profits were realized, as the course taken was judicious. While all of the leases owned by the firm were still in existence, *Page 144 
viz., April 20th, 1869, and on January 21st, 1869, the owners of the hotel property made leases to the defendant, to commence from May 1st, 1871, and to continue as to part of the property for five years, and as to another portion for ten years from that date, at specified rents. The leases were obtained by Read without notice to the plaintiff, and he now claims that they are his exclusive property. They are of great value and the hotel at the commencement of the action March, 1870, was still in operation. The furniture, fixtures, stock, etc., were valuable and the business carried on was profitable.
The case has in it every element of the equity which has been already considered. The partnership is undisputed; the leases were in existence, when the renewal was made. The act of renewal was clandestine, or occurred "behind the back" of the plaintiff. It took place while the partnership was in force. The right to renewal was immediate and vested in Read during the partnership's continuance. The property belonging to the firm, and which will be prejudiced by the prospect of disposing of it at a sacrifice at the close of the existing lease, is large and valuable.
Common justice and a due regard to rules of public policy demand that the renewal lease should be declared to belong to the firm, and that the defendant should be required to account to the plaintiff for his portion of its value. The clauses in the leases to Read that there shall be no assignment without the consent of the landlord do not stand in the way of the plaintiff's relief. This does not consist in an assignment in the ordinary sense of that term. On the contrary, the ground of relief is that the defendant acted inequitably when he entered into the contract; that he must therefore be considered as a trustee, while the assignment to the firm simply follows as an incident to the giving complete effect to the trust relation declared by the court to exist between the parties. (Featherstonhaugh v.Fenwick, supra.)
The judgment must be reversed, and a new trial ordered.
All concur; REYNOLDS, C., not sitting.
Judgment reversed. *Page 145