Commercial Lease Case Analyzes Statute of Frauds and Parol Evidence Rule

A Tennessee case, Smith v. Hi-Speed, Inc. (Tenn. Ct. App. 2016), which involved a commercial lease, sets forth a very useful analysis of the parol evidence rule and the statute of frauds. The facts and legal arguments, as well as the analysis of the Court of Appeals of Tennessee, align in a way that make the opinion in the case one that can be helpful to practitioners and litigants in many real estate cases where the parol evidence rule and the statute of frauds are in play.

Here are the salient facts:

• Mother owned two commercial buildings, one in Tennessee and one in Arkansas
• Mother’s son (“Son”) owned an interest in Hi-Speed (the opinion does not discuss whether Son owned all or some of Hi-Speed)
• Mother agreed to spend significant money to build out the Arkansas building for Hi-Speed
• Mother and Hi-Speed entered into a written lease agreement for the Arkansas building (the “Lease”)
• The Lease provided that it was for 20 years with base rent of $14,000 per month
• The Lease also provided that Hi-Speed would pay additional rent of $4,000 per month so long as the Mothers’ Tennessee building was pledged as collateral for the loan Mother obtained to build out the Arkansas building
• Hi-Speed made the $4,000 additional monthly rent payments while the Tennessee building was pledged as collateral which was through 2008
• Even after 2008, Hi-Speed continued to make the additional rent payments to Mother, and in even greater amounts than $4,000 per month
• In 2009, Mother’s son died
• In 2011, new management at Hi-Speed notified Mother that the additional rent payments each month would cease

Mother filed suit against Hi-Speed. She claimed that the Lease did not contain the entire agreement of the parties and that they also verbally agreed that the additional rent payments would continue as long as Mother was obligated on the loan she obtained to build out the Arkansas building.  (The term of Mother’s obligation on the loan went well beyond the time period that Mother’s Tennessee building secured the loan). The trial court held that the parol evidence rule barred Mother from offering evidence of the verbal agreement.

PAROL EVIDENCE RULE ANALYSIS

Under Tennessee law, to generalize, the parol evidence rule prohibits parties from using evidence of the parties’ negotiations and communications (written or oral), which occurred prior to the formation of their written contract to alter or vary their contract.  Mother argued that the parol evidence rule did not apply under either of four exceptions to that rule.  Those exceptions are:

1. Extraneous evidence (parol evidence) may be used to prove the existence of an independent or collateral agreement;
2. Where the parties’ written agreement was not intended to contain their complete and exclusive agreement, parol evidence may be used to prove terms that are additional to the terms in the parties’ written agreement, but which are not inconsistent with it;
3. Parol evidence may be used to prove that the written agreement does not contain the correct agreement of the parties; and
4. Parol evidence does not prevent the parties from proving an agreement which was made after the parties written agreement was made. (In spite of the court’s characterization, this is not an exception as the parol evidence rule does not apply to negotiations and communications occurring after the formation of the parties’ written contract.)

As to each of the above, the court in the Hi-Speed case found:

1. This exception did not apply because it does not apply where parol evidence is used to establish a collateral agreement which contradicts the written agreement. The appeals court held that the oral agreement contradicted the terms of the Lease because the Lease provided that the additional rent was only due so long as the Tennessee building was pledged as collateral for the loan.
2. This exception did not apply because the term of the oral agreement Mother wanted to offer in evidence, that the additional rent would be paid so long as the loan was outstanding, contradicted the terms of the written Lease that the additional rent was due for only so long as the Tennessee building remained as collateral for the loan.
3. This exception did not apply because it only applied in cases where the plaintiff had requested that a written agreement be reformed for mistake and Mother’s lawsuit did not request that relief.
4. This exception (which is not an exception despite the court so calling it) did apply.  The appeals court held that it was possible that Mother might be able to prove that the verbal agreement she sought to enforce was made after the written Lease was signed. Thus, the appeals court found that the trial court should not have held that the parol evidence rule barred Mother from attempting to establish the verbal agreement she sought to establish.

STATUTE OF FRAUDS ANALYSIS             

The appeals court ruling that the parol evidence rule did not bar Mother from putting on proof of the verbal agreement between her and Hi-Speed ultimately did not help Mother because the court held that any such verbal agreement was unenforceable under the Tennessee statute of frauds.  That statute, generally speaking, requires real estate contracts, like leases, to be in writing and to be signed.  This ruling proves how effective the parol evidence rule can be in defending a client in a real estate litigation matter where the rule applies.