Abbott v. BOB'S U-DRIVE
352 P.2d 598, 81 A.L.R. 2d 793, 222 Or. 147 (1960)
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Rule of Law:
A covenant in a lease requiring arbitration of disputes is a covenant that runs with the land. Consequently, an occupant of a leased premises who is deemed an assignee by implication is bound by the arbitration clause, even if they were not a party to the original written lease or a formal written assignment.
Facts:
- In April 1952, plaintiff leased commercial premises to Robert E. Thompson for an automobile rental business under a lease containing a mandatory arbitration clause.
- In 1953, Thompson incorporated two businesses, Bob's U-Drive and Continental Leasing Company, both of which he managed and co-owned.
- Both corporations began operating the car rental and leasing business from the leased premises.
- In August 1954, Thompson executed a written assignment of his entire interest in the lease to Bob's U-Drive.
- No written assignment of the lease was ever made to Continental Leasing Company, though it continued to operate from the premises and pay rent alongside Bob's U-Drive.
- The operations of the two corporations were intertwined, with business conducted from a single office, although they maintained separate records and bank accounts.
- A controversy arose between the plaintiff and the two corporations regarding the performance of the lease terms, specifically related to rental payments.
Procedural Posture:
- Plaintiff filed a petition in the circuit court for Multnomah county to compel defendants Bob's U-Drive and Continental Leasing Company to arbitrate a dispute under a lease agreement.
- Continental Leasing Company filed an answer objecting to arbitration on the grounds that it was not a party to a written arbitration agreement.
- The circuit court entered an order compelling Continental Leasing Company to proceed with arbitration.
- A board of arbitrators conducted a hearing and issued a monetary award in favor of the plaintiff.
- The circuit court overruled objections from both defendants and entered a joint and several judgment against them based on the arbitration award.
- Defendants, Bob's U-Drive and Continental Leasing Company, appealed the judgment to this court.
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Issue:
Does a corporation that occupies a leased premises and pays rent, but is not a party to the written lease or a formal written assignment, become a co-assignee by implication and thereby become bound by the lease's covenant to submit controversies to arbitration?
Opinions:
Majority - O'Connell, J.
Yes. A corporation that occupies a leased premises and pays rent becomes a co-assignee by implication and is bound by the lease's covenant to arbitrate. When a person other than the original lessee is in possession of leased premises and paying rent, a legal presumption arises that the lease has been assigned to that person. This implied assignment is sufficient to bind the assignee to covenants that 'touch and concern' the land. The court holds that a covenant to arbitrate disputes arising from the lease, such as rental payments, does touch and concern the land because it relates to the parties' interests as lessor and lessee. Therefore, Continental Leasing Company, as an assignee by implication, was bound by the arbitration clause contained in the original written lease.
Dissenting - Duncan, J. (Pro Tempore)
No. A corporation that is not a party to the original lease is not bound by the covenant to arbitrate. An assignee is bound only by covenants that run with the land due to privity of estate, not privity of contract. While a covenant to pay rent runs with the land, a covenant to arbitrate is a personal covenant between the original contracting parties and does not run with the land. Therefore, Continental Leasing Company was not bound by the arbitration clause and was entitled to have the dispute tried in a court of law rather than being compelled to arbitrate.
Analysis:
This decision expands the scope of covenants that "run with the land" to include procedural provisions like arbitration clauses, so long as they relate to the subject matter of the lease. By recognizing an "assignee by implication" based on possession and payment of rent, the court prevents lessees from using corporate formalities to enjoy the benefits of a lease while evading its obligations. The ruling strengthens the enforceability of arbitration agreements against successors-in-interest and makes it more difficult for affiliated corporate entities to shield themselves from lease covenants.
