First American National Bank v. Chicken System of America, Inc.
616 S.W.2d 156 (1980)
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Rule of Law:
An assignee of a lease is liable to the lessor for covenants running with the land only while privity of estate exists. For liability to extend beyond the termination of privity of estate, the assignee must have expressly assumed the lease's obligations, thereby creating privity of contract with the lessor.
Facts:
- On May 28, 1968, First American National Bank (First American) leased a property to Chicken System of America, Inc. (Chicken System) for a 15-year term, with a clause prohibiting assignment without written consent.
- On April 30, 1969, Performance Systems, Inc. (PSI) entered into an agreement with Chicken System's parent company to purchase its retail outlets.
- The purchase agreement stated that responsibility for the real estate leases would transfer to PSI after April 30, 1969.
- First American never gave written consent for the assignment of the lease from Chicken System to PSI.
- Despite the lack of consent, PSI took possession of the property on May 1, 1969, and paid rent directly to First American through October 1970.
- On November 1, 1970, PSI defaulted on rent payments and vacated the premises.
- Both First American and PSI made efforts to find a new tenant for the property.
- On September 1, 1972, First American, without consulting PSI, entered into a new lease for the property with a third party, Sir Pizza.
Procedural Posture:
- In a prior lawsuit, First American sued PSI in the Chancery Court for Davidson County for rent due after PSI's 1970 default but before the property was re-let.
- The Tennessee Supreme Court affirmed a judgment for First American in that case, holding PSI liable based on privity of estate.
- First American then filed the current lawsuit against PSI in the Chancery Court to recover rent deficiencies that accrued after it re-let the property to Sir Pizza on September 1, 1972.
- The Chancellor (trial court judge) ruled in favor of First American, holding PSI liable for these subsequent deficiencies.
- PSI (appellant) appealed the Chancellor's judgment to the Court of Appeals of Tennessee, with First American as the appellee.
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Issue:
Is an assignee of a lease, who has not expressly assumed the lease's obligations, liable to the lessor for rent deficiencies that accrue after the assignee has vacated the property and the lessor has re-let it to a new tenant?
Opinions:
Majority - Lewis, Judge.
No. An assignee who has not expressly assumed the lease is not liable for rent after the privity of estate has been terminated. Liability can only be based on privity of estate or privity of contract. Here, privity of estate ended when First American re-let the premises to Sir Pizza, which terminated PSI's possessory rights as effectively as a reassignment would have. Privity of contract never existed because PSI never made an express promise to First American to be bound by the lease covenants for the full term; its agreement to take 'responsibility' for the lease was made with Chicken System, not the lessor. A mere acceptance of an assignment, without an express assumption of its obligations to the lessor, is insufficient to create privity of contract.
Analysis:
This case clarifies the critical distinction between a lease assignment and an express assumption, reinforcing traditional property law principles. It establishes that an assignee's liability based on privity of estate is coextensive with their possession and ends when that possessory right is terminated, either by reassignment or by the lessor's actions in re-letting the property. The ruling emphasizes that to hold an assignee liable for the entire lease term, a lessor must secure an explicit assumption of the lease obligations, as courts will not infer such a promise from the assignee's conduct or from agreements made with the original lessee. This precedent protects assignees from indefinite liability while compelling lessors to be diligent in formalizing relationships with new tenants.
