Appeal
from Hale Circuit Court (CV-17-5)
MITCHELL, JUSTICE.
This is
a commercial-lease dispute. Since November 2012, LNM1, LLC,
has operated a gasoline station and convenience store in
Greensboro under a lease agreement with the owner of the
property, TP Properties, LLC. In August 2017, TP Properties
sued LNM1 and its owner Mohamed Alsahqani in the Hale Circuit
Court, seeking to terminate the lease because LNM1 had not
maintained all the required insurance coverages. The trial
court entered a summary judgment in favor of TP Properties,
holding that LNM1's failure to maintain the insurance
required by the lease agreement constituted a material breach
of that agreement, thus entitling TP Properties to terminate
the lease. LNM1 and Alsahqani appeal. We affirm.
Facts
and Procedural History
On
October 12, 2012, LNM1 and TP Properties executed a lease
agreement with a term of 10 years. That agreement authorized
LNM1 to operate a gasoline station and convenience store that
TP Properties owned in Greensboro. LNM1 agreed to pay TP
Properties "base rent" of $7, 000 per month. Under
a section of the lease agreement captioned "Additional
Rent," LNM1 also agreed to purchase and maintain the
following insurance coverages: (1) a general-liability policy
written by an insurer rated "A" or better by A.M.
Best Company, Inc., providing $1, 000, 000 of coverage per
occurrence and listing TP Properties as an additional
insured; (2) a liquor-liability policy providing $500, 000 of
coverage and listing TP Properties as an additional insured;
and (3) a policy insuring the building and canopy on the
property. A separate provision in the lease agreement
obligated LNM1 to obtain $1, 000, 000 of
environmental-impairment-liability insurance and to list TP
Properties as an additional insured on that policy.
The
lease agreement also granted LNM1 an option to purchase the
property at any time during the term of the lease for a base
price of $850, 000, with a credit to be given for all sums
previously paid as rent. TP Properties agreed that if a third
party offered to purchase the property during the term of the
lease, LNM1 would have 45 days to exercise its purchase
option after being given notice of the other offer.
Finally,
the lease agreement provided that TP Properties could
terminate the lease at any time if LNM1 failed (1) "to
substantially comply with any material provision of [the]
Lease" or (2) "to exert good faith efforts to carry
out provisions of [the] Lease."
LNM1
began operating the gasoline station and convenience store in
November 2012. Alsahqani has stated in an affidavit that LNM1
made various capital improvements to the property upon taking
possession and that he has invested several hundred thousand
dollars in the business. There is no indication in the record
that LNM1 ever failed to pay the $7, 000 monthly base rent or
that there were any disputes regarding the property or the
lease until the summer of 2017.
On June
27, 2017, TP Properties notified LNM1 that it had received a
bona fide offer to purchase the property. LNM1 thereafter
promptly notified TP Properties that it would exercise its
option to purchase the property. TP Properties subsequently
requested information from LNM1 regarding the insurance
policies LNM1 held so that TP Properties could determine any
post-sale liabilities it might have related to the property.
After LNM1 provided the requested information, TP Properties
discovered that LNM1 had not obtained all the insurance
coverages required by the lease agreement. Specifically,
although LNM1 had, in November 2012, purchased a $2, 000, 000
general-liability policy listing TP Properties as an
additional insured, LNM1 had changed carriers in November
2016; the new policy, also providing $2, 000, 000 in
coverage, did not list TP Properties as an additional
insured. Additionally, LNM1 had procured a liquor-liability
policy with a limit of only $100, 000, as opposed to the
$500, 000 limit the lease agreement required, and that policy
had never listed TP Properties as an additional insured.
Finally, LNM1 had never purchased or held any
environmental-impairment-liability insurance whatsoever.
LNM1
and Alsahqani state that TP Properties thereafter told them
that it would still proceed with the sale of the property to
LNM1 but that it first needed Alsahqani to execute an
affidavit and an indemnification agreement. On August 11,
2017, Alsahqani executed an affidavit acknowledging that TP
Properties was not listed as an additional insured on the
general-liability policy covering the property and that LNM1
had never purchased the environmental-impairment-liability
insurance required by the lease agreement.[1] Alsahqani further
stated in that affidavit that LNM1 had no knowledge of any
"claims, actions, suits, complaints, liens or
investigations of any kind" related to the property.
Three days later, Alsahqani executed an indemnification
agreement agreeing that he and LNM1 would pay any claims or
costs that TP Properties subsequently became obligated to pay
stemming from LNM1's use of the property during the term
of the lease agreement.
On
August 24, 2017, TP Properties filed a two-count complaint
against LNM1 and Alsahqani. The first count of the complaint
sought rescission of the lease agreement, alleging that
rescission was warranted because LNM1's failure to obtain
the required insurance coverages constituted a material
breach of the agreement. TP Properties' second count
requested that the trial court enter a judgment declaring
that LNM1 had materially breached the lease agreement and
that the agreement was thus rescinded. TP Properties
supported its complaint with a copy of the lease agreement,
LNM1's general-liability policy, and the affidavit and
indemnification agreement that Alsahqani had executed. TP
Properties simultaneously moved the trial court to enter a
temporary restraining order and preliminary injunction
barring LNM1 from proceeding with its purchase of the
property through the exercise of the purchase option in the
lease agreement. The trial court entered the requested
temporary restraining order that same day and, following a
hearing, converted the temporary restraining order to a
preliminary injunction.
Over
the following weeks, LNM1 took steps to obtain the insurance
coverages required by the lease agreement. It first added TP
Properties as an additional insured on its general-liability
policy effective September 6, 2017. LNM1 subsequently
acquired new $500, 000 liquor-liability and $1, 000, 000
environmental-impairment-liability policies that took effect
on September 18, 2017; both policies listed TP Properties as
an additional insured.
On
October 2, 2017, LNM1 and Alsahqani answered TP
Properties' complaint and filed a counterclaim seeking a
judgment declaring that TP Properties was obligated to sell
the property to LNM1 in accordance with the purchase option
in the lease agreement. LNM1 and Alsahqani did not disclose
in their responsive pleading that, since the filing of the
complaint, they had acquired the insurance policies required
by the lease agreement.
On
January 12, 2018, LNM1 and Alsahqani moved the trial court to
enter a summary judgment in their favor, arguing (1) that
LNM1 had substantially complied with the terms of the lease
agreement; (2) that LNM1 had properly exercised the purchase
option before TP Properties gave it notice of noncompliance
or initiated efforts to terminate the lease; and (3) that the
parties had modified the terms of the lease agreement by
executing the indemnification agreement. TP Properties
thereafter filed its own summary-judgment motion, arguing
that it was entitled to terminate the lease because, it said,
(1) LNM1's failure to obtain the insurance policies
required by the lease agreement was a material breach of that
agreement and (2) LNM1's apparent failure to make any
effort to obtain three of the four required policies in 2012
"and continuing to this day" demonstrated its lack
of good faith, which constituted an alternative basis for
terminating the lease.
Following
a hearing on the parties' dueling summary-judgment
motions, the trial court allowed the parties to submit
additional materials in support of their arguments. TP
Properties did so, emphasizing to the trial court that
"[i]t has been five months since this lawsuit was filed
and LNM1 hasn't cured anything. LNM1 does not even
contest that it has never cured the insurance breaches."
TP Properties also submitted an affidavit from a local
insurance agent in which the agent stated that it was
effectively impossible for LNM1 to fully cure its breach
because there was no insurance available that would
retroactively cover any claims that arose from incidents that
had occurred during the previous years of the lease. LNM1 and
Alsahqani also submitted a post-hearing brief, but they did
not address the allegation that LNM1 had not cured its
default.
On
February 6, 2018, the trial court entered a summary judgment
in favor of TP Properties in which it made the following
...