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LLC v. TP Properties, LLC

Supreme Court of Alabama

November 1, 2019

LNM1, LLC, and Mohamed Alsahqani
v.
TP Properties, LLC

          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 ...


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