Bunke, Inc. v. Johnson

NO. 82-459

I N THE SUPPSME COURT O F THE STATE OF M N A A
OTN

1983

BUNKE, I N C . , a Montana c o r p o r a t i o n ,

p l a i n t i f f and A p p e l l a n t ,

B B JOHNSON and HARLAN CARPENTER, d/b/a
O
t h e JOCAR P a r t n e r s h i p ,

D e f e n d a n t s and ~ e s p o n d e n t s .

Appeal from: D i s t r i c t Court of t h e T h i r t e e n t h J u d i c i a l D i s t r i c t ,
I n and f o r t h e County o f Y e l l o w s t o n e
Honorable R o b e r t W i l s o n , J u d g e p r e s i d i n a .

C o u n s e l o f Record:

For Appellant:

James R. C a r l s o n , Hysham. Montana

For Respondents-

Ralph L. H e r r i o t t , B i l l i n q s , Montana

--

S u b m i t t e d on b r i e f s : March 2 4 1983

Decided: J u l y 1 8 , 1 98 3

Filed:
JUL 18 1983

Clerk
Mr. Justice Fred J. Weber delivered the Opinion of the Court.
Plaintiff Bunke, Inc. (Bunke) appeals from a decision of
the Thirteenth Judicial District Court, Yellowstone County,
in this declaratory judgment action arising out of the lease
of The Rails Inn Motel in Forsyth, Montana. We affirm the
District Court.
Bunke raises the following issues on appeal:
1. Does section 70-26-203, MCA, justify the tenant,
Bunke, vacating the premises and discharge it from further
payment of rent a.nd other obligations under the lease?
2. Does the landlord's retaking of possession and
operation of the motel terminate the lease and with it all of
the obligations under the lease?
Plaintiff Bunke is a family corporation based in Miles
City, Montana, which operates several motels in the area.
Defendants Bob Johnson (a contractor) and Harlan Carpenter
formed a partnership (Jocar) in fall of 1980 for the purpose
of building the Rails Inn Motel in Forsyth, Montana. Their
decision to build was based in part upon their ongoing
negotiations with Burlington Northern Railroad (BN) for the
use of the facility by a guaranteed number of BN employees,
at that turn-around point on the line.
Letters from BN's Tom Jarnigan indicate that BN did not
promise a long-range contract, but at first contemplated a
guaranteed 35 rooms per day. The agreement finally entered
into by Jocar and BN on March 31, 1981 guaranteed 20
occupancies per day at a reduced rate of $17 each. The
contract was terminable upon thirty days' written notice or
24 hours' notice in the event of certain contingencies. No
mention was made in the agreement of cafe or bar facilities.
Bunke contends the restaurant and bar were essential to the
BN lease, while Jocar's position is that those facilities
were to be installed if and when suitable operators could be
found.
In spring of 1981, while Jocar was proceeding with the
construction of the Rails Inn, Bunke expressed an interest in
leasing and operating the facility. During subsequent
negotiations between Bunke and Jocar, Garry Bunke, who is an
officer of the corporation and an attorney, represented
Bunke; Jocar was not represented by counsel. The record
suggests that numerous matters were discussed which were not
included in the lease agreement drafted by Garry Bunke and
signed by the parties April 21, 1981.
The term of the lease was from May 1, 1981, to April 30,
1982. The monthly rental payment was $13,295, payable on the
fifth day of the following month. The lease provided that
Bunke would pay $11,400 or the actual property taxes,
whichever was less, and $2,400 as its share of the insurance.
Bunke would be liable for utilities, and would not involve
Jocar in any expense or liability. Bunke had a one-year
option to purchase the entire facility, including "the
restaurant and bar portion," for $850,000; the price did not
include "fixtures, furniture and equipment nor liquor
license. " In the event Bunke chose not to exercise the
option to purchase, all lease payments were to be considered
rental. Jocar had the right to terminate the lease upon 30
days' written notice for Bunke's failure to perform the
conditions of the lease or failure to conduct its business
properly.
The lease contained no provisions regarding:
a. The railroad occupancy agreement;
b. Installation and operation of a bar and cafe;
c. Responsibility for repairs and maintenance;
d. Responsibility for correcting flaws in construction
and supplying furnishings;
 e. Responsibility for complying with sanitary and
licensing standards and getting a license.
f. The cost of signs;
g. Termination by Bunke;
h. Effect of termination upon the option to purchase
and rental payments.
Bunke took possession of the Rails Inn on May 1, 1981,
installed a manager, and opened for business May 4, 1981. In
the weeks prior to Bunkels taking possession, Bunke's
president, Paul Bunke, had visited the site numerous times.
He was familiar with the progress of construction, and the
fact that the Rails Inn was not completely finished at the
time Bunke took possession, and could only enjoy limited
occupancy at first. He also had read the BN agreement and
was familiar with its terms.
Numerous problems arose between Bunke and Jocar from the
outset, partly because the facility was newly constructed and
was just starting up, partly because the lease failed to
establish the responsibility of Jocar for certain equipment,
adjustments and corrections demanded by Bunke.
Jocar did not finish the bar/cafe section; nor did Jocar
find anyone to operate a bar/cafe during Bunkels occupancy,
although the Rails Inn sign advertised "The Beanery Cafe'' and
"The Sidetrack Lounge." Jocar refused to finish and open the
bar/cafe section unless a suitable operator could be found
who was willing to pay the $3,000 or $4,000 monthly rental.
Bunke claims many prospective clients turned away upon
learning the facility lacked a bar and cafe. Bunke also
claims the lack of a bar and cafe led to BN's reduction of
its guaranteed occupancy from 20 to ten rooms per day,
effective December 1981.
In the beginning of May when the Rails Inn opened, the
bedspreads and color TV's had not yet arrived; the beds'
headboards did not match the mattresses; the parking lot was
not paved; room key tags, checkout cards, and other small
items were not provided; there was no ice machine; light
fixtures in the restaurant portion and the basement were
missing; security lights and door, certain handrails,
electrical panels and fire extinguisher boxes were not
finished. Loose bricks at the front entrance caused water to
pool and seep into the lobby when it rained. In the weeks
that followed, Bunke and Jocar could not agree as to which
was responsible for finishing certain items, which items
amounted to wear and tear, and how responsibility and
expenses for signs, utilities and compliance with codes
should be allocated.
During the summer of 1981, the Rails Inn was inspected
by the Rosebud. County Department of Public Health and the
Montana Building Codes Divison. Certain deficiencies were
found requiring correction before the Rails Inn could be
licensed. These corrections included handrails on certain
stairways, laundry chute sprinklers, laundry room fans, and
basement sprinklers. Certain of the deficiencies were
corrected by Jocar--the laundry chute was closed off and fans
were relocated. Handrails were installed in October 1981.
The last letter from the Rosebud County Department of Public
Health is dated October 22, 1981. The letter indicated that
further information was required from the Montana Building
Codes'Division before the motel could be licensed.
During the summer of 1981, Bunke and Jocar negotiated a
substantial reduction of rental payments based upon the above
deficiencies. They agreed to reduce the rent for May and
June to 40% of actual income rather than the $13,295 monthly
figure specified in the lease. The rent for May was $4,904;
the rent for June was $8,760. Bunke and. Jocar agreed that
the rental for July, August, and perhaps September, would be
$12,500 per month.
Many deficiencies were actually corrected by Jocar. The
parking lot was paved in July 1981; the TVs, proper
headboards, and bedspreads were received and installed by
mid-May. Jocar installed rain gutters, replaced bricks, and
closed off the laundry chute to conform to building code

requirements. Bunke supplied its own ice machine and
repaired door locks. Certain matters remained unresolved,
including the cost of signs and the absence of the bar/cafe.
On September 15, 1981, Paul Bunke sent Bob Johnson of
Jocar the following letter:
"This is to confirm our conversation at the Blue
Spruce today, September 15, 1981. It is my
understanding that the lease for the Rails Inn will
remain at $12,500.00 for the month of September,
less $1,886.03 for amounts due by JOCAR to Bunkes,
Inc . It is further my understanding that the
October rental is to be negotiated at that time.
Further, and also pursuant to our conversation, we
intend on setting November 1, 1981 as a termination
date for the lease in exchange for releasing the
option to purchase. We are willing to continue the
lease if we can mutually agree with you as to terms
for the month of November and subsequent months."
No reference is made to specific deficiencies or the overall
incompleteness of the Rails Inn.
Jocar responded in writing on October 9, 1981, stating
that full rental payments were expected. On October 16,
1981, Garry Bunke wrote to Jocar setting out a schedule of
past payments. He mentioned the $4,904 May payment, which
was only 40% of the gross income, "due to the fact that the
motel was not completed on May 1." He also referred to the
$8,760 June payment, also only 40% of the June gross, because
"the motel still was not complete in many respects." Bunke
stated that Jocar's failure to install the bar/cafe was the
major problem with the lease. He stated that the motel was

"still not complete in many respects," asserting that defects
in the laundry room would have to be corrected before the
State would issue a license. On October 20, 1981, Jocar sent
Bunke a letter which included a list of amounts due and
stated:
"Jocar will look to your corporation for the
payments set forth in the written lease until the
same expires of its own terms."
This intention was reiterated in a letter from Jocar to Bunke
dated November 6, 1981.
On November 1, 1981, Bunke moved out of the Rails Inn.
Bunke made no rental payments or other payments after October
1, 1981. Jocar operated the Rails Inn from November 1, 1981
to May 1, 1982, netting $36,758.83.
On November 25, 1981, Bunke filed its complaint, seeking
a declaratory judgment that Jocar had breached the "terms and
provisions, warranties and representations that they made to
enter into the lease agreement," and seeking damages in the
amount of $23,000 for that breach. Jocar cross-complained,
alleging damages arising from Bunke's unilateral termination
of the lease and its failure to make the remaining rental
payments and other payments required by the lease agreement.
Trial was held on July 13-14, 1982, before the District

Court sitting without a jury. On August 10, 1982, the
District Court filed its findings and conclusions; judgment
in favor of Jocar was entered August 24, 1982. The court
held that Bunke was liable to Jocar for $54,572.98 plus
costs; the amount represented adjusted damages less
mitigation resulting from Jocar's operation of the Rails Inn
between November 1, 1981 and May 1, 1982. Bunke appeals.

Bunke argues that the District Court ignored section
70-26-203(1), MCA, which states:

"If within a reasonable time after notice to the
lessor of dilapidations which he ought to repair,
he neglects to do so, and if the cost of such
repairs does not require an expenditure greater
than 1 month's rent of the premises, the lessee may
 perform such repairs himself and deduct the
expenses of such repairs from the rent, or the
lessee may vacate the premises, in w h i c h c a s e
he is discharged from further paymenFof -
- rent or
performance - other conditions." (Emphasis ae.
of dd
d)
Bunke cites cases in which this Court recognized that the
lessor's failure to repair "dilapidations" justified the
lessee's choosing either of the options stated in
70-26-203(1), MCA, and similar earlier code sections.
Lowe v. Root (1975), 166 Mont. 150, 531 P.2d 674;
Noe v. Cameron (1922), 62 Mont. 527, 205 P. 256.

The lessee's right to "repair and d.eductWor vacate the
premises if a lessor fails to make repairs he ought to make
is well-settled in Montana. Lowe, supra; Lake v. Emigh
(1946), 118 Mont. 325, 167 P.2d 575; (SS42-401, 402, R.C.M.
1947; S(S7741, 7742, R.C.M. 1935; section 70-26-203 (I), MCA.
This right arises under contract law and involves the
presumption that a person would not agree to lease a
residential facility which was unfit for human habitation.
In Lowe, 166 Mont. at 159, 531 P.2d at 679, this Court
recognized that the presumption extends to commercial
residential facilities, such as hotels, stating:
"Beyond a doubt a hotel is 'a building intended for
the occupation of human beings' and thus within the
scope of sections 42-201 and 42-202, R.C.M. 1947."
It does not follow, however that a lessee may vacate
without liability, or repair and deduct, where the needed
repairs do not significantly affect the leasehold or
compromise the purposes for which the property is leased. In
Lake, 118 Mont. at 332, 167 P.2d at 579, this Court noted
that sections 7741 and 7742 of the 1935 Revised Codes of
Montana (forerunners to section 70-26-203, MCA) "relate only
to dilapidations rendering the premises untenantable" or
"unfit for habitation." Section 42-201, R.C.M. 1947,
required that the lessor of a building intended for human
occupation "must, in the absence of an agreement to the
contrary, put it into a condition fit for such occupation,
and repair all subsequent dilapidations thereof which render
it untenantable ... " Section 42-202 R.C.M. 1947, allowed
a lessee to vacate, or repair and deduct up to one month's
rent, as to dilapidations which the lessor "ought to repair."
Section 42-201, R.C.M. 1947, was repealed in 1977.
Section 42-202 was reenacted substantially intact into
section 70-26-203 (1), MCA, applicable to commercial
residential leases. The repeal of section 42-201 leaves in
some doubt the character of those dilapidations which a
landlord ought to repair under section 70-26-203, MCA. If
the dilapidations must be so extensive as to render the
premises untenantable, they would probably also be so
extensive that the cost of repairing them would exceed a
month Is rent. This would leave the tenant with the
unsatisfactory options of (1) remaining in premises, which
while not untenantable are significantly affected by serious
defects; (2) vacating at risk of liability under the lease;
or (3) repairing at his own expense. On the other hand,
the statute can hardly be intended to burden the landlord
with making the most trivial repairs or facing a broken
lease. Clearly, the dilapidations that a landlord ought to
repair under section 70-26-203, MCA, are those which
significantly diminish the enjoyment of the premises or
substantially interfere with the purposes for which the lease
premises are intended.
The record here establishes that the building
"deficiencies" listed by Bunke were not such as to adversely
affect rentals, thus compromising the purpose of the lease.
Indeed, Bunke rented the rooms in the Rails Inn continuously
from the first week of its possession of the facility. Bunke
has not demonstrated that the deficiencies that existed were
substantial enough to have an adverse financial effect.
 Bunke relies upon Lowe, supra, to support its assertion
that Jocar's failure to comply with all code requirements is
sufficient to justify Bunke's abandonment of the Rails Inn in
November, 1981. In Lowe, 166 Mont. at 159, 531 P.2d at 679,
we stated:
" [Lessee] had the choice of making the repairs
called for by the letter of the fire marshal and
deducting the cost from the rent payments, to the
extent of one month's rent payment, or to vacate
the premises."
In Lowe the deficiencies noted in the fire marshal's letter
were sufficient to warrant the condemnation of the building
as a fire hazard and a public nuisance.
In the case at bar the record supports the District
Court's conclusion that Jocar took steps to remedy the
deficiencies and bring the building up to code requirements
so it could be licensed. Communications in the record from
the Rosebud County sanitarian express the county's
recognition of Jocar's correction of several problems. The
remaining problems were obviously minimal; the record shows
that Jocar obtained the city business license for the Rails
Inn without difficulty. It appears that Jocar has not yet
applied for a motel license from the State. During the
summer months, the Rails Inn has been operating at about 83%
of capacity, which Jocar considers successful.
This Court also must consider the negotiated agreement
between Bunke and Jocar to reduce the May rent by $8,000 and
the June rent by $4,500 because of deficiencies which existed
when Bunke assumed occupancy of the Rails Inn. Such a
substantial reduction in rent suggests that the parties
settled the question between them, and that Bunke assumed the
responsibility for correcting deficiencies. In effect, the
negotiated reduction suggests an agreement to "deduct and
repair. " Section 70-26-203, MCA, is phrased in the
disjunctive; a tenant is not granted the right to deduct for
the repairs of a building's flaws, - to vacate the premises
and
because of the flaws.
The record also establishes that Bunke entered into the
lease agreement and took possession of the Rails Inn knowing
the facility was not finished, and that completion would take
some time. Bunke may not fairly argue the delay in
completion to justify a decision to abandon only a few months
after taking possession.
In light of the evidence that (1) the deficiencies in
the Rails Inn were not significant enough to have an adverse
financial impact upon the motel's operation; (2) Jocar had

taken some steps to conform to code requirements prior to
Bunke's departure; (3) the rent reductions suggest an agreed
settlement of Bunke's claims of incomplete construction, we
find substantial evidence to support the District Court's
conclusion that Bunke was not entitled to vacate without
further obligation under the lease pursuant to section
70-26-203, MCA.
We note in passing that those "promises" which Bunke
claims induced it to enter into the lease--the BN guaranteed
occupancy agreement and the operation of a bar/cafe on the
premises--are not dispositive here. First, and most obvious,
they are not pertinent to the issues raised by Bunke.
Section 70-26-203, MCA, is not applicable; the absence of a
bar/cafe can hardly be considered a "dilapidation" which the
landlord ought to repair. Second, if Bunke had intended to
hold Jocar to any "promises", those promises could have and
should have been incorporated into the lease agreement which
Bunke's attorney drafted. This was not done. Where the
contract is clear and unequivocal on its face, we will not
consider par01 evidence to modify its terms. Spraggins v.
Elvidge (1981), Mont . , 625 P.2d 1151, 38 St.Rep.
493. Evidence of negotiations which preceded the written
contract may have been admissible at trial to support Bunke's
theory of fraud, under section 72-11-304(2), MCA. But the
District Court found no fraud, and, as Bunke notes, fraud is
not raised as an issue on appeal. Bunke may not use that
evidence on appeal to seek to modify the terms of the
contract, which is clear and unambiguous on its face, and
which simply does not provide for Jocar's operation of a bar
and cafe on the premises. Third, the record establishes that
Bunkes had read and were familiar with the terms of the BN
agreement. The agreement made no reference to a bar/cafe; it
contained a 30-day termination provision. Bunke could not
reasonably claim to have relied on assurances by Jocar that
the bar/cafe was "necessary" to the BN agreement, or that the
Rails Inn was certain to enjoy a long-term occupancy
guarantee from BN. Finally, there is testimony from Bob
Johnson that Jocar agreed to install a bar/cafe only if a
suitable operator could be found, who could pay the monthly
rental of $3,000-$4,000. Johnson testifed that he was unable
to find such an operator, although a number of prospective
operators were interviewed. There is substantial evidence
to support the District Court's conclusion that Jocar was not
obliged under the contract or otherwise to establish an
operating bar/cafe within the Rails Inn.
We hold that Bunke was not entitled to vacate the Rails
Inn under section 76-20-203, MCA, and that Bunke unilaterally
breached the terms of the lease agreement by abandoning the
premises on November 1, 1981, and failing to make the agreed
monthly rental payments and other payments.
11.

Runke argues that by reentering and taking possession of
the Rails Inn on November 1, 1981, Jocar impliedly consented
to Bunke's surrender of the premises, thereby extinguishing
Bunke's further obligations under the lease agreement. Bunke
quotes from the American Law of Property subsection 3.99:
"A lease may be terminated by surrender, a
'yielding up' to the owner of the reversion or
remainder. The surrender ordinarily will not
affect any interest third persons may have acquired
in the leasehold. It extinguishes the lessee's
liability for future rent, but not for accrued rent
or for past breaches of other covenants.
"The situation that has given rise to most
litigation is that where the tenant abandons the
premises and refuses to pay rent. The courts
usually hold that the lessor may let the premises
lie idle and collect the rent. There are
statements in some cases that the lessor has a duty
to mitigate damages, as for breach of contract, but
most of the decisions are simply that if the lessor
reenters for the purpose of reletting for the
- -
lessee he must use reasonable diligence in so
doing. Generally, however, the courts - -
hold that
the lessor who reenters may relet - - lessee's
for the
benefit, hoIdinq the lessee for any deficiency,
provided - gives the lessee notice."
he (Emphasis
added)
Bunke also relies upon Knight v. OM1 Corp. (1977), 174
Mont. 72, 568 P.2d 552. In Knight, the landlord cancelled
the lease agreement for non-payment of rent. We found that
the landlord's cancellation and reentry terminated the lease
agreement, and absent an explicit saving clause in the lease
agreement establishing the tenant's further obligations,
there were none.
Bunke also refers this Court to Bonnet v. Seekins
(1952), 126 Mont. 24, 29, 30, 243 P. 2d 317, 320 (cited in
Knight, supra), wherein this Court stated:

"The obligation to pay the agreed rental continues
until the lease is legally terminated. (citation
omitted)
"A lease for a fixed term may not be terminated by
the act of the tenant in abandoning the property
before the end of the term in the absence of
consent on the part of the landlord. (citation
omitted) The landlord's consent to the surrender
or abandonment may be either express or implied.
(citation omitted)
"'A surrender cannot be effected by the act of only
one party; the concurrence, in some way, of both
lessor and lessee is necessary in order to
 accomplish a surrender.' 3 Thompson on Real
Property, p. 750, sec. 1491. 'The surrender of
leased premises b~ the tenant before - expiration
the
of - - - - not effective unless there - -
- the term is is an
acceptance 2 the landlord. Any act equivalent to
- aareement on the art of the tenant to abandon
an L - -

- - landlord to resume possession is sufficient
and