Commercial Lease Case Analyzes Statute of Frauds and Parol Evidence Rule
A Tennessee case, Smith v. Hi-Speed, Inc. (Tenn. Ct. App. 2016), which involved a commercial lease, sets forth a very useful analysis of the parol evidence rule and the statute of frauds. The facts and legal arguments, as well as the Court of Appeals’ analysis, make the opinion helpful to practitioners and litigants in many real estate cases where these doctrines are at play.
Here are the salient facts:
Mother owned two commercial buildings, one in Tennessee and one in Arkansas.
Mother’s son (“Son”) owned an interest in Hi-Speed (the opinion does not say whether Son owned all or just part of Hi-Speed).
Mother agreed to spend significant money to build out the Arkansas building for Hi-Speed.
Mother and Hi-Speed entered into a written lease agreement for the Arkansas building (the “Lease”).
The Lease provided for a 20-year term with a base rent of $14,000 per month.
It also provided that Hi-Speed would pay additional rent of $4,000 per month while Mother’s Tennessee building was pledged as collateral for the loan she obtained to build out the Arkansas building.
Hi-Speed made the additional rent payments while the Tennessee building was pledged as collateral, through 2008.
Even after 2008, Hi-Speed continued making additional rent payments to Mother, often in greater amounts than $4,000 per month.
In 2009, Son died.
In 2011, new management at Hi-Speed notified Mother that the additional monthly payments would stop.
Mother filed suit against Hi-Speed. She claimed the Lease did not contain the entire agreement of the parties and that they had also verbally agreed the additional rent payments would continue as long as she remained obligated on the loan for the Arkansas building. (Her obligation on the loan lasted longer than the period when the Tennessee building was pledged as collateral.)
The trial court held that the parol evidence rule barred Mother from offering evidence of the verbal agreement.
Parol Evidence Rule Analysis
Under Tennessee law, the parol evidence rule generally prohibits parties from using evidence of prior negotiations or communications—written or oral—to alter or vary a written contract.
Mother argued that the rule did not apply under four exceptions:
Parol evidence may prove the existence of an independent or collateral agreement.
Where a written agreement was not intended as complete and exclusive, parol evidence may supply additional consistent terms.
Parol evidence may prove the written agreement does not contain the correct agreement of the parties.
Parol evidence does not prevent proof of agreements made after the written contract.
As to each of these, the Court of Appeals found:
Exception 1 did not apply. Parol evidence cannot be used to establish a collateral agreement that contradicts the written contract. The oral agreement contradicted the Lease, which stated that additional rent was only due while the Tennessee building was pledged as collateral.
Exception 2 did not apply. The oral agreement (that rent would continue so long as the loan was outstanding) contradicted the Lease (rent due only while the Tennessee building secured the loan).
Exception 3 did not apply. This exception is limited to reformation claims based on mistake. Mother did not request reformation.
Exception 4 did apply. The appeals court found it possible that Mother could prove the verbal agreement was made after the Lease was signed. Thus, the trial court should not have barred her from attempting to establish that claim under the parol evidence rule.
Statute of Frauds Analysis
The appeals court’s ruling on the parol evidence rule ultimately did not help Mother. The court held that any such verbal agreement was unenforceable under the Tennessee statute of frauds.
The statute of frauds requires real estate contracts, such as leases, to be in writing and signed. As a result, even if Mother could prove the oral agreement, it would still fail for lack of a signed writing.
This ruling shows how powerful the parol evidence rule and the statute of frauds can be in defending a client in real estate litigation when these doctrines apply.