HDRE Business Partners Ltd. Group, L.L.C. v. Rare Hospitality International, Inc.

Citation: 484 F. App'x 875Docket: No. 11-30970

Court: Court of Appeals for the Fifth Circuit; July 30, 2012; Federal Appellate Court

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The appeal centers on whether an assignment of a purchase agreement was intended to novate a lease agreement. The district court ruled that the parties intended to novate the lease, granting summary judgment to Defendant-Appellee RARE Hospitality International (RARE). Plaintiff-Appellant HDRE Business Partners Limited Group (HDRE) contests this ruling. Upon de novo review, the appellate court determined that the intent of the parties is a factual issue, thus reversing the district court’s decision.

In February 2008, HDRE and RARE entered into a lease for a commercial property that HDRE did not yet own, allowing RARE to operate a restaurant. The lease included a feasibility period of sixty days for RARE to withdraw if the property was unsuitable, and HDRE was to acquire the property within thirty days of RARE obtaining necessary permits. HDRE also had a separate purchase agreement with Stirling Bossier, L.L.C. for the property. 

As negotiations progressed, RARE expressed a preference to purchase the property rather than lease it just before the feasibility period expired. RARE requested that HDRE assign its purchase rights to them without terminating the lease. HDRE consented, and an assignment agreement was executed on May 16, 2008, giving RARE the right to buy the property, with provisions for a fee of $210,000 upon closing. 

Subsequently, RARE did not secure corporate approval for the purchase and informed HDRE and Stirling of its decision not to proceed. HDRE then sought to enforce the original lease, leading to this breach of contract action after RARE claimed the lease had been novated. The court highlighted that a novation extinguishes an existing obligation by substituting a new one, with the parties' intent being paramount. The burden of proof for establishing a novation lies with the party claiming it.

HDRE contends that the district court incorrectly granted summary judgment by failing to consider evidence indicating that HDRE did not intend for the assignment to novate the lease agreement. RARE asserts that the assignment constituted a novation, as it could not coexist with the lease. The district court based its decision on an interpretation of the documents, concluding that HDRE's assignment of its purchase rights eliminated its status as a party to the lease, which required ownership of the property.

However, the assignment agreement does not mention novation, and deposition testimonies from HDRE’s representatives dispute the notion of intent to substitute the assignment for the lease. They clarified that HDRE's assignment was conditional upon RARE's completion of the purchase, allowing HDRE to rely on the original lease as a backup if the sale fell through. Evidence shows RARE communicated a preference for ownership but did not unequivocally terminate the lease, contradicting the district court's view that RARE was on notice of a lease termination. The district court dismissed the testimonies as 'self-serving,' yet these statements provided crucial insight into the coexistence of the lease and assignment, presenting a factual dispute.

Furthermore, the nature of the transaction did not make it inconceivable for the lease to survive the assignment. HDRE's initial proposal for an immediate fee was altered to a contingent fee based on RARE’s successful purchase, further supporting the idea that HDRE viewed the lease as a viable option for cost recovery. RARE's failure to terminate the lease during the feasibility period suggests an intent to keep it in place as a precaution. The conclusion drawn is that the intent to novate is not clear, and the lease did not require HDRE to possess good title at the time of execution, as per Louisiana law, which allows a lease to be binding even if the lessor lacks ownership.

The district court erred in asserting that the purchase assignment rendered HDRE incapable of fulfilling its lease obligations. Under Louisiana law, impossibility only extinguishes an obligation when performance is absolutely impossible, not merely more challenging. Although the assignment may have complicated HDRE's ability to perform, it did not eliminate their capacity to acquire the property after RARE chose not to proceed with the purchase. 

RARE presented two alternative arguments to affirm the district court's ruling. First, it claimed the lease was extinguished due to the doctrine of confusion, which applies when a lessor and lessee's interests merge in one person. However, because RARE did not purchase the Stirling property, it did not consolidate both interests. Second, RARE contended it could not be liable for breach due to HDRE’s alleged failure to obtain a surety bond. Nonetheless, the lease required RARE to provide written notice of any breach and a 30-day period to cure the default before terminating the lease. RARE failed to demonstrate sufficient evidence of such notice, making summary judgment inappropriate on this basis.

The case involved complex circumstances that created factual disputes regarding the intent of the assignment and the lease agreement. The district court erroneously dismissed testimony from Dingier and Cowan that could have clarified these issues, warranting a reversal of its judgment. Additionally, although RARE argued that HDRE, as a separate legal entity, lacked the right to lease the property due to a naming error in the purchase agreement, both parties acknowledged this mistake should not affect the litigation. Evidence showed that all parties, including Stirling, recognized HDRE as the legitimate purchaser throughout the transaction. Thus, the incorrect entity name did not determine the outcome. The decision has been reversed and remanded for further proceedings.