Professor Andrej Thomas Starkis

Rowen & Blair El. Co. v. Flushing Operating Corp. 20

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Rowen & Blair El. Co. v. Flushing Operating Corp. 20

ROWEN & BLAIR ELECTRIC COMPANY, a Michigan Corporation, Plaintiff-Appellant, 20

v. 20

FLUSHING OPERATING CORPORATION, a New York Corporation, et al., Defendants- 20

Appellees. 20

Docket No. 22011. 20

Court of Appeals of Michigan. 20

Jan. 7, 1976. 21

Released for Publication March 23, 1976. 21

Leave to Appeal Granted April 23, 1976. 21

KAUFMAN, Judge. 21

Plaintiff appeals a decision of the Kalamazoo County Circuit Court, which, following a bench trial, refused to impose a mechanics' lien on a building owned by defendant Flushing Operating Corporation (Flushing). We affirm. 21

The building in question was leased by Flushing *482 to Dutch Treat Bakers, Inc. (Dutch Treat). Dutch Treat desired to expand its operations by acquiring the property but could not finance the acquisition. As a result, Dutch Treat entered into negotiations with Flushing which decided to purchase the building and its plot of land and lease it to Dutch Treat. Flushing leased the realty to Dutch Treat on July 2, 1969, for a term of ten years, commencing October 1, 1969. During negotiations, Flushing and Dutch Treat determined that approximately $45,000 would be needed to renovate the building to serve as a wholesale bakery. As a result, the lease contained a provision for leasehold improvements: 21

'The landlord has agreed to expend the sum of forty-five thousand dollars ($45,000.00) for improvements to the leased property and for replacement of fixtures as may be required. The alterations, additions and improvements as made with the subject $45,000.00 shall be described in detail by the tenant and a list thereof attached to and made a part of this lease agreement as an exhibit hereto. Any alterations, additions and improvements made, whether from the funds advanced by the landlord or paid for by the tenant, as well as any fixtures, shall immediately become the property of the landlord and at the end or other termination of this lease shall be surrendered to the landlord, with the exception that the moveable personal property and moveable trade fixtures put in by the tenant at the tenant's expense may be removed on or before the expiration or termination of this lease.' 21

At trial, the testimony presented indicated that, at the time of signing, figures were attached to the lease estimating future repairs to be; structural, $30,000; electrical, $10,000; miscellaneous, $5,000. The list was apparently lost and could not be produced at trial. 21

*483 Plaintiff, one of a number of contractors hired by Dutch Treat, pursuant to an oral agreement with Dutch Treat, began electrical work on the building early in July, 1969. A letter agreement embodying the oral terms was prepared by plaintiff and sent to Dutch Treat on October 9, 1969. It was not signed until April 6, 1970. In the meantime, Dutch Treat was making progress payments to plaintiff on a 'cost-plus' basis. Dutch Treat sent plaintiff's first invoice to Flushing which issues a check for $7,040.35 payable to plaintiff and Dutch Treat. This check was endorsed by Dutch Treat and turned over to plaintiff. 21

This was the first time that plaintiff had any knowledge of or contact with Flushing. **636 Plaintiff's employees noted Flushing's check but did not attempt to ascertain Flushing's position. They assumed that Dutch Treat owned the building. 21

On December 23, 1969, Flushing sent its last check for leasehold improvements to Dutch Treat because the $45,000 contractual limit had been reached through progress payments to plaintiff and the other contractors. At that time, Dutch Treat was behind in its rental payments, and Flushing, by applying the arrears to the rental payment account, used up the remainder of the account. Dutch Treat itself later made two $5,000 payments to plaintiff on March 30 and May 13, 1970. 22

On May 27, because of a growing indebtedness to plaintiff and the resultant pressure, officers of Dutch Treat signed a 9 per cent demand note for $40,872.48, the amount of the debt. On May 20, plaintiff had also filed a statement of account and lien with the Register of Deeds. Both Flushing and Dutch Treat were named but no notice was served on Flushing within the 10-day period prescribed by *484 M.C.L.A. s 570.6; M.S.A. s 26.286. Nor had plaintiff served the requisite notice of intention to claim a lien on Flushing within 90 days of the first furnishing of labor, M.C.L.A. s 570.1; M.S.A. s 26.281. 22

Plaintiff completed work on May 13, 1971, and timely filed the requisite statement with the register of deeds to establish a mechanics' lien against the property occupied by Dutch Treat. Plaintiff claimed that $39,033.50 remained unpaid. A suit to foreclose the lien was begun on May 3, 1971. After this Court reversed a summary judgment for defendant, Rowen nd Blair Electric Co. v. Flushing Operating Corp., 49 Mich.App. 89, 211 N.W.2d 527 (1973), a bench trial was held. 22

The trial court held that plaintiff was entitled to judgment against Dutch Treat for the full amount of the May, 1970, promissory note plus interest. However, after the suit had commenced Dutch Treat had gone bankrupt and had been liquidated. Thus, the crucial issue was the validity of plaintiff's lien against the building, still owned by Flushing. The building was then empty because several creditors had repossessed Dutch Treat's machinery. 22

The trial court held that the lien was valid against Flushing. It held that plaintiff's failure to give statutory notice to Flushing was not fatal because it found an agency relationship to exist between Dutch Treat and Flushing. Notice to Dutch Treat, the agent, was held to provide notice to Flushing, the undisclosed principal. Merithew v. Bennett, 313 Mich. 189, 193, 20 N.W.2d 860 (1945). The court also held that no apparent authority was present. 22

However, Flushing's liability was held to be limited to the extent of the authority given to Dutch Treat. The court held that such authority *485 was limited to $10,000. This was the amount allegedly specified for electrical repairs on the Flushing-Dutch Treat lease. Plaintiff had already been paid $17,040.35, an amount in excess of this limit. The court further held that plaintiff had failed to carry the burden of proof which required plaintiff to demonstrate that it was owed money for work other than the electrical job. 22

On appeal, plaintiff raises two claims of error: (1) that the trial court erred in holding that, because the machinery was removed from defendant's building, plaintiff's work did not benefit defendant and, thus, a lien cannot result, and (2) that the trial court erroneously used $10,000 as the limit on Flushing's liability. Defendant Flushing contends on appeal that the trial court's finding of agency was erroneous. Flushing's claim, however, was not properly raised by a cross-appeal, GCR 1963, 807.1, and we do not consider it. 22

The trial court stated: 23

'This Court finds that there has been paid to Rowen and Blair a total of $17,040.35. The burden is upon the Plaintiff in this case to establish its claim by the greater weight of the evidence. Plaintiff was unable to sort out from its accounting **637 those items which were for electrical work, those items which were for millwright services and those items which were for the installation of equipment which has been removed and which was of No benefit to the lessor and owner of the building.' (Emphasis supplied.) 23

Defendant cites Canvasser Custom Builders, Inc. v. Seskin, 38 Mich.App. 643, 196 N.W.2d 859 (1972), Lv. den. 387 Mich. 783 (1972), as supporting authority for the trial court's holding that enhancement must be proven. That case states that: 23

'A mechanic's lien * * * gives the lienor an interest, *486 In rem, in the property that he has Participated in improving to the extent of the enhancing value of his material and labor.' 38 Mich.App. at 647, 196 N.W.2d at 861. (Emphasis supplied.) 23

If correct, this rule would certainly require affirmance. However, our reading of the Canvasser case and other relevant cases convinces us that this dictum is unsupported by any authority in this jurisdiction. 23

We find that, while one of the purposes of the mechanics' lien law is to prevent a property owner from being unjustly enriched, the law does not make proof of actual enrichment a prerequisite to obtaining a lien. The instant question has never been decided in this jurisdiction. An early case, Smalley v. Gearing, 121 Mich. 190, 79 N.W. 1114 (1899), examined the legislative motive behind the mechanics' lien law: 23

'The lien law was enacted for the benefit and protection of laborers and material men, and should be construed liberally. 23

'The equity of a lien claim for labor or materials arises from the fact that the value of the property to which they have been applied has been increased.' Id. at 203, 79 N.W. at 1120. 23

The policies of assuring payment for a laborer's work and avoiding unjust enrichment are equally important. We find that the legislative intent and judicial gloss require that, where material is actually used and work actually rendered on a building, enhancement is presumed. 23

In Smalley v. Gearing, the Court applied the enhancement rule to deny a lien for materials never used on the subject property. The equities of *487 both statutory policies clearly dictate this result. In McClintic- Marshall Co. v. Ford Motor Co., 254 Mich. 305, 311, 236 N.W. 792, 793 (1931), the Supreme Court, in dictum, alluded to the presumption of enhancement resulting from labor and materials which actually enter into a structure: 23

'The Mechanics' Lien Law (3 Comp.Laws 1929, s 13101 Et seq.) is framed upon the theory that those who perform work or furnish material Which enters into and enhances the value of improvements on real estate are entitled to a preferred claim against and a lien upon the specific property Presumably bettered by the performance of such labor and the furnishing of such materials; the security of attaching creditors and mortgagees being so enhanced in value thereby that they are not prejudiced.' (Emphasis supplied.) 23

We cite specifically the Court's use of the phrase 'presumably bettered'. We find significant the use of the word 'presumably' instead of the word 'actually' and read the phrase in its legal context. 24

We note additionally that those cases using the enhancement language of Smalley v. Gearing, supra, involved property whose value was actually increased as a result of a mechanic's work and, thus, the instant issue was never raised. See Alpena for use of Besser v. Title Guaranty & Surety Co., 159 Mich. 329, 123 N.W. 1126 (1909), Canvasser Custom Builders Inc. v. Seskin, supra. See also Saginaw Lumber Co. v. Wilkinson, 266 661, 666--667, 254 N.W. 240, 242 (1934), where, although the record was devoid of actual increase in value, the Court presumed enhancement in noting that **638 '(p)laintiff's material went into the property, Thereby adding to its value'. (Emphasis supplied.) 24

The mechanics' lien statute itself is written broadly so as to include all possible types of work *488 and speaks in terms of protecting all those who perform such work. As its purpose, the act, 1891 P.A. 179, states: 24

'to establish, protect, and enforce by lien the rights of mechanics and other persons furnishing labor or materials for the building, altering, improving, repairing, erecting or ornamenting of buildings, * * *.' 24

Nowhere is actual enhancement required. The statute requires only that the potential lienor 'furnish any labor or materials in or for building, altering, improving, repairing, erecting, ornamenting * * * any * * * structure'. M.C.L.A. s 570.1; M.S.A. s 26.281. Plaintiff here has furnished labor and materials to alter, improve and repair defendant's building. 24

The salutary purposes of the mechanics' lien law would be defeated if a mechanic supplied materials or labor but could not obtain the lien's protection because the owner, his agent or other third party had taken action to render the work valueless. Construing the law to prevent a lien in such a case would greatly limit those whom the act was meant to protect from using the remedies provided for their protection. Even in cases where the work itself had proven faulty, rendering it worthless, the apparent remedy is recoupment not denial of a lien. Albert Gall Co. v. Dowagiac Gas Co., 160 Mich. 255, 125 N.W. 283 (1910). 24

We agree with the Court in Masterson v. Roberts, 336 Mo. 158, 78 S.W.2d 856 (1934), which, in finding evidence of enhancement irrelevant, opined that potential enhancement 24

'is a question which the owner decides for himself, when he authorizes the improvements made, and he is bound by his own decision, so that it makes no difference, *489 so far as a lien against the premises is concerned, whether his judgment was good or bad.' 24

A vast majority of states which have considered the instant issue have required no enhancement. Hardwood Interior Co. v. Bull, 24 Cal.App. 129, 140 P. 702 (1914), Chamberlain v. City of Lewiston, 23 Idaho 154, 129 P. 1069 (1912), App. dismissed 234 U.S. 751, 34 S.Ct. 775, 58 L.Ed. 1576 (1914), Nichols v. Levy, 55 Nev. 310, 32 P.2d 120 (1934), Albuquerque Lumber Co. v. Montevista Co., 39 N.M. 6, 38 P.2d 77 (1934), Masterson v. Roberts, supra, Overhead Door Co. of Illinois v. Bernstein, 285 Ill.App. 587, 3 N.E.2d 169 (1936), McHugh Electric Co. v. Hessler Realty and Development Co., 50 Del. 296, 129 A.2d 654 (1957), Nolte v. Smith, 189 Cal.App.2d 140, 11 Cal.Rptr. 261 (1961), United Pacific Insurance Company v. Martin and Luther General Contractors, Inc., 455 P.2d 664 (Wyo.1969). These cases have applied this rule where the building was not completed or was destroyed without the mechanic's fault. One jurisdiction which does require enhancement bases its decision on a statute drawn much more narrowly than ours. Stone v. Rosenfield, 141 Conn. 188, 104 A.2d 545 (1954). 24

Although we have held that the trial court was in error in requiring enhancement, we affirm its decision because of our holding on plaintiff's second appellate issue. The trial court found an agency relationship between Flushing and Dutch Treat. It held that Dutch Treat's authority to contract with plaintiff was limited to $10,000. 25

In this case Dutch Treat was acting as a special agent to an undisclosed principal. A special agent is 'an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service'. Restatement of Agency 2d, s 3, p. 15. A special agent can bind an undisclosedprincipal *490 only with contracts made within the scope of his authority. Restatement of Agency 2d, s 195A, p. 434. See also Saginaw, T. & H.R. Co. v. Chappell, 56 Mich. 190, 22 N.W. 278 (1885). 25

**639 The $10,000 figure was the sum estimated by Flushing and Dutch Treat as the amount required for electrical work. We do not agree that this was the correct limitation on Dutch Treat's agency. This sum was only an estimate as to how much electrical work might be done. It was apparently appended to the contract as an exhibit pursuant to a contract clause. That clause, however, required that 25

'The alterations, additions and improvements As made with the subject $45,000 shall be described in detail by the tenant and a list thereof attached to and made a part of this lease agreement as an exhibit hereto.' (Emphasis supplied.) 25

The $10,000 was only an estimate, not a statement of an amount actually expended or an improvement actually made. 25

We find, instead, that the agency was limited to an expenditure of $45,000 for all improvements, alterations and additions. This was the figure negotiated by the parties to the lease and specifically made part of the lease. Before this amount was reached plaintiff was paid with a check from Flushing. After $45,000 was expended, Dutch Treat itself paid plaintiff $10,000. A mechanics' lien is based entirely on the contract between the parties. Sewell v. Nu Markets Inc., 353 Mich. 553, 91 N.W.2d 861 (1958). As principal and lessor, defendant Flushing's lien liability on the contract between lessee Dutch Treat and plaintiff is limited to the portion made by Dutch Treat within the *491 scope of its agency. The Restatement of Agency 2d, s 195A, provides that: 25

'A special agent for an undisclosed principal has no power to bind his principal by contracts or conveyances which he is not authorized to make unless: 25

(a) the agent's only departure from his authority is 25

(i) in not disclosing his principal, or 25

(ii) in having an improper motive, or 25

(iii) in being negligent in determining the facts upon which his authority is based, or 25

(iv) in making misrepresentations; or 26

(b) the agent is given possession of goods or commercial documents with authority to deal with them.' 26

In the instant case, Dutch Treat's actions do not fall within either of the exceptions. The agent's departure from authority here would have been exceeding the monetary limit of that authority and not disclosing the principal. Plaintiff cannot bind defendant Flushing beyond the authority granted by Flushing to Dutch Treat. This authority expired on December 23, 1969, when the $45,000 limit was surpassed. The debts claimed by plaintiff in the instant action arose after that date. 26

We recognize that this is an unfortunate case where, through no fault of its own, either the plaintiff or the defendant will be subject to a monetary loss. Because of Dutch Treat's bankruptcy, plaintiff's sole remedy has become the mechanics' lien. That lien is, however, an extraordinary remedy, one designed as an alternative to a suit for damages and one to be applied narrowly. Additionally, plaintiff had a demand note from Dutch Treat but failed to negotiate it. These facts present an apparent clash between the purposes of the mechanics' lien law and principles of agency law. This is not a case where defendant used an *492 agent in an attempt to circumvent the lien law. If it were, we would have no trouble applying the lien law. See Merithew v. Bennett, 313 Mich. 189, 20 N.W.2d 860 (1945). 26

Because the lien is completely dependent on the underlying contract, plaintiff unfortunately cannot recover from defendant. The contract was a cost-plus agreement, one to be paid as the work progressed. It was not a lump sum payment. Apparently, the other contractors were paid on a similar basis. Defendant carefully restricted Dutch Treat to $45,000 for leasehold improvements. As such, once this figure was surpassed, any liability for paying any of the contractors fell to Dutch Treat. 26

**640 Affirmed. No costs, neither party having prevailed in full. 26

Rowen & Blair El. (II) 26

390 Mich. 593, 250 N.W.2d 481 (1977) 26

ROWEN & BLAIR ELECTRIC CO., a Michigan Corporation, Plaintiff-Appellant, 26

v. 26

FLUSHING OPERATING CORPORATION, a New York Corporation, et al., Defendants- 26

Appellees. 26

No. 5, Jan. Term, 1977. 26

Supreme Court of Michigan. 27

Feb. 14, 1977. 27

FITZGERALD, Justice. 27

The issue on appeal is whether a lessee acted as its lessor's agent in contracting for certain improvements made to the leased premises. The agency theory is advanced by Plaintiff Rowen & Blair Electric Co. which, although contracting directly with the lessee to do electrical work, seeks to impress the lessor's interest with a mechanic's lien. The asserted agency relationship is also said to result in direct dealing by the contractor with the owner, so as to excuse the statutory requirements regarding service of the notice of intention to claim a lien,[FN1] and service of a copy of the recorded statement of lien.[FN2] The Court of Appeals at 66 Mich.App. 480, 239 N.W.2d 633 (1976), held that, **482 on the facts of this case, plaintiff *596 could not bind the lessor beyond the monetary limit placed on the lessee's authority to expend on the lessor's behalf for improvements to the leasehold. 27

FN1. MCLA 570.1; MSA 26.281. 27

FN2. MCLA 570.6; MSA 26.286. 27

I 27

The evidence indicates that Dutch Treat Bakers, Inc., desired to expand its bakery operation by acquiring the subject land and building in Kalamazoo County, but could not finance the acquisition. As a result Dutch Treat entered into negotiations with defendant Flushing Operating Corporation which decided to purchase the property and lease it to Dutch Treat. In June of 1969, Flushing purchased the property on contract from a subsidiary of Gulf and Western Corporation. The contract was not recorded. On September 30, 1969, Flushing took a warranty deed to the premises from Gulf and Western and recorded the deed on October 23, 1969. 27

On July 2, 1969, Flushing leased the building to Dutch Treat for a ten-year term, commencing October 1, 1969. The lease contained the following provision regarding improvements: 27

'The landlord has agreed to expend the sum of forty-five thousand dollars (45,000.00) for improvements to the leased property and for replacement of fixtures as may be required. The alterations, additions and improvements as made with the subject $45,000.00 shall be described in detail by the tenant and a list thereof attached to and made a part of this lease agreement as an exhibit hereto. Any alterations, additions and improvements made, whether from the funds advanced by he landlord or paid for by the tenant, as well as any fixtures, shall immediately become the property of the landlord and at the end or other termination of this lease shall be surrendered to the landlord, with the *597 exception that the moveable personal property and moveable trade fixtures put in by the tenant at the tenant's expense may be removed on or before the expiration or termination of this lease.' 27

The alterations referred to were those necessary to adapt the premises for use as a wholesale bakery. 27

The trial testimony indicates that, at the time of the execution of the lease, figures were attached to the lease estimating repairs to be: structural, s30, 000; electrical, $10,000; miscellaneous, $5,000. This list of estimates was apparently lost and could not be produced at trial. The detailed list of alterations, additions and improvements was never provided to Flushing by Dutch Treat as was required by the terms of the lease, nor was Flushing otherwise made aware in advance of the exact nature and character of the work to be done on the premises by the various contractors. 28

In July of 1969, plaintiff orally agreed with Dutch Treat to furnish labor and materials in connection with electrical and millwright work to be done in the installation of trade fixtures and equipment on the premises. The agreement called for payments on a cost-plus basis. In the early part of October 1969, plaintiff started work on the premises and confirmed in writing the verbal agreement in a letter memorandum to Dutch Treat dated October 9, 1969. The memorandum was not signed by Dutch Treat until April 6, 1970, after nearly all the work had been done and after the $45,000 limit contained in the lease had been exceeded by Dutch Treat. The testimony indicates that Dutch Treat finally signed the memorandum in response to pressure from plaintiff which was concerned that accounts receivable were getting to high. Dutch Treat did not sign as agent, nor does the name of Flushing appear on the memorandum. *598 As will be seen, Infra, plaintiff learned of the existence of Flushing in late November 1969, but made no attempt to discover the exact relationship between Flushing and Dutch Treat. The record further indicates that plaintiff did not rely on the credit of anyone other than Dutch Treat. Plaintiff's president testified that plaintiff had done much work for Dutch Treat in the past and had always been paid. 28

On or about November 1, 1969, plaintiff submitted two statements to Dutch Treat **483 for work done during October. These were the first bills submitted by plaintiff for work done on the premises, and totaled $7,040.35. These invoices were forwarded by Dutch Treat to Flushing's office in New York for apyment out of the $45,000 improvement account. On November 17, Flushing made out its check in the amount of the invoice payable jointly to Dutch Treat and plaintiff. The check was sent to Dutch Treat which endorsed it and forwarded it to plaintiff. 28

No more of plaintiff's invoices were presented by Dutch Treat to Flushing for payment. Neither plaintiff nor any other contractor forwarded any statements directly to Flushing. Although the source of the November 17 check was noted and the check was photocopied by plaintiff, no inquires were made by plaintiff to either Dutch Treat or Flushing as to their relationship. 28

In late December 1969, Flushing issued its last check out of the $45,000 repair account, payable jointly to Dutch Treat and another contractor. At this time, Flushing's president contacted Dutch Treat's president and advised him that the account had been exceeded, except for approximately $1,245 which would be applied to rent in arrears. Consequently, Dutch Treat was informed that no further bills would be paid by Flushing. 28

*599 Although plaintiff continued to send monthly statements to Dutch Treat after November 1969, it received no further payment until March 30, 1970, when Dutch Treat paid $5,000 by its own check, and thereafter until May 13, when Dutch Treat made an additional $5,000 payment by its own check. One week later, on May 20, 1970, plaintiff recorded its statement of account and lien with the Kalamazoo County Register of Deeds naming both Flushing and Dutch Treat as owners. On May 27, 1970, at the insistence of plaintiff, the officers of Dutch Treat executed and delivered to plaintiff a corporate note payable on demand for the $40,872 balance owing to plaintiff. No attempt was made by plaintiff to have Flushing sign on this note. 28

Although it appears that record title to the property was in a subsidiary of Gulf and Western Corporation at the time plaintiff commenced performance, no notice of intent to claim a lien or copy of recorded statement of lien was ever served on that entity. Neither was a copy of the statement ever served on Flushing, although its title had been of record for some seven months when plaintiff completed its performance. 29

II 29

Plaintiff filed its complaint to foreclose the lien on May 3, 1971. The trial court granted summary judgment for the defendant on the grounds that there had been no direct dealing between plaintiff and Flushing and that failure to comply with the notice and service provisions was therefore fatal to plaintiff's claim. This summary judgment was reversed by the Court of Appeals at 49 Mich.App. 89, 211 N.W.2d 527 (1973), as being inappropriate on *600 the factual record then existing, and the matter was remanded for trial. On remand, the trial court found that an agency relationship did exist between Dutch Treat and Flushing, and that plaintiff was dealing directly with the owner through its agent. But the trial court held that the agent's authority to bind Flushing for the cost of electrical improvements was limited by the $10,000 estimate that Dutch Treat had made to Flushing regarding those improvements. Judgment was entered in favor of plaintiff and against Dutch Treat in the amount of $40,872, but this was of little solace to plaintiff since Dutch Treat is totally insolvent. Plaintiff appealed the denial of lien foreclosure to the Court of Appeals, which agreed with the trial court that Dutch Treat could not bind Flushing beyond the monetary limit placed on its authority to expend on Flushing's behalf for improvements, although it found the appropriate limitation to be the $45,000 amount set forth in the lease rather than the $10,000 internal estimate regarding electrical work. Since plaintiff's claim was for work done and material supplied after the $45,000 limit had been exceeded, the Court of Appeals **484 affirmed the trial court's judgment denying a lien. 29

III 29

The statute allows a lien only to the extent of the interest of the owner, part owner, or lessee with whom the claimant has contracted.[FN3] However, the lessor's interest has been reached where, in fact or in law, the lessee becomes the lessor's agent with authority to contract for improvements which will be of substantial benefit to the reversion. [*601 FN4] The use of the agency theory is based upon the policy consideration that: 29

FN3. Sewell v. Nu Markets, Inc., 353 Mich. 553, 91 N.W.2d 861 (1958). 29

FN4. See Hart v. Reid, 243 Mich. 175, 219 N.W. 692, 220 N.W. 717 (1928), and Merithew v. Bennett, 313 Mich. 189, 20 N.W.2d 860, 163 A.L.R. 988 (1945). Cf. Sewell v. Nu Markets, supra. 29

"It would open the door to great fraud in practice to allow the owner of property to lease it to another, contract with the other to put on permanent improvements, improvements that are only valuable when standing upon the premises, and then say that the materialmen and laborers who placed these permanent improvements upon defendant's property have no claim against the property, and must go unrewarded if the tenant is insolvent. It would be an invitation to short leases with agreements in the lease that the tenant should build permanent structures upon the premises during the term of the lease and this without jeopardizing any interest which the owner had in the property, while he greatly profited from the transaction." Merithew v. Bennett, supra, 313 Mich. at 194, 20 N.W.2d at 862, quoting from Denniston & Partridge Co. v. Brown, 183 Iowa 398, 167 N.W. 190, 191 (1918). 30

However, an agency is not created by the mere relationship of landlord and tenant.[FN5] The possibility of the owner's unjust enrichment through circumvention of the lien statute must exist. Each case necessarily turns on its own facts, the court's primary focus being directed to whether the lessee in fact was, or in equity should be viewed as, the lessor's agent in contracting for improvements. 30

FN5. Anno: Lessee as Agent of Lessor Within Contemplation of Mechanic's Lien Laws, 163 A.L.R. 992. 30

Some courts have held that the test of agency Vel non is whether, under the terms of the lease, the lessee has a mere privilege or is obligated to make improvements.[FN6] In Hart v. Reid, supra, the *602 lessee was required as a condition of the lease to erect an entirely new building at the cost of $500,000. The building, of course, was of substantial benefit to the owner's reversion. In Merithew v. Bennett, supra, the 25-foot addition and installation of the air conditioning unit was mandatory, and it is clear that these improvements were of substantial benefit to the lessor because she had agreed to pay the entire cost of them. 30

FN6. See Anno: Mechanic's Lien--Lessee's Improvements, Supra, at 994-- 1000. 30

If improvements are merely permitted, it has been held that there is no agency,[FN7] even where the lessee is granted reduced rents if he chooses to make improvements.[FN8] Other courts have emphasized the presence or absence of reliance by the contractor on the lessor's credit.[FN9] 30

FN7. Sewell v. Nu Markets, supra. See, also, Miles v. Bunn, 173 Wash. 303, 22 P.2d 985 (1933). 30

FN8. Seattle Ass'n of Credit Men v. Daniels, 15 Wash.2d 393, 130 P.2d 892 (1942). 30

FN9. Platner Lumber Co. v. Krug Park Amusement Co., 131 Neb. 831, 270 N.W. 573 (1936). Delany & Co. v. Duvoli, 278 N.Y. 328, 16 N.E.2d 354 (1938), reh. den., 278 N.Y. 715, 17 N.E.2d 136 (1938). 30

IV 30

There are a number of factors which distinguish this case from those cases hereinbefore **485 cited in which an agency relationship was found to exist between the lessor and the lessee. In the instant case, the parties to the lease do not appear to have contemplated the building of a permanent structure upon the premises. Instead, Flushing and Dutch Treat agreed that, at the discretion of Dutch Treat, certain alterations and improvements would be made on a vacant building owned by Flushing in order to make the leased premises suitable for the operation of a wholesale bakery by Dutch Treat. 30

While it is impossible to determine from the *603 record the extent to which Flushing expected the value of its reversion to be enhanced by the improvements and the degree to which Flushing was merely making the lease agreement more attractive to Dutch Treat by agreeing to expend $45,000 for improvements and alterations 'as may be required,' it is clear that the alterations and improvements were to be of primary benefit to Dutch Treat. Indeed, Dutch Treat was not obligated by Flushing to make these improvements; they were essential to Dutch Treat's business operations. 31

It is equally clear in retrospect that the alterations were not in this case of any value to the reversion. The bulk of the work performed by plaintiff was the wiring and setting up of bakery equipment, all of which has either been seized by the Internal Revenue Service or repossessed by various secured parties. Flushing was left with nothing more than it had acquired by deed, I.e., a plot of land upon which sat a vacant building. Plaintiff's president conceded at trial that prospective purchasers or tenants would not pay more for the building because of work done on it by plaintiff. 31

Furthermore, in comparing this case with those cited cases in which an agency relationship was found to exist between the lessor and the lessee, it is important to bear in mind that in the present case there was no reliance by the contractor on the lessor's credit. As plaintiff performed on the contract, it never relied on the credit of anyone other than Dutch Treat. Although it noted that Flushing was the source of payment on its first invoice, plaintiff made no inquiries to anyone at the time regarding Flushing's status. Nor did plaintiff ever attempt to bill Flushing directly when thereafter its invoices went unpaid by Dutch *604 Treat, even though Flushing's interest in the property was of record before plaintiff received its first payment. There is no claim that Dutch Treat or anyone else misrepresented the ownership of the subject premises. Plaintiff has at all relevant times constructive notice that Dutch Treat was not the owner of record. Plaintiff's argument that Flushing was under an obligation to provide notice of any limitation on the lessee's authority to bind the property for improvements is inconsistent with the rule that, absent other considerations, mere possession with authority to alter or improve is by itself insufficient to create an agency by which the lessor's interest can be bound. 31

However, it is not necessary to the proper disposition of this case that we pass upon the rulings of the lower courts that an agency relationship was created by the terms of the lease. We need hold merely that there are no circumstances evident in this record which would warrant allowing Dutch Treat to bind its alleged principal beyond the express limits to its authority. 31

The judgment of the Court of Appeals is affirmed, with costs to defendant Flushing 31


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