## Facts

- In 1968, First American National Bank (First American), as trustee and lessor, leased improved commercial property in Nashville to Chicken System of America, Inc. (Chicken System) for a long term at $1,049.08 per month, with additional obligations for items such as taxes and insurance.
- The lease barred any assignment or sublease without First American’s written consent.
- In 1969, Performance Systems, Inc. (PSI) purchased Chicken System’s store business and, as part of that transaction, agreed with Chicken System that PSI would be responsible for the real estate lease going forward.
- First American did not give written consent to any assignment or sublease to PSI and notified Chicken System and PSI that it did not consent.
- Despite the lack of consent, PSI took possession and paid rent to First American from about May 1969 until November 1970.
- In November 1970, PSI stopped paying rent and vacated the premises.
- First American later leased the premises to a pizza company (Sir Pizza) beginning in September 1972 for less rent than the Chicken System lease.
- In earlier litigation, First American sued Chicken System and PSI for unpaid rent and other lease-related charges that accrued up to the September 1972 reletting; the Tennessee Supreme Court affirmed PSI’s liability for that period based on privity of estate.
- First American then filed this second action against PSI seeking the post-September 1972 “deficiency” (the difference between the original lease rent and the rent received from Sir Pizza, plus other claimed amounts).
- The trial court entered judgment for First American against PSI (about $47,384.27), and PSI appealed.

## Issues

1. Was PSI liable to First American for rent deficiencies and other lease obligations accruing after September 1972 under privity of estate, even though PSI had vacated in 1970 and First American later leased the premises to Sir Pizza?
2. Did PSI incur post-September 1972 liability to First American under privity of contract based on PSI’s agreement with Chicken System and PSI’s prior rent payments to First American?

## Decision

- Reversed and dismissed as to PSI.
- PSI was not liable for obligations accruing after First American relet the premises to Sir Pizza because PSI’s liability without an express assumption rested on privity of estate, and that relationship did not continue after the new lease created a new leasehold estate.
- PSI was not liable under privity of contract because PSI did not clearly assume the lease obligations in a way that created a direct contractual obligation to First American.

## Legal Principles

- An assignee who does not expressly assume the lease is liable to the landlord only by privity of estate, and only for covenants running with the land during the period the assignee holds the leasehold estate.
- Privity of estate, and the related liability, ends when the assignee no longer holds the leasehold and the landlord creates a new leasehold estate (including by entering a new lease with a third party).
- To impose privity-of-contract liability on an assignee for obligations beyond the assignee’s period of possession, the assignee must expressly assume the lease obligations in clear terms; a private agreement between tenant and assignee, or rent payments made during occupancy, does not by itself create that direct contractual liability to the landlord.

## Conclusion

The Tennessee Court of Appeals held that PSI, having never expressly assumed the lease as a contractual obligation to First American, could not be charged with rent deficiencies that accrued after First American entered a new lease with Sir Pizza in September 1972, because PSI’s only potential liability ran through privity of estate, which ended once the premises were relet under a new leasehold estate.


First American National Bank v. Chicken System of America, Inc., 616 S.W.2d 156 (1980)