                IN THE COURT OF APPEALS OF TENNESSEE
                            AT KNOXVILLE
                                         FILED

                                        October 18, 1999




                                       Cecil Crowson, Jr.

                                      Appellate Court Clerk




CHATTANOOGA ASSOCIATES,                    )
LIMITED PARTNERSHIP,                       )        03A01-9901-CH-00021
                                           )
      Plaintiff/Appellee                   )        Appeal As Of Right From The
                                           )        HAMILTON CO. CHANCERY COURT
vs.                                        )
                                           )
CHEROKEE WAREHOUSES, INC., )               HON.     HOWELL N. PEOPLES,
                                           )        CHANCELLOR
      Defendant/Appellant                  )




For the Appellant:                                For the Appellee:
Frank P. Pinchak                                  Bruce C. Bailey
WITT, GAYTHER & WHITAKER, P.C.                    CHAMBLISS, BAHNER & STOPHEL, P.C.
1100 SunTrust Bank Building                1000 Tallan Building
736 Market Street                                 Two Union Square
Chattanooga, TN 37402-4856                 Chattanooga, TN 37402




REVERSED and REMANDED                                                          Swiney, J.



                                      OPINION

              This is an appeal from an Order of the Chancery Court of Hamilton County awarding


                                                                                                  Page 1
Plaintiff $46,249.47 for the cost of construction (repaving) on the parking lot of a storage warehouse

which Chattanooga Associates Limited Partnership (“Plaintiff”) leased to Cherokee Warehouses, Inc. (“

Defendant”), plus late fee and attorney's fees, under the terms of the Lease, for a total judgment of

$71,288.77. Defendant appeals, and raises these issues:

                1.      Whether the Chancellor Erred in Refusing to Bar
                        Recovery by Virtue of the Plaintiff's Breach of the
                        Implied Covenant of Good Faith and Fair Dealing.

        2.      Whether the Chancellor Erred in Concluding that the Defendant
                      was liable under the lease agreement with the Plaintiff for
                      its share of the paving “repairs.”

        3.      Whether the Chancellor Erred in Awarding a 15% Late Charge.

For the reasons stated in this Opinion, we reverse the judgment of the Trial Court and remand the

case to the Trial Court for further proceedings in accordance with this opinion.

                                           BACKGROUND

                Cherokee Warehouses, Inc. is in the public warehouse business. It owns 18 warehouses

(three million square feet) and leases other warehouses. In August1992, it leased 56% of a warehouse

owned by Chattanooga Associates, Ltd. In March 1993, Cherokee expanded its occupancy to 79% of

the space. The other 21% of the space in that warehouse was subject to an ongoing lease to Red Food

Stores. The Lease Agreement between Cherokee and Chattanooga Associates provides, as pertinent:

                1. Payment of Rental; Tenant's Proportionate Share.
                . . . Tenant covenants and agrees to pay the rent herein reserved and
                each installment thereof promptly when and as due, together with all
                other sums, reimbursements, costs, fees, charges and expenses required
                to be paid by Tenant to Landlord from time to time hereunder, all of
                which shall be deemed additional rent hereunder.

                13. Repairs; Maintenance and Common Areas.
                (f) To the extent Landlord elects to perform or otherwise performs any
                maintenance or repairs on the building, or the land on which the building
                is situated, including but not limited to, landscaping, grass cutting,
                resurfacing of paved areas, removal of snow or ice from paved areas,
                etc., Tenant agrees to pay its proportionate share (as defined in Section
                1) of the costs incurred by Landlord therefor, within ten days of demand
                therefor by Landlord, which demand shall be accompanied by an invoice
                indicating the maintenance and repairs undertaken by Landlord in regard
                to such areas, the cost incurred in connection therewith, and Tenant's


                                                                                                         Page 2
                 breakdown of Tenant's proportionate share thereof.

                                                   * * *
                 16. Default.
                 (b) In the event of any default (as defined in subsection [a] above),
                 Landlord, in addition to any and all legal and equitable remedies it may
                 have, shall have the following remedies:
                                                   * * *
                 . . . In the event Landlord brings any action against Tenant to enforce
                 compliance by Tenant with any covenant or condition of this Lease,
                 including the covenant to pay rent, Tenant shall promptly reimburse
                 Landlord for all costs and expenses incurred by Landlord in bringing,
                 defending and/or prosecuting such action, including, but not limited to,
                 attorneys' fees.

                 (c) In the event Tenant fails to pay Landlord any payment of rent (basic
                 or additional) due hereunder within 10 days from the date on which any
                 such payment was due, in addition to all other rights and remedies
                 hereunder or at law or in equity to which Landlord may be entitled,
                 Landlord may at Landlord's option charge Tenant a late charge equal to
                 15% of the payment or other such charge, which charge shall be payable
                 by Tenant to landlord within 5 days of demand therefor.

                 In early fall of 1994, Red Food Store employees contacted Plaintiff’s general manager,

Pete Smith, and complained about a large pothole outside the portion of the warehouse occupied by Red

Food. Plaintiff contacted a large real estate developer in Chattanooga, CBL (the owner of Hamilton

Place Mall), and asked for the name of a qualified civil engineer. Plaintiff was referred to Charles Miller,

a licensed civil engineer with special experience in grading, water, pavement design, roadway design,

drainage, and parking lots, who had designed the parking lots for Hamilton Place Mall. Plaintiff told

Miller it had a warehouse, “. . . and that the parking lot was failing, potholes and those kinds of things,

would I go out and look at it and give her a contract to come up with -- to mitigate the failures in the

asphalt at this location.”

                 Miller sent a proposal to Plaintiff, dated and faxed on October 21, 1994. He advised

that the pavement failures should be filled and re-paved, then the whole parking lot should be paved

over. The primary reason for these failures was water getting into the subgrade. It was Miller’s opinion

that if they just repaired the cracks and didn’t repave the whole area, then the joints where new asphalt

and old asphalt join (“cold seams”) would develop leaks, and the repair would have to be done over.




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Also, Miller felt the concrete trailer pads should be extended by at least eight feet and concrete pads

should be installed for the dumpsters because the lack of pads had caused tractor-trailers and dumpster

trucks to punch holes in the asphalt. Miller also noticed tracks in the grass and recommended that

bollards1 be installed to keep trucks off the grass. His cost estimate for the recommended work was

$75,000, and his fee for the plans and specifications was $5,000, including the cost of receiving bids and

periodic inspection. Plaintiff accepted Miller’s proposal by signing the proposal letter the same day.

                Miller testified that he had never been to the property before he was asked to quote and

supervise this job, and he had no idea of its condition in 1992, when these parties entered into their lease

agreement. When the project started, he did not have any formal discussions with the tenants but, as a

passing courtesy, he stopped by and spoke to someone, whose name he does not know, about the fact

that they were going to be digging and they would work with the tenants in getting the trucks in and out.

Although they doubled the size of the concrete pads, if they had not put down new concrete, they still

would have put down new asphalt because there were holes in the pavement where the truck stanchions

were too big and overshot the existing pads. Although the project improved the value of the property,

Miller regards the job as a maintenance and repair job, not a new construction project, and thinks that

any repairs will improve the value of any property.

                The Trial Judge asked Miller whether he could produce a breakdown of what it would

cost just to repair the potholes, eliminate the increased dolly areas, eliminate the pads for the dumpsters,

and eliminate the bollards, and Miller replied that it could be done.

                Susan Katzenberg, one of the two general partners of the Plaintiff (the other partner is

her father), testified that the partnership acquired this property from the developer when the warehouse

was one or two years old, in 1976. In April or May of 1992, when the partnership’s realtor was

negotiating a lease agreement with Defendant, she talked with Jim Kennedy of Cherokee Warehouse by

phone because the realtor told her there were some issues preventing the closing of the lease. She told

Kennedy that she wanted to go over point by point any of the issues that were of concern to him. He

replied that his father had found their lease cumbersome and didn’t want to hire a lawyer to go over it, so


                                                                                                               Page 4
they had found some other warehouse property and had signed a much shorter lease on it. However,

Kennedy did not think the lease itself was particularly an issue, and perhaps they would need more space

later and would lease from her.

                On August 27, 1992, Defendant did sign a lease with Plaintiff. That lease was amended

twice because Defendant increased their rental space from 56% to 79% and because Defendant wanted

to reduce the term of the lease from one-year to month-to-month. Plaintiff viewed Defendant as being

there on a short-term lease, providing current income to Plaintiff while it continued to actively market the

property for a long-term tenant. Plaintiff doesn’t view Defendant as a short-term tenant in hindsight,

since it actually stayed there three years.   Counsel for Defendant asked Ms. Katzanberg whether the

work done under the repaving contract would have enhanced the marketability of the property to

potential long-term lessees, to which she replied, “Not necessarily. Possibly.” If Plaintiff had had an

offer from a long-term lessee, it would have given Cherokee notice to move out.

                Ms. Katzenberg testified that she decided to repave the parking lot because Red Food

complained about the potholes. She went out to the parking lot and looked at the problem, and because

the failure was fairly extensive, she hired Miller to plan and supervise the job. She entered the contract to

repave on December 20, 1994. The work started that day and ended the last week in January 1995.

She sent a letter to Defendant on December 28th notifying them that the work would be done. Ms.

Katzenberg did not consider notifying the Defendant before then, as it was her view that the work

needed to be done, Defendant was required to pay for it under the lease terms, and prior notice to

Defendant was not required. She billed Red Food for its portion (21%) of the contract in its annual bill

for additional rent under the terms of the lease, and Red Food paid its bill. When she sent the bill to

Defendant for its 79% of the contract as part of its annual bill for additional rent, Defendant refused to

pay for the work, but paid for the other annual charges. Defendant then gave Plaintiff 60 days notice and

moved out of the warehouse in May 1995, not having paid the $55,866.22. Plaintiff incurred $6,400 in

attorney fees for the law firm of Ballard-Spahr in Baltimore and $11,000 for the law firm of

Chambliss-Bahner in Chattanooga in attempting to collect the debt from Defendant, plus expenses.


                                                                                                                Page 5
                 David Holt, CPA, whose accounting firm does work for Defendant, testified that he

reviewed the history of the repaving project at Defendant’s request, and opined that, from both a

financial and an accounting standpoint, and from a tax return filing standpoint, the expenditures that were

made would constitute capital additions rather than repair items.              His opinion was based on

generally-accepted accounting principles and income tax law and regulations, IRS rulings and case law,

which hold that “a capital item is one that would appreciably prolong the useful life of an asset or

materially enhance its value, arrest deterioration and prolong the life [of the capital asset].”

                 Jim Kennedy, President of Cherokee, testified that his company owns 18 warehouses

and leases others (13 or 14 at the time of this controversy) from owners, as well as leasing to tenants the

18 buildings it owns. In his business, Mr. Kennedy makes it his policy to know about the (competing)

warehouse space available in the area, and he has known of this particular warehouse for 20 years or

more. There are three warehouses close together, and in the 1970s his company leased each of the

other two briefly. His general impression is that the buildings and the pavement around them have been

pretty much the same over the 20 years. During the time Defendant leased the building in this suit, it was

paying a reduced rental rate because the space was still being shown to potential long-term tenants and

Defendant knew it could be moved out on short notice. The agreement was mutually beneficial.

Defendant got a good rental rate ($1.80 per sq. ft. vs. $2.65 per sq. ft.), and Plaintiff got some income

from a short-term tenant while trying to find a long term tenant. Both parties “understood that this was a

short-term arrangement.”

                 Kennedy testified that he saw little, if any, difference in the condition of the parking area

from the time Defendant first leased it in September1992 until it was repaved in January 1995. He may

have seen one or two potholes. If Jane Katzenberg had told him, in October 1994, that she was

planning to commence this project in December and then bill him for it, he would have “found a way to

get out of the building.”

                 Pete Smith, thirty-plus year employee and warehouse manager for Defendant, testified

that he had managed this warehouse during the entire time that Defendant leased it from Plaintiff. When


                                                                                                                 Page 6
Defendant moved in, there were two potholes in the pavement. One was large - “probably a three-foot

square.” The warehouse had flooding problems when it rained.             Tractor-trailer drivers sometimes

wouldn’t drop their trailers at the Defendant’s site because they didn’t want to get their feet wet. 2 There

was a problem with the truck pads, which were originally designed in 1976 for trailers 45 - 48 feet long,

but when the regulations changed allowing trailers to be longer, the pads were too short.

                Bob Hellerstedt, thirty-plus year employee for Defendant, testified that he first looked at

the warehouse with the realtor in 1992. At that time, it had been sitting empty and Plaintiff was trying to

find a long-term tenant. He inspected the building and the pavement before Defendant leased it, and

could state the condition of the pavement at the time they leased it and at the time the Kitzmiller-Murray

repaving contract was undertaken. He said,

                Well, I think, as Pete said, it didn’t change that much. There were some
                potholes or holes around those dolly pads, especially over around the
                Red Food section and on down on the other end. But, for the most part,
                the general area was in pretty decent shape . . . it [the potholes] was
                there when we moved in there . . . it’s one thing to patch a pothole, but
                when you start a general improvement project where you’re changing the
                slopes of the lot itself to improve the thing, which it did, I mean, the work
                did that, we didn’t have to wade in any more after that happened when it
                rained, but that was – that’s certainly not repair in my mind . . . [d]own
                closer to the building, I guess they raised that elevation, the pavement
                itself, I would say maybe as much as five or six inches.


                                             DISCUSSION

                The Trial Court found that the lease agreement provided that Defendant was leasing the

space “as is,” and that Defendant would pay its proportionate share of “any maintenance or repairs.”

Defendant occupied the space for three years, and after two of those years, Plaintiff investigated the

possibility of making repairs to the parking lot. An engineer (Miller) made recommendations for the

repairs, and those recommendations were carried out. Defendant occupied 79% of the warehouse

space, and they were billed for 79% of the cost of the repairs.

                The Trial Court found that the work done in this case involved both repairs and

improvements. The Trial Court ordered that Plaintiff is entitled to recover from Defendant the cost of




                                                                                                               Page 7
necessary repairs but is not entitled to recover enhancements or improvements, such as the enlargement

of pads, installation of new pads, and installation of bollards. The Trial Court then referred the matter to

a special Master to determine the cost of reasonable repairs solely of the potholes and cracks in the

parking lot, with 79% of the cost to be borne by the Defendant. Other costs, including attorney fees,

were to be decided after the Master had made his determination.

                  On February 11, 1999, the Master filed his report, indicating that the matter was

submitted to him upon stipulations of the parties. The apparent stipulation (prepared by counsel for

Plaintiff but not signed by either party, and appended as Exhibit 1 to the Master’s Report) stated that

Defendant owed Plaintiff $46,249.47, before fees, costs, or interest. The Trial Court adopted this “

finding” and enforced against Appellant the contract provisions for attorney fees and a 15% late fee on

failure to pay for the repairs.

                  Our review is de novo upon the record, accompanied by a presumption of the

correctness of the findings of fact of the Trial Court, unless the preponderance of the evidence is

otherwise. Rule 13(d), T.R.A.P.; Lindsey v. Lindsey, 976 S.W. 2d 175,178 (Tenn. App. 1997). The

interpretation of a written agreement is a matter of law and not of fact. Therefore, as to matters of law,

our scope of review is de novo on the record with no presumption of correctness of the Trial Court’s

conclusions of law. Park Place Center Enterprises v. Park Place Mall Associates, 836 S.W. 2d

113, 116 (Tenn. App. 1992).             Park Place also described the general principles of contract

interpretation:

                  The cardinal rule of interpretation of contracts is to ascertain the intention
                  of the parties and to give effect to that intention consistent with legal
                  principles. In construing contracts, the words expressing the parties
                  intentions should be given their usual, natural, and ordinary meaning.

                  Defendant first asks this Court to reverse the decision of the Trial Court and bar the

Plaintiff’s recovery because the Plaintiff “was under a duty to disclose her secret plan to construct

extensive improvements, and she failed to do so.” Defendant contends the Plaintiff’s conduct clearly

violated the implied covenant of good faith and fair dealing, citing Winfree v. Educators Credit Union,




                                                                                                               Page 8
900 S.W.2d 285 (Tenn. App. 1995)(perm. app. denied), and Covington v. Robinson, 723 S.W.2d

643 (Tenn. App. 1986) (perm. app. denied).

                 In Winfree, plaintiff entered into a “Memorandum of Understanding” with Educators

Credit Union in which he agreed to act as an unpaid marketing representative for ECU in consideration

for the opportunity to sell cancer insurance to ECU’s members. As policies were sold, payments for

those policies were deducted from the payroll checks of credit union members. Four years later, under a

new administration, ECU cancelled the payroll deductions for Winfree’s insurance policies, causing a

number of ECU members to cancel their policies. In determining whether ECU had violated its “

contractual obligation of good faith and fair dealing,” this Court stated that:

                 There is an implied undertaking in every contract on the part of each
                 party that he will not intentionally or purposely do anything . . . which will
                 have the effect of destroying or injuring the right of the other party to
                 receive the fruits of the contract. Ordinarily if one exacts a promise from
                 another to perform an act, the law implies a counterpromise against
                 arbitrary or unreasonable conduct on the part of the promissee.
                 However, essential terms of a contract on which the minds of the parties
                 have not met cannot be supplied by the implication of good faith and fair
                 dealing.

Winfree at 289, citing Section 256 of American Jurisprudence, Second Edition, on Contracts.

                 Our Supreme Court discussed the nature of the duty of good faith in Wallace v.

National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1997):

                 In Tennessee, the common law imposes a duty of good faith in the
                 performance of contracts. This rule has been considered in several
                 recent decisions of the Court of Appeals. The law regarding the good
                 faith performance of contracts was well stated by the Court of Appeals
                 in TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169, 173 (Tenn.
                 App. 1987):

                 It is true that there is implied in every contract a duty of good faith and
                 fair dealing in its performance and enforcement, and a person is
                 presumed to know the law. See Restatement (2d) Contracts, § 205
                 (1979). What this duty consists of, however, depends upon the
                 individual contract in each case. In construing contracts, courts look to
                 the language of the instrument and to the intention of the parties, and
                 impose a construction which is fair and reasonable.

                 In Covington v. Robinson, 723 S.W.2d 643, 645-46 (Tenn. App.
                 1986), which was relied upon by the Court of Appeals in TSC


                                                                                                          Page 9
                Industries, the Court of Appeals held that in determining whether the
                parties acted in good faith in the performance of a contract, the court
                must judge the performance against the intent of the parties as
                determined by a reasonable and fair construction of the instrument. In a
                later decision, the Court of Appeals held that good faith in performance
                is measured by the terms of the contract. “They [the parties] may by
                agreement, however, determine the standards by which the performance
                of obligations are to be measured.” Bank of Crockett v. Cullipher,
                752 S.W.2d 84, 91 (Tenn. App. 1988).
                           ***
                In this case . . . the language of the agreements clearly states the terms
                and reflects the intent of the parties . . . . Performance of a contract
                according to its terms cannot be characterized as bad faith.
                [emphasis added]
                                                     ***
                . . . it should be noted that the common law duty of good faith in the
                performance of a contract does not apply to the formation of a contract.
                 See Restatement (Second) of Contracts, § 205 cmt. c (1979).
                Consequently, the common law duty of good faith does not extend
                beyond the agreed upon terms of the contract and the reasonable
                contractual expectations of the parties. [citations omitted]

Wallace at 687.

                For Defendant to prevail on this issue, it must prove that the Plaintiff’s actions were not a

performance of the contract according to its terms. This is particularly true in this case where the parties

to the contract are two experienced commercial entities.

                By the testimony at trial and the purported stipulation of the parties, the Plaintiff

constructed bollards, concrete pads and extensions to concrete pads, and billed the new construction to

the Defendant as “repairs.” Under Wallace, if Plaintiff’s actions in making the “repairs” without

notifying the Defendant beforehand was consistent with the performance of the contract according to its

terms, the Plaintiff’s actions cannot be characterized as bad faith and Plaintiff cannot have breached its

duty of good faith and fair dealing. The contract gave the Plaintiff the option to elect to perform “any

maintenance or repairs. . .” as it saw fit. The contract placed no requirement on the Plaintiff to notify the

Defendant before undertaking any such “maintenance or repairs.” If Defendant had wished such a

requirement be placed on the Plaintiff, it could have negotiated that issue with the Plaintiff and insisted

that such a provision be included in the contract. No such provision requiring notice was included. It is

the opinion of this Court that the Trial Court did not err in refusing to bar recovery by virtue of the


                                                                                                                Page 10
alleged breach by the Plaintiff of the implied covenant of good faith and fair dealing.

                Defendant next argues that the Chancellor erred in “concluding that the construction

project was not a capital improvement.” The real issue before the Trial Court and this Court is whether

or not the work Plaintiff had performed constituted “maintenance and repairs” under the contract

between the parties. The Trial Court did find that some of the expenses were for improvements.

Kitzmiller-Murray’s invoice to Chattanooga Associates for the work done was for $79,950.65, of

which $9,233.92 was charged to a neighbor whose easement was also paved, leaving $70,716.73

owing from Chattanooga Associates to the contractor. Excluding the cost of concrete dolly pads

($21,045.69) and bollards ($790) from that the amount left $48,881.04 due by the tenants under the

Plaintiff’s theory. Defendant’s 79% of that amount would be $38,616.02. However the apparent

stipulation upon which the Master relied includes an additional $8,072.51 for “square yard of asphalt for

dolly pad repair” upon which there was no testimony and which was not included in any of the bills in the

record. Considering all of this, we are unable to verify by the record or our calculations that Cherokee

owes $46,249.47 rather than, at most, $38,616.02, for repairs.

                Moreover, we find no evidence in the record that the apparent stipulation includes any

consideration of the cost of raising the pavement height so that it would be above the water level during

storms, as recommended by Charles Miller and apparently as actually done in the repaving, according to

the testimony of Bob Hellerstedt. As previously discussed, the original quote letter from Miller to

Katzenberg, which described his inspection of the parking lot, begins with the observation: “Dear Ms.

Katzenberg: As you know your warehouse is in a low area and has high ground water table. . . . During

the last substantial storm event the water level in the structure was the same as the ponds across the

railroad tracks. Therefore, even if we improve your on-site drainage there is no apparent outlet to drain

the water away from the site.” The letter discusses measures to improve drainage, add bollards, add

concrete pads, enlarge concrete pads and repair the areas that have failed, all of which was done. It is

uncontested on appeal that some of these measures were improvements, not repairs.

                The determinative factor in this appeal is the contract between the parties itself. What


                                                                                                            Page 11
was it that the Defendant contractually agreed to pay? The contract answers that question, and the

answer is that the Defendant agreed to pay its proportionate share of the costs incurred by the Plaintiff

for maintenance and repairs. Under Plaintiff’s interpretation of this contractual provision, it could have

had this parking lot construction work done the day after the contract was signed and Defendant, an

admittedly short term tenant, would have been responsible for its proportionate share of those expenses.

This Court is of the opinion that such was not the intention of the parties as reflected in the contract.

                The contractual obligation to pay for repairs imposes an obligation merely to keep the

premises in as good a repair as they were when the lease was entered into. Taylor v. Gunn, 227

S.W.2d 52, 56 (Tenn. 1950). The definition of “improvement” has been discussed by this Court in

Memphis Light, Gas & Water Div. v. T. L. James & Co. , Tenn. App. No. 52, filed October 17,

1986, (no appl. perm app).

                Black’s Law Dictionary, 5 th Ed. (1979) defines the term “improvement”
                as follows:
                Improvement: A valuable addition made to property (usually real
                estate) or an amelioration in its condition, amounting to more than mere
                repairs or replacement, costing labor or capital, and intended to enhance
                its value, beauty or utility or to adapt it for new or further purposes.
                 Generally, buildings, but may also include any permanent structure or
                other development, such as a street, sidewalks, sewers, utilities, etc.
                [emphasis added]

             This definition of “improvement has been adopted in its totality as
             Section 1 of 14 Tenn. Juris., Improvements (1984).
Memphis Light, supra.

                This Court has previously discussed improvements and repairs under the terms of a

lease contract which provided that the lessee pay for repairs:

                Common sense dictates that maintenance, such as painting the structure
                and resealing the parking lot adds to the physical life of the building, yet
                without question these activities are no more than ordinary maintenance.
                We are further of the opinion that replacement of damaged awnings as
                opposed to the installation of new awnings falls within the purview of
                maintenance. Such activities are nothing more than expenditures which
                are required to keep the building in a state of good repair.

Brooks v. Networks of Chattanooga, Inc., 946 S.W.2d 321, 328 (Tenn. App. 1996).

                Brooks does not support the Plaintiff’s position in this case. The controlling language in



                                                                                                             Page 12
the lease in Brooks is considerably broader than in the case currently before us. Specifically, the lease in

Brooks required the tenant there to pay its pro rata share of the “operating costs” of maintaining the

common areas and building. The lease in Brooks defined “operating costs” as “. . .the total cost and

expense incurred in operating, maintaining, repairing and replacing the common areas and building in

which Leased Premises are located. . .” There is no corresponding language in the lease in the case now

before us that requires Defendant to be responsible for its pro rata share of “replacing” the area in

question. Additionally, the controlling language of the lease in Brooks was absolutely clear that it was

the parties’ intention that that lease be a “triple net” lease to the landlord during the term of the lease so

that the tenant was responsible to pay “. . .all costs, expenses and obligations of every kind relating to

the Leased Premises which may arise or become due during the term of this Lease. . .” [emphasis

added]. The lease in question before this Court in this appeal contains no such language.

                 In this case, the evidence in the record is insufficient to determine on appeal whether the

expenses apportioned to Cherokee under the lease were for repairs or for improvements or

replacements. Although the Master incorporated a purported stipulation in his findings, the stipulation

document itself is unclear. We cannot tell from the record before us which of the construction expenses

were necessary to put the premises in as good of repair as when the lease was entered into and which

were improvements or replacements which resulted in the premises being put in better condition than at

the time the lease was entered into by the parties.

                 “Even though [Appellant] has not questioned the Trial Court’s damage calculation on

appeal, we have the responsibility to apply the controlling law whether or not cited or relied upon by

either party.” McClain v. Kimbrough Constr. Co., 806 S.W.2d 194, 201 (Tenn. App. 1990)(perm.

app. denied). As in McClain, “while we favor the conservation of the judicial resources, we do not

have sufficient evidence to calculate” the cost of repairs vs. improvements/replacements in this case. Id

at 201.

                 We reverse the judgment of the Trial Court and remand the case to the Trial Court to

determine what amount of the construction expense was necessary to keep or place the premises in as


                                                                                                                 Page 13
good a condition as they were in when the lease was entered into by the parties. In keeping with the

parties’ contract and the Order of the Trial Court, 79% of the expenses determined to be repairs as

defined above shall be apportioned to Defendant.

                 In light of our holding above, the Chancellor’s award of a 15% late charge was in error.

Since some of the expenses charged to the Defendant by the Plaintiff were not proper under the lease as

repairs, the Defendant was justified in refusing to pay the bill within the time specified by the contract. A

landlord cannot trigger a late fee provision by sending an inflated bill which the tenant rightfully refuses to

pay, as such an attempt would be a violation of the implied covenant of good faith and fair dealing as

discussed earlier in this Opinion.

                                              CONCLUSION

                 The judgment of the Trial Court is reversed and the case remanded to the Trial Court

for further proceedings consistent with this Opinion. Costs of this appeal are assessed to the Appellee.




                                                   _________________________________________
                                                   D. MICHAEL SWINEY, J.




CONCUR:



___________________________________
HERSCHEL P. FRANKS, J.




___________________________________
CHARLES D. SUSANO, JR., J.




                                                                                                                  Page 14
