Mullendore Theatres, Inc. v. Growth Realty Investors Co.

In 1969, Conner Theatres Corporation (Conner) entered a 10-year lease that required Connor to pay a $22,500 security deposit to the landlord of the property. The lease provided that: (1) the landlord could keep the security deposit as damages if Conner defaulted in the performance of the lease; (2) if Conner did not default, the landlord would return the security deposit to Conner when the lease expired in 1979; and (3) all covenants in the lease ran with the land. Conner assigned the lease to Mullendore Theatres, Inc. (Mullendore) (plaintiff) in 1974. The deposit was reduced to $6,000 at the time of the assignment. Prior to the assignment, the landlord transferred the property to North Pacific World Trade Center, Ltd. (North Pacific). In 1975, North Pacific defaulted on a note and deed of trust. Growth Realty Investors Co. (GRIC) (defendant) acquired the property and sold it to the City of Tacoma (city). GRIC agreed to indemnify the city for any liability it might have for the $6,000 deposit. Mullendore negotiated a new lease with the city in 1980 and agreed to release the city from any claims Mullendore had against it. However, Mullendore reserved its claims against any other potentially liable party and sued GRIC for the return of the security deposit. The trial court found that the 1969 lease’s covenant to refund the deposit ran with the land and that GRIC was bound through the indemnification clause in its agreement with the city. On appeal, GRIC claimed that: (1) the covenant to return the deposit did not run with the land, and (2) Mullendore’s release of the city extinguished any obligation that GRIC might have assumed.