The hallmark of a lease is that, in return for paying rent, a tenant gets exclusive possession of its leased premises. So, if a tenant is entitled to exclusive possession, absent a specific lease provision, by what right does its landlord get to show the leased premises to prospective buyers or tenants? The answer to that question got mangled by a trial court and an appellate court in Iowa, only to be properly reached by the Supreme Court of Iowa. Or, so Ruminations thinks and a disappointed tenant does not.
It is best to start with the “central” lease provision facing all three courts. Here it is. Read it carefully because it “looks” OK at first blush, but smart, experienced leasing professionals will quickly identify the deficiency that sent an anxious landlord and its anxious tenant to three courts at commensurate expense and with a likely sense of angst. This was the last part of an article labeled: “SIGNS”:
Landlord, during the last ninety (90) days of this Lease, or any extension, shall have the right to maintain in the windows or on the building or on the premises a “For Rent” or “For Sale” sign, and Tenant will permit, at such time, prospective tenants or buyers to enter and examine the premises.
We’ll get to some other relevant lease provisions in the decision reached three months ago in Alta Vista Properties, LLC v. Mauer Vision Center. But, for now we’ll slowly walk our way through. The court’s actual opinion can be seen by clicking: HERE. We’ll try to do it justice in explaining what path the Supreme Court of Iowa took to say that the landlord could show the leased premises to a prospective buyer at any reasonable time.
The tenant’s position was that the express lease provision cited above, to a 90 day window at the end of the lease’s term, LIMITED the landlord’s right to show the property to prospective buyers to those 90 days. The landlord argued that this provision did not preclude entry for such a purpose at other times as well, otherwise its right to sell the property would be meaningless (read that as: the tenant’s interpretation would be an unlawful restraint on alienability, and thus violative of long-established public policy).
Readers who suspect that today’s blog posting is another excursion into the wonderful, wacky world of contract interpretation would be right. If, however, anyone thinks we’re going to blab on and on again about the Parol Evidence Rule, relax; not today. There were no relevant documents or oral agreements preceding this lease, probably because the original landlord and the litigant tenant were two hands of the same person – they were “affiliates” of each other. The landlord’s interest was subsequently sold, but the lease wasn’t changed in that transaction. Consequently, the court had no interest in any self-serving testimony from the tenant’s principal when he offered to explain what he had in mind when signing the lease on behalf of both the tenant and the original landlord.
There is a “rule” of contract interpretation with a fancy Latin moniker: “Expressio unius est exclusio alterius.” For the rest of us: “The expression of one thing of a class implies the exclusion of others not expressed.” That rule appears to have been in the minds of the trial court and of the (intermediate) appellate court because each applied it to the exclusion of what is supposed to be an overriding principle of contract interpretation: “An interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.”
There are corollaries of the latter principle such as, “A lease includes not only what is expressly stated by its terms but also what is necessarily implied to give effect to its express terms.” Yes, wise courts imply contractual terms where the obligation “arise[s] from the language used or [is] indispensable to give effect to the intent of the parties.”
Here’s a good place to tell you about some of the other lease provisions that guided the Iowa Supreme Court when it reversed each lower court’s tenant-favorable ruling.
One provision gave the landlord the right to assign the lease and to mortgage its property.
Another, an express “covenant of quiet enjoyment” provision was peculiarly written. Here it is with the “peculiar” word underlined by us:
18. COVENANT FOR QUIET ENJOYMENT. Landlord covenants that Landlord’s estate in said Premises is in fee simple; and that the Tenant on paying the rent herein reserved and performing all the agreements by the Tenant to be performed as provided in this Lease, shall and may peaceably have, hold and enjoy, the non-exclusive use of the Leased Premises for the term of this Lease.
[Ruminations thinks the word, “non-exclusive,” is inconsistent with a covenant of quiet enjoyment, but we won’t go down that road today.]
Yet another provision gave the tenant a right of first refusal if the landlord was willing to accept someone else’s specific offer to buy the property.
And, if readers of the blog postings of the last two weeks are curious, the lease had an “integration” (complete agreement) provision.
The Iowa Supreme Court gave a roadmap of sorts to where today’s blog posting is headed. Looking at the “landlord access” provision of the lease (i.e., the first one we cited above), it wrote: “True, it says the tenant must allow prospective tenants and buyers to enter and examine the premises during the last ninety days. Yet it does not say this is the only time they are permitted on the premises.”
Applying its approach to figure out what this “access” language meant in the CONTEXT of the entire lease, the court dissected the quoted text, dividing it into two categories: (a) the posting of “for lease” and “for sale” signs; and (b) entry into the leased space. Surprisingly (to us) the court understood that these specific signs would be for the purpose of finding a new tenant or a property buyer. It understood the concept that “for sale” and “for rent” signs give the public the wrong impression about a tenant’s status. A “for sale” sign in a tenant’s window might mislead passersby to think the tenant’s business was for sale. A “for lease” sign would lead passersby to think the tenant was closing or moving. That might be fine if true (such as within a few months), but not if posted with three years to go in the lease’s term. In the court’s mind, posting a “for sale” sign that makes it look like the tenant, not the landlord, is selling is something of much greater concern to a tenant than it would be a “loss” to the landlord if it couldn’t post such a sign. So, the court recognized that the ninety day period for posting such signs had a clear basis and found nothing else in the lease that contradicted a plain reading of the 90 day restriction for signs.
Implicit in the court’s separating the “signage” portion of the disputed clause from the “entry” portion was the court’s holding that “the landlord may enter” provision was not so encumbered. It noted that the lease did not bar the landlord from entering whenever it wanted do and didn’t bar the landlord from bringing anyone else with it during such entries (possibly save for prospective tenants and buyers, though the court clearly decided these, too, could enter with the landlord). And, once the signs might be posted, it appeared that prospective tenant and buyers didn’t have to be accompanied by the landlord.
Further, the (extraneous, we think) “non-exclusive” in the quiet enjoyment text was grabbed onto by the court when it said that if the landlord couldn’t bring prospective tenants and buyers into the leased space, the tenant would be quietly enjoying the “exclusive” right to be in the space. [That’s going pretty “broad” to us. We don’t think the court thought through all of the implications of that, but it’s the court’s job to make those decisions, not ours.]
Most importantly, and (to Ruminations, most interestingly), the court wondered how a landlord who was given the right to sell the property (with readers remembering that this dispute was about showing the leased space to a prospective buyer) could realistically sell the property if it couldn’t show the entire property to the prospect. Here’s how it expressed its wonderment: “Who would buy or finance something he or she could not could not look at?” Using pretty clear language, the Iowa Supreme Court further wrote: “The inconvenience to [the tenant] if [the landlord] is allowed to show the property at a reasonable time to a buyer is minimal. Yet the potential loss to [the landlord] if it cannot show the property is substantial: [the landlord] would likely be unable to sell the property to or finance the property with any bona fide third party.”
All of that analysis led the court to find the tenant’s interpretation (of only a 90 day window to show the property) to be unreasonable when reading the lease “as a whole.” And, such an interpretation would be an impermissible restraint on alienation (alienation = getting the property out of the hands of someone who no longer wants the property or the specific property interest).
So, what went on? Simply speaking, the principle noted way, way above, “An interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect” was given effect. The tenant’s narrow, self-serving reading of an isolated set of words in the lease would have overridden the common sense implication of the landlord’s right to sell and mortgage its property.
It’s not that Ruminations hasn’t made this observation before that one needs to very cautious when reading only those words in an agreement that one likes to read. Individual provisions of an agreement need to be read in the context of the entire agreement. If a particular provision was actually intended to trump what the parties would expect from the agreement, as a whole, that particular provision ought to say so, and say so clearly, such as (what we doubt was really intended): “Landlord’s prospective buyers, tenants, and mortgagees have no right to enter the leased space other than within the last 90 days of the lease term.”
Well, the landlord won. It got what it was looking for. It also got to visit all three levels of the Iowa court system. We hope the tour was worth the price. Much less expensive would have been insisting that the lease be modified to expressly permit access for prospective buyers and mortgagees at all reasonable times. That’s what the “standard” approach to lease writing calls for. Well, pay a little for a lease review “now” or a lot more later for litigation.
As for the tenant, we hope its personal (and unreasonable) reasons to bar access to its landlord were important enough for it to take the same courthouse tour. Yes, it’s true it found two courts to stand on its side (at no small cost, we’re sure), but it should never have taken great courage that those lower courts’ rulings would stand. True, this might have been a “case of first impression” in Iowa, but it wasn’t in Colorado, Washington or the District of Columbia, where tenants made similar arguments and lost. The principle relied upon by the Iowa Supreme court was followed in California, New York, and Illinois (and probably elsewhere as well).
We’d be unhappy if we didn’t tell readers that the Iowa Supreme Court also held that the tenant’s barring access to its landlord would be a breach of the implied covenant of good faith and fair dealing. For our thoughts on that subject in connection with our lease and contract issues, see some of our earlier Ruminations by search the blog site using “good faith and fair dealing” as your search term. All we’ll do today is share an example used in the Second Restatement of Contracts to illustrate this covenant:
If A, the owner of a shopping center, were to lease part of the premises to B with the exclusive right to conduct a supermarket, it would be a breach of the implied duty of good faith and fair dealing for A to acquire the adjoining land and lease it to C to run a competing supermarket. … Although leasing the adjoining land to C would not literally violate the express terms of A’s lease with B, it would nevertheless constitute a breach of contract by implication for violating the obligation of good faith and fair dealing. See id. The point is: The express right to operate the only [supermarket] on the premises carries with it the implied right not to have the landlord go into competition next door.
For today’s purposes: “That’s all she wrote.” [From, among other sources, the album “No Mercy.”]