It’s easier to “say so” in a lease than to have a court tell you what you meant or wanted to say. And, that’s true whether the court has ruled in your favor or against you. For one, rulings are usually not entirely favorable. Another is that uncertainty is an enemy. A third is that money is better spent at the outset, as painful as that may be to some. As is often said, “Pay me a little now or a lot more later.”
Today, we’ll introduce a simple California Court of Appeal ruling about the sufficiency of parking at a shopping center. We’re talking about the December 7, 2015 unpublished decision in a case titled: Gietzen v. Goveia. For those interested in seeing the written opinion, click: HERE.
Let’s get the lease’s relevant provisions out of the way. There wasn’t a lot, and here is what we’ve selected:
Article 9.1: “The Common Area shall be available for the nonexclusive use of Tenant during the full term of this Lease or any extension of the term hereof . . . .”
Article 40 was an integration clause providing that all agreements and negotiations were merged in the lease and that there were no implied covenants.
Keep Article 40 in mind as we retell the story.
A small group of restaurants wanted to relocate one of its existing units and identified a target property. In addition to the space that interested it, there was a space for a yet unknown anchor tenant. The restaurant’s owner asked something like, “Who will be the anchor tenant,” and was satisfied when told it would be a well-regarded marine hardware company, basically a solid, plain vanilla retailer. The landlord was engaged in active negotiations with that retailer.
In the course of negotiations with the restaurant tenant, the prospective deal with the marine hardware retailer ended and negotiations between the landlord and a major fitness center began. Those negotiations were successful. The restaurant tenant also signed a lease, unaware that the shopping center’s anchor tenant would be the fitness center, not the marine hardware store. In fact, it didn’t learn about the fitness center until the restaurant’s fit-up was nearly complete.
All readers know that fitness centers are “parking sucker-uppers.” But how many of us knew, “by how badly?” In this case, as a parking survey revealed, fitness center customers took up approximately 95% of the center’s spaces. To make matters worse for the restaurant, though at 95% it could hardly matter, the fitness center’s lease gave it a protected parking area of about half of the parking lot. For the restaurant, there was an even greater problem. It and the fitness center shared the same peak business hours.
Pay attention: the restaurant’s lease promised nothing about parking other than the lot would be “available for the nonexclusive use of Tenant.” The lease disclaimed any prior discussions. Yet, a trial court and an appellate court awarded the restaurant nearly two million dollars in damages because there was, essentially, no parking for customers of the restaurant. The restaurant was able to prove that its business suffered to at least that extent. And that was despite the landlord’s efforts to ameliorate the parking shortage by providing on-site valet parking, security guards, and requiring employees to park off-site.
What is instructive is how the courts came to conclude that the restaurant was entitled to what Ruminations will call a “fair shot” at the parking. I don’t think we can phrase the first reason better than did the appellate court when it wrote about Article 9.1 promising non-exclusive use of the common areas:
A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties. … The reasonable interpretation of the clause is that the common area shall actually be available for the tenant’s use, not some hypothetical availability. Where a single tenant takes up the vast majority of the parking spaces (a survey showed 95 percent), it is reasonable to conclude other tenants have been denied use of the common area. In addition, where the landlord at the time of leasing is well aware of the tenant’s propensity to deny use to other tenants, it is reasonable to conclude the landlord authorized the denial of use. [Underlining by Ruminations.]
Think about that, here is a court saying that there is some minimum, enforceable expectation on the part of a tenant (and an implied promise) on the part of a landlord that the common areas will be adequate for the reasonable needs of the tenants. Yes, implied. This whispers of the Uniform Commercial Code’s (UCC’s) default standard that when goods are sold, they will be both merchantable and fit for a particular purpose. [The important element of the implied warranty of merchantability is that the goods “are fit for the ordinary purposes for which such goods are used.”] Neither the trial court nor the appellate court in this restaurant case cited the UCC’s provisions, but they certainly are there.
This is a powerful concept. Look back at what we told you about Article 40 of this Lease. It said that the tenant couldn’t rely on having been told that the anchor tenant would be the marine hardware store, that all of its rights and duties were in the lease, not in earlier agreements, and that there were NO implied covenants. But, without the two courts calling the right to parking an implied covenant, they did.
Yes, we are saying that these courts found an implied covenant in the lease that promised parking. We are also saying that, using the courts’ reasoning, they could have found other rights implied by the promise of that non-exclusive use of the common areas. In fact, the landlord, on appeal, accused the trial court of reading an implied covenant into the lease even though Article 40 expressly disclaimed implied covenants. The appellate court swept that argument way by responding in the following way:
But the court implied no such term. Nor did the court imply a lease term that [the restaurant was] entitled to a set number of parking spaces or exclusive parking spaces. Instead the court based its decision on the breach of the express lease covenant allowing [the restaurant’s] nonexclusive use of the common area. [The restaurant] was, for all practical purposes, deprived of that use.
There was a second, perhaps underlying, basis for the court’s decision – our old friend, the covenant of good faith and fair dealing that is read into every contract. The landlord raised this directly to the appellate court, contending that the trial court was in error when it found the landlord to have acted in bad faith with regard to its tenant’s right to enjoy the common areas. Pay careful attention to how the appellate court addressed that charge. Pay special attention to what we’ve underlined:
There is implied in every contract a covenant of good faith and fair dealing. … The covenant requires each party not to do anything that would deprive the other party of the benefits of the contract. … The trial court’s finding that [the landlord] breached the lease covenant in bad faith is simply another way of saying that it breached the implied covenant of good faith and fair dealing.
[The landlord] points to the general integration clause of the lease. That clause states there are no implied covenants. But it would be unreasonable to construe that clause as meaning [the landlord] is not required to act in good faith.
The good faith of the parties is essential to all contracts. No agreement, no matter how finely crafted, will protect a party if the other party is not acting in good faith. If indeed [the landlord] is contending that the lease allows it to act in bad faith, it must point to a clause more specific than a general clause against implied covenants.
There you have it. Watch out. When one party or the other to a lease or any other contract promises something to the other, it can’t merely be something hypothetical. In the context of a commercial lease, if you see parking, you are supposed to give or get parking, as the case may be. Next, it could be lighting or entrances or exits. People who understand that a car dealer doesn’t have to promise that the car you see has an engine in order that you are entitled to get one when you buy the car, should understand that without “real” parking or similar items, a leased space can’t be “driven.”
Of course, as we wrote at the start of today’s blog posting, how much easier would it have been has the lease prohibited or restricted “parking sucker-upper” or called for a particular type of anchor tenant or both? If you think that this particular restaurant’s owner never had a concern about parking, think otherwise. He knew that a fitness center’s customers could overwhelm a parking lot; he had that exact experience at another one of his restaurants.
Yes, other courts might reach the same result as did these California courts, or they might not. How much simpler and less expensive would it have been to have the lease deal with parking in an expressed way rather than in an implied one?