I’m Frustrated; Let’s Call It A Day And Part Company.

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In 1902, a tenant rented premises for the purpose of watching the upcoming two-day coronation procession of Edward VII. The premises were promised to be a great place from which to view what was expected to be a gala event. A one-third deposit was posted upon signing and the balance was to be paid at least two days before the scheduled coronation. There was a written agreement covering the two-day rental, but it made no reference to Edwin VII’s big day.

King Henry became ill and the procession (parade and all) was cancelled. The tenant didn’t pay the rest of the rent. The landlord sued for the balance of the rent and, in response, the tenant countersued for return of its deposit.

In 1861, an entertainment impresario contracted for use of a music hall, intending to present “a variety of extravagant entertainments” in that performance space. A week before the first performance date, the venue was destroyed by fire. The impresario sued for return of its money on the grounds that the hall owner failed to deliver on its promise to provide the space. The contract did not allocate the risk of such a fire as between the hall owner and the impresario. [It did end with, “G-d’s will permitting.”

In the first case, the tenant and landlord knew the purpose of the rental. In the second case, the purpose of the agreement was clear. In each case, the court ordered that moneys first paid be returned and that the parties were to be put back to where they were before the lease or contract had been executed. The common element was that the contracting parties knew that the deal had been made for a special purpose and that the purpose had been frustrated by reason of an unanticipated event about which the parties had made no agreement as to “what would happen.”

What Ruminations is speaking of (so to speak) is the doctrine of “frustration of purpose” or “impossibility.”

Though this legal “principle” existed even in Roman law, it (probably) was first explicated in England in an 1889 court decision in the case of: The Moorcock. That case taught us that if the purpose behind a contract (such as a lease) is not written in the document, it can be “implied” by the circumstances.

The Moorcock was a ship to be unloaded at a rented wharf. While the ship was in its berth, the tide went down and the ship was damaged when it settled on a ridge. The ship’s owner claimed that the wharf owner should not have rented a spot where the tide could drop to such a level. The “landlord” responded, “tough luck, it was your risk.”

Let’s not argue “what if” or “but.” Unless you were there, you don’t know the facts. What we do know, however, is that Judge Bowen (the Judge deciding about ships and low tide) wrote:

In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events as it must have been in the contemplation of both parties that he should be responsible for in respect to those perils or chances.

Translated loosely, if the contracting parties knew there was a special purpose for the business arrangement (to see a coronation, to put on a “big show,” or to load or unload your ship) and, without fault on the part of a contracting party, the purpose can’t be achieved, the law can unwind the deal.

Those are nice stories, but why is Ruminations dragging them out from more than 100 years ago. It’s because the doctrines (or excuses) of “impossibility of performance” or “frustration of purpose” are still very much alive and they can come into play even when dealing with a hum drum commercial lease. In fact, the District Court of Appeal of Florida just proved that point in an opinion in filed on January 13. If you’d like to see it, just click: HERE.

The permitted use in a freshly-signed lease allowed the tenant to use the leased space “solely for the purpose of the operation of a child day care center.” It limited the customer base to “up to thirty-five children between the ages of six weeks and five years.” The tenant was obligated to use its best efforts to keep the children inside the leased space and from loitering in the common areas of the shopping center. It also was required to “comply with laws.”

The state where the leased space was located regulates child care facilities and where more than five children will be in attendance, such facilities require licenses. Further, outdoor play areas are required except in designated urban areas where indoor space may be substituted. Six month provisional licenses are available, presumably to allow a non-conforming center to get into compliance.

Possessing a lease was a requirement for applying for a license. But, no outdoor space was available for the tenant’s use and the tenant would not sign a lease until it had assurance that the location would be designated as “urban.” So, it consulted with the county where the property was located and was advised the space was in an “urban” area. Based on that information, it signed the lease.

The tenant then applied for an operating license and, about a month later, it got a response, not the one it wanted. Its application was denied because, contrary to what the county had determined, the issuing agency decided that the location was not “urban” and, thus, an outdoor play area would be needed. It issued a six-month provisional license which ran out with no hope of complying with the outdoor play space requirement. The tenant abandoned the premises and the landlord sued for possession and damages.

The lower court gave the landlord what the landlord asked for. To do so, it summarily dismissed the tenant’s defenses of “impossibility, impracticality, frustration of purpose, and commercial frustration of purpose.” The tenant appealed and the appellate court ruled that possession of the leased space was properly granted to the landlord but said “not so fast” when it came to awarding money damages. Here’s how that court looked at the tenant’s defenses:

The common thread between these four affirmative defenses is foreseeability at the inception of the lease.

If a risk was foreseeable at the inception of the lease, then there exists an inference that the risk was either allocated by the contract or was assumed by the party.

Generally, foreseeability in the context of contractual defenses is an issue of fact precluding summary judgment. … Foreseeability [is] a question of fact precluding summary judgment in the context of an impossibility defense to the enforcement of a contract.

If men could reasonably differ over the objective facts concerning whether [the landlord] should have foreseen [the tenant’s] loss, then the issue should be left to the jury.

[For those unfamiliar with this “summary judgment” stuff, here is a very, very short primer. Basically, if a case has no “undisputed facts,” a judge can make a ruling “as a matter of law” without the need for a trial where a jury (or, if no jury, then a judge) would have heard evidence about the disputed facts. In the case at hand, the lower court did not believe that the facts about the availability of a license would be relevant to the outcome of the case. The appellate court disagreed. In doing so, it did not rule in favor of the tenant. Instead it ordered that the case go back to the lower court for a jury trial to determine the facts. With that “law” in mind, we continue with the story.]

The landlord argued that the risk of the tenant being unable to get the required license was foreseeable and fell upon the tenant. However, the court pointed out the lease didn’t allocate the risk of “no license” and that the landlord was well aware that the tenant needed a license and wasn’t willing to sign the lease without assurance that one could be obtained.

The appellate court looked at the undisputed statements in the affidavit submitted by the tenant to the court and found that there was a genuine issue of material fact as to whether it was foreseeable at the inception of the lease that the licensing Department would deny the tenant the urban designation or require outdoor play space for licensure.

Consequently, it might have been that each of the landlord and tenant knew that the space was specifically intended for use as a child care center and it would be impossible for the lease to be used for that purpose without a license. To reach or reject that “factual” conclusion, the parties would need to appear before a jury. If the a jury were to find those to be the “facts,” then the “child care center” purpose was “frustrated” and became “impossible.” And, if frustrated and impossible, just as was the case with King Henry, the tenant would be excused from the lease and the landlord would get no compensation in the form of money damages.

Is there a lease drafting or negotiation lesson here? Of course there is. It is both simple and complex. Those who craft leases and enter into lease agreements really must try hard to ask a lot of “what if” questions. By example, knowing that obtaining a “license” was critical, the lease in our story should have covered the “what if a license could not be obtained” question. That would have eliminated expensive trips to two (or possibly three) courts. It would have given each party an “expectation.” That’s the simple part. The complex part is that raising the question up front might have resulted in no lease in the first place. Ruminations is perfectly comfortable with that possibility because, in the end, that is what would happen if the question isn’t asked. The difference is that no one would have gone down the wormhole as did the child care tenant and its landlord. Basically, just because you are afraid of the answer doesn’t mean you shouldn’t ask the question.

One more thought, though not a very developed one: “what if the permitted use clause was more flexible and allowed a use or uses other than the very narrow “child care center”? Would a court find that the tenant could “walk” because it couldn’t get a license but could still “find” another business to operate there? Would it matter whether the landlord knew that despite the “broader” use clause, the tenant only wanted to operate a child care center? Our Ruminating only convinces us that where the parties see a possible “problem” down the line, they should agree on a “what if” provision up front so that they get the “certainty” they bargained for and not what a court delivers to them years later.

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Comments

  1. Jeremy J. Deeken says:

    Good questions are asked. Tenants often seek extensive use clauses when they only intend a much narrower use-perhaps to their peril. What would stop a court from reading a broad use provision such as one allowing “any legal use” to counter a tenant’s impossibility defense based on a regulatory impairment of its “true” intended use. The court might reason that the tenant must have seen some value in the space, independent of any particular intended use.

  2. The need for a lease prior to submission of an application appears to be standard operating procedure for liquor distilleries. It is easy enough to write a provision into the lease that states that if the liquor license is denied the lease may be terminated by either party. If the tenant is permitted a free rent period while the liquor license is pending, then it seems only fair that the Landlord should be entitled to retain some or all of the security deposit (depending on the size of the deposit relative to the monthly rental) as compensation for keeping the property off of the market during the period in which the license application is pending; however, if the tenant has been paying the full rent, then the security should be returned in full if the license is not forth coming because but for the license, the tenant would not have entered the lease at all.

  3. Susan Langlotz says:

    Why wasn’t the lease drafted with a condition, in favor of the Tenant obtaining the required indoor/outdoor space, as this is a critical piece of the puzzle for this deal to work?
    Maybe a daytime activity centre for seniors as an alternative use? Some day I’d like to draft the document for a combined child/seniors activity care centre.

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