Frustrated? – Bail Out Of A Lease Before It Begins – Impossible? No.

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Today, we offer a potpourri of rants: the doctrine of impossibility; good faith and fair dealing; and why did you think you could get away with that?

We’ve written about “impossibility” and “impracticality.” [Take a look at one such posting by clicking: HERE.] Basically, if the conditions are “right” (“the stars are aligned”), a party can get out of a contract if the purpose for which the agreement was reached turns out to be impossible to achieve. In the context of a Florida commercial lease dispute, the United States Court of Appeals for the Eleventh Circuit recently summarized a general principle of Florida law as follows:

Where the parties contract for the use of a property which use is not allowed by law, the consideration wholly fails, and the money paid for the contract should be returned and the parties mutually released.

That principle is not unique to Florida law.

The appellate court, in a decision that can be seen by clicking: HERE, tells the following, simple story. A shopping center lease was signed with a tenant wanting to open a tanning salon. The tenant then applied for an “Addition/Alteration Building Permit Application” in order to make needed changes to the space. It was denied. The reason given was that its zoning ordinance did not permit tanning salons at the tenant’s location. The sense one would get from the appellate court’s decision is that the city was probably on shaky ground when using such an excuse for the permit denial.

The landlord identified a local land use attorney thought to “give [the tenant] the best shot at getting [the] use restriction lifted.” In response, the tenant told the landlord that: “We have no interest in spending money on attorneys plus we will [m]iss most of our season now.” It never took possession of the leased space and never paid rent. So, surprise-surprise, the landlord sued the tenant for breach of contract. Surprise, surprise, the tenant raised the following defenses: lack of consideration, illegality, frustration of purpose, impossibility, impracticality, and mutual mistake.” All “turn[ed] on the alleged inability of [the tenant] to use the property for the only purpose allowed by the lease. The court expanded (or expounded) on some of the various items in the tenant’s laundry list of “affirmative” defenses:

“Want of consideration” and “frustration of purpose” are legally equivalent terms that describe a situation “when the very purpose of an agreement has been totally frustrated.

Where [a] contract contains a clause that is illegal,” the contract need not be enforced.

“Mutual mistake . . . of a fact existing at the time of the contract” can result in the cancelling of the contract.

“Impossibility of performance” refers to those factual situations . . . where the purposes, for which the contract was made, have, on one side, become impossible to perform.

“Frustration of purpose” refers to that condition surrounding the contracting parties where one of the parties finds that the purposes for which he bargained, and which purposes were known to the other party, have been frustrated because of the failure of consideration, or impossibility of performance by the other party.

“Impossibility of performance” can include extreme “impracticability of performance.”

So, at this point, we have a principle telling us that, if it were an accepted fact that tanning salons were not permitted in the leased space, the lease would be a nullity. [Had the lease expressly placed the risk of such a situation on the tenant, that would not be the case. But, those aren’t our facts.] We also have another fact, one we’ll state simply (again) by using the court’s words: “[The tenant] repeatedly assert[ed], and [its landlord] agree[d], that the relevant zoning regulation did not actually prohibit the operation of tanning salons and thus the denial of the permit was in error.”

So, what was the tenant thinking? That’s easy, giving a legitimate gloss to the tenant’s thoughts, we would say that it was “frustrated.” It was frustrated by the delay and the prospect of spending money to appeal the city’s denial. But, being “frustrated” and having the “very purpose” of the lease frustrated aren’t even in the same ball park. The tenant could have eliminated the legally cognizable “frustration of purpose” by “simply appealing the permit denial.” Succinctly stated, “Courts are reluctant to excuse performance that is not impossible but merely … profitless[ ] and expensive.”

Now, we get to drag out an old saw, “a conventional wisdom.” Parties to an agreement have the duty to act in good faith. The agreement, in the described situation, a lease, does not include such an obligation within its text. But, when people sign an agreement, society expects that they will work “in good faith” to follow through on their promises, more precisely, not to “frustrate” (there’s that word again) the benefit of the bargain reasonably expected by the other party. Though this appellate court didn’t say so, what (we think) the tenant failed to do was to act in good faith. It had the obligation to appeal what it conceded was an erroneous permit denial. The landlord reasonably expected that the tenant would work toward opening its tanning salon.

Instead, the tenant argued that it was the landlord’s fault that no appeal was filed because the landlord should have “helped.” While it raised that argument, even it couldn’t do so with a straight face. After all, though it had two weeks within which to file an appeal of the permit denial, it waited 13 days to tell the landlord about the denial. Even so, the landlord had no affirmative duty to help, only not to hinder.

So, what are we left with? The doctrines of impossibility or of frustration of purpose remain intact. They, however, aren’t malleable concepts stretchable to their emotional equivalents. And, we are reassured that parties are expected to work toward honoring their contractual obligations, not to look for legal-sounding arguments that would act as escape clauses. Yes, what was the tenant thinking?

More importantly, tenants with any question about their right to operate at a particular location or who need unusual leasehold improvements should “check it out first.” Yes, ask the municipality first. Get a provision in the lease saying that there is no obligation to file an appeal or to spend more than “X” dollars for improvements. As to the case at hand, we all know that tanning salons are now a disfavored business in the minds of many. Why obligate yourself to a lease if you might face delays and legal expenses, the realization of which would make you change your mind about going forward? Ruminations would characterize pre-lease signing advice as “doing your due diligence.” “Due diligence” is what smart people do before they sign binding agreements.

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Comments

  1. Why wasn’t this handled at the Letter of Intent stage as a condition of the negotiation, instead of well after all the effort by both sides to put a formal lease document in place? Makes no sense to me.

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