Daily Development for Monday, January 21, 2001 by: Patrick A

Daily Development for Monday, January 21, 2001 by: Patrick A. Randolph, Jr. By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LANDLORD/TENANT; DEFAULT; "PRETEXTUAL BASIS" RATIONALE:" Mississippi Supreme Court develops concept that landlord cannot terminate lease on basis that strikes a court as a "pretext" to enable landlord to relet premises at higher rent, even when the basis is a clear default of the existing lease.

Bennett v. Waffle House, Inc., 711 So.2d 370 (Miss. 2000) Tenant Waffle House had a fifteen year ground lease with seven five year renewals, for a total 50 year period. (The renewal periods had CPI rent adjusters). The lease discussed the fact that Tenant intended to build a "standard Waffle House," and that would it comply with local laws. Over time, Tenant expanded the size of the restaurant from one that seated 33 to one that seated 54, and made certain other changes in layout of the property.

When Tenant attempted to renew the lease, Landlord objected that it had violated the lease in several respects through its expansion over time, and refused to renew or accept rent. Tenant pointed out that the lease stipulated that it was a ground lease and did not require Tenant to build anything. Any improvements belonged to the Tenant. Consequently, Tenant argued, it was inappropriate to infer any commitment to build to certain narrow specifications from general language discussing the fact that the premises was intended to be a "standard Waffle House," even if that term could be defined. The court adopted the general rule that use restrictions are to be construed narrowly in favor of broad use rights for the tenant.

The lease also provided that Tenant had the right to mortgage the property, but that Landlord had the right to pay the mortgage and "assume the right and privileges of the mortgage holder." Landlord argued that Tenant had entered into a sale/leaseback of the improvements to the property that was the equivalent of the mortgage, and that it had been denied the ability to pay the mortgage and assume the mortgagee's position. The court held that Landlord had waived whatever rights it had in this regard, even assuming that the sale/leaseback was a mortgage within the meaning of the lease, because it raised its demand fifteen years after the sale/leaseback was entered into. (The court does not say so, but one assumes from the discussion that Landlord had notice of the arrangement fifteen years earlier.)

Finally, Landlord argued that the Tenant had not complied with the driveway width and parking space depth requirements of the City, despite the fact that the Tenant had agreed to comply with these laws. The opinion tells us nothing as to when these violations occurred or when Landlord knew of them. Nor are we told how severe the violations were. The court simply holds, citing a 1985 District of Columbia, New York, and Pennsylvania cases, that the alleged unlawful activity was nothing more than a "pretext" to justify termination so that the landlord could collect a higher rent.

Reporter's Comment: This comment comes from Rod Clement of the Mississippi Bar, writing for the Newsletter of the Real Property Section of the Mississippi Bar and reprinted with permission: The court's reliance on a District of Columbia case for the doctrine of "pretextual forfeitures" is puzzling. Couldn't the same result have been reached by applying the same traditional Mississippi common law rules that the court used to shoot down the [Landlord's] argument about the "hidden mortgage?" The [Reporter] finds that the application of this doctrine of not enforcing "pretextual forfeitures" in this commercial context to be troubling. This doctrine shifts the inquiry from wether the tenant has breaded the terms of the lease to the landlord's subjective intent in asserting a breach, which should be irrelevant. In a market in which rents are rising, a tenant always will be able to argue that the landlord's assertion of a breach is a "pretextual forfeiture."

Editor's Comment 1: As indicated in the editor's discussion of the case above, the court does not give us sufficient information upon which to conclude that the violations of city code in this case were known to the landlord. Hence, it is possible that the waiver theory was not available to justify avoiding a finding of default. Further, without knowing more about the violations, it is difficult to say that the violations were de minimus. A landlord who tolerates a known unlawful condition on his premises might be liable for damages for injuries resulting from that condition, and either of the types of conditions described conceivably could be found to be a proximate cause for personal injuries in the appropriate case. Therefore, it might be that the court felt that it was reduced to relying upon the notion of the "pretextual forfeiture" because there was no alternative in order to avoid the landlord's assertion of default.

Editor's Comment 2: The editor agrees with the Reporter, however, that the results should follow the law, and not vice versa, particularly in commercial cases. And the notion that a perfectly legitimate claim of default could be set aside because the landlord's motive in asserting the default is to terminate the lease and obtain a higher rent is dangerous for a number of reasons. First, of course, is the fact that it simply denies freedom of contract in commercial leases. Second is the fact that it plunges courts into the difficult problem of determining subjective intent when in fact a variety of motives might have driven the landlord to take a certain action.

The fact that courts sometimes must sometimes establish subjective intent, such as in criminal cases and in some tort cases, does not mean that this is an inquiry that ought to be welcomed. It is a difficult, expensive process that often does not lead to truth. Further, the fact that a case may turn on such a finding often makes the outcome difficult to predict, blocking settlement negotiations and in many cases, and extending disputes and tying up property and capital. To what end? We're only talking money here. No widows or orphans are thrown into the street. It's a Waffle House. If there was a significant default, no waiver, and the landlord wants to call in the cards, let him do so. Terminate the lease and let's all get on with our lives.

Editor's Comment 2: All of the cases cited by the Mississippi Court, by the way, although they are commercial cases, are easily distinguishable, as the default could be and was avoided based upon interpretation of the parties' intent or waiver, or both.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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