Daily Development forWednesday, October 13, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

LANDLORD/TENANT; COMMERCIAL; LANDLORD DUTY OF OPERATION: Neither (i) owner's management of mall in anticipation of selling it nor (ii) owner's rejection of plaintiff's option to renew its lease breached the implied covenant of good faith and fair dealing or violated the Connecticut Unfair Trade Practices Act (CUTPA).

De La Concha of Hartford, Inc. v. Aetna Life Insurance Company, 849 A.2d 382 (Conn. 2004)

Plaintiff De La Concha, a retail distributor of tobacco and tobacco products, leased space from defendant Aetna, in the Hartford Civic Center (Civic Center). De La Concha filed suit against Aetna alleging that Aetna had breached the implied covenant of good faith and fair dealing and had violated the state's unfair practices act, CUTPA, by changing its leasing and promotional practices at the Civic Center during De La Concha's tenancy and by refusing to renew De La Concha's lease. The trial court rejected De La Concha's claims as factually unfounded, and the Supreme Court of Connecticut affirmed the judgment for Aetna.

At heart of De La Concha's claim that Aetna violated CUTPA and breached the implied covenant of good faith and fair dealing with respect to the leasing and promotional practices is the idea that the economic viability of any one retail tenant of an enclosed mall, such as the Civic Center, depends upon the occupancy rate of the entire mall. De La Concha argued that Aetna had an obligation, implied under its lease, to make good faith efforts to promote and to maintain the mall. De La Concha supported its claim by pointing to two provisions in the lease: the gross sales provision, which afforded the plaintiff the right to renew its lease provided its gross sales exceeded a certain threshold, and the promotional fund provision, which required Aetna to contribute not less than 25 percent of the total amount that the Civic Center tenants had paid into the promotional fund. De La Concha claimed that once Aetna had decided to sell the Civic Center, it engaged in a purposeful course of conduct to "starve out" De La Concha and other tenants in order to make the Civic Center more appealing to potential purchasers who might prefer greater flexibility in deciding what to do with the space. De La Concha asserted that Aetna stopped promoting the Civic Center and started declining to enter into new leases or lease renewals on terms that would be attractive to existing tenants.

The court found that the landlord did alter its leasing practices. The landlord had resolved to sell the mall after twenty years and $50 million in losses. It questioned whether the mall concept was viable in light of other occurrences that had reduced the market for the mall, and anticipated that anyone buying the facility might want to turn it to a different use. Therefore, it inserted in any new leases an early termination clause to protect future buyers, and in general tried to lease for shorter terms. It did not, however, as tenant alleged, lease for any other purpose or refuse retail leases. And it did not continue to invest heavily in promoting the mall.

The Court found that landlord's leasing and promotional decisions were undertaken reasonably and in good faith. Aetna took such actions for the purpose of extricating itself from an unsuccessful business venture. The Court cited the fact that Aetna had lost more than $50 million in twenty years at the Civic Center. The Court also considered the fact that for many years, Aetna spent enormous amounts of its own money to make the Civic Center a viable business venture, many times contributing more to the promotional fund than it was required to contribute. The tenant might have had a right to expect that landlord would not deliberately attack its business, and conceivably that it would not change from a retail concept during the term of tenant's lease, but tenant had no legitimate expectation that landlord would act contrary to its own self interest to maximize retail activity in the mall.

Moreover, the Court was persuaded by the number of factors beyond Aetna's control that contributed to the falling occupancy at the Civic Center: the deteriorating economic situation in downtown Hartford; the departure of Hartford Whalers; and the expansion of shopping malls in the suburbs. The court further concluded that there was no showing in this case either that the landlord set out to destroy the tenant with its actions or that anything that the landlord did or failed to do in fact had the adverse impacts on tenant's business that tenant claimed. Tenant was a cigar store. For the two years after landlord had begun a process of "underplaying" its retail purposes, the tenant did a record business because cigars had a sudden popularity. Thereafter, although landlord had not altered its activities from the prior two years, cigar interest faded and so did tenant's business.

Ultimately, the Court concluded that although Aetna pursued "its own self-interest in limiting its losses in the operation of the Civic Center, it did not do so because of a dishonest purpose, a furtive design or ill will toward the plaintiff."

In analyzing the CUTPA claim, the Court explained that a "violation of CUTPA may be established by showing either an actual deceptive practice…or a practice amounting to a violation of public policy…Whether a practice is unfair and thus violates CUTPA is an issue of fact." The Court collapsed its decision with regard to the CUTPA claim into its factual finding with regard to the claim about the implied duty of good faith. "The very same evidence upon which [the findings that the defendant acted in good faith] were predicated also provides the basis for the court's determination that the defendant did not engage in any conduct prohibited by CUTPA."

Comment 1: The court does not deny that there might be a duty on the part of the landlord to operate the mall in such a way as to further the objects of the contract that it had with the tenant. In fact, it states, in so many words, that the landlord did have such a duty.

[E]very contract carries an implied duty "requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement." . . . The covenant of good faith and fair dealing presupposes that the terms and purpose of the contract are agreed upon by the parties and that what is in dispute is a party's discretionary application or interpretation of a contract term.". . . To constitute a breach of [the implied covenant of good faith and fair dealing], the acts by which a defendant allegedly impedes the plaintiff's right to receive benefits that he or she reasonably expected to receive under the contract must have been taken in bad faith.. . . Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive.... Bad faith means more than mere negligence; it involves a dishonest purpose." (Citation omitted; internal quotation marks omitted.)

As the court concluded there was no breach of the duty of good faith and fair dealing here, the editor concludes that the court found no breach of any contractual duty by the defendant landlord. The case discusses the fact that the landlord had certain obligations to contribute to a promotional fund and to spend monies contributed by tenants for promotion, and also indicates that in the later years the landlord may not have contributed as much as it should have, but the editor will accept the court's apparent conclusion that there was no express violation of contract.

It is abundantly clear that, in any event, the court did not believe that the landlord's actions in fact led to the tenant's failure to generate enough revenue to satisfy its option rights or to remain profitable. So, "no harm, no foul."

Comment 2: Although the facts of this case did not support any claimed implied duty on the part of the landlord to promote retail activity in the mall, the case also does not really stand for the proposition that the landlord would never had such a duty. The editor is not a great fan of implied duties, but has elsewhere articulated the argument that there is justification for recognizing some minimal duty in these cases, and certainly the justification is equal to or greater than the "flip side" argument that landlords often make in favor of an implied duty on the part of tenants to operate continuously. The editor discussed what case law exists on this issue in an article: "Do Retail Landlords Have A Continuing Operation Duty?" - Probate & Property, Spring 2003. He has expanded this discussion in the recently published Randolph Edition of Friedman on Leases, Section 27.6.

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