Daily Development for Wednesday, September 22, 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

Note that there are two reports covering different issues in this case. Ed.

LANDLORD/TENANT; LANDLORD’S REMEDIES; WAIVER: Language in lease that states that in the event of tenant default, landlord, at its option, may terminate the lease or re-enter and relet in mitigation of damages, is not a limitation on landlord’s right, when tenant defaults in rent, to leave tenant in possession and sue for the rent.

Bowdoin Square v. Winn-Dixie Montgomery, Inc., 873 So. 2d 1091 (Ala. 2003)

The landlord’s center was struggling. Its largest tenant, Wal Mart, had vacated a 90,000 square foot space, although it was continuing to pay base rent. Its second anchor tenant, Winn Dixie, found that the Wal Mart departure significantly undercut its profitability, and went dark in its 20,000 square foot space, again continuing to pay rent.

Wal Mart proposed to the landlord that Wal Mart be permitted to sub lease its space to Hertz for a call center. In addition, it proposed that Hertz be permitted to use as an employment center the 6000 square feet of space between the Wal Mart leased premises and the Winn Dixie leased premises. The landlord was amenable to this, but noted that a cross easement agreement provided that the property in the center was to be used only for purposes traditionally associated with retail shopping centers (except for a small amount of square footage that specifically could be used for office purposes.) It took the position that, although the landlord was the party responsible for enforcing the cross easement agreement, Winn Dixie would have to approve the uses proposed by Wal Mart before the landlord would agree to permit them.

While Winn Dixie was evaluating the request to consent to these uses, Hertz obtained the keys to the 6000 square feet, remodeled them, and started using the area for a hiring center. The landlord specifically noted that it had not consented to this use, that its consent was contingent upon Winn Dixie’s consent, but it did nothing to oust Hertz either. The landlord told its attorney to escrow the Hertz rent on the 6000 feet until the issue could be resolved. Later, still before Winn Dixie had indicated formally any objection to the change in use, Wal Mart permitted Hertz into the Wal Mart space to begin its call center.

A few months later, Winn Dixie formally notified the landlord that the changes were not in its best interest in that they detracted from the leaseability of Winn Dixie’s space due to the change in use and to the impact on available parking. The Winn Dixie letter stated that the landlord was in breach of the Winn Dixie lease and that it would commence withholding rent immediately. Thirty days later (the notice period for landlord default), Winn Dixie informed the landlord that it was terminating the lease entirely.

The landlord then brought suit for accrued and accelerated rent until the end of the lease. The landlord apparently did not deduct from its claim the fair rental value of the premises during the balance of the term because it concluded that under Alabama law it had no duty to mitigate.

The tenant argued that, whatever Alabama law might be absent the provision in the lease, that provision specifically limited the landlord’s options to a rescission of the lease (in which case landlord would get no future rent) or a seizure of the premises and a reletting in mitigation, with the landlord collecting only the difference between the mitigation proceeds and the contract rent as the months went by.

The trial court found that the landlord had breached the lease, but that this did not justify the tenant in terminating the lease, so that the landlord did have a remedy for the tenant’s failure to pay the rent. But the court held that the language discussed about specifically limited the landlord’s options for the tenant breach to the two listed options, so it denied any claim for the rent or damages.

On appeal, the Alabama Supreme Court upheld the finding that there was a breach by the landlord, and ruled that Alabama follows the rule that a material breach by the landlord may justify a commercial tenant in terminating the lease, in effect, for constructive eviction and breach of the covenant of quiet enjoyment. But it held that whether the tenant was justified in concluding that there had been a sufficient material breach to warrant the claim that it had been “commercially ousted” by the landlord was a jury question, and remanded for a determination of whether the tenant had legitimately terminated the lease or had illegitimately abandoned it. If there was an abandonment, the Supreme Court noted, the landlord would have the right to leave the premises vacant and collect the rent as it fell due, but it could not sue for accelerated rent, at least absent any right in the lease permitting it to do so.
The court then turned to the question of whether, assuming that the jury found an abandonment, the lease language prevented the landlord from leaving the premises vacant and suing for the rent as it fell due. Despite the fact that the tenant presented authority from two other jurisdictions that appeared to involve leases with very similar language, both of which had held that the landlord’s rights were restricted to the listed options, the court held that there was no such limitation in the instant lease. The court stressed that the clause said that the landlord “at its option” could elect either of the two remedies, and it concluded from that language that the parties intended that the landlord had other options as well. Therefore if there were to be a finding of abandonment, the tenant would be liable for the rent as it fell due for the balance of the 20 year term.

A dissenting judge argued that the language establishing the two options for the landlord was ambiguous and that extraneous evidence ought to be considered. In the dissent’s view, the clause should not have been interpreted for the landlord as a matter of law.

Comment 1: Cute issue. The editor believes that the words “at its option” did not necessarily indicate that the landlord had the option to reject either of the listed alternatives. The editor tends to side with the dissenter, who argued that the language was ambiguous in context and that external evidence should have been admissible. Certainly the landlord would have been better served if the lease language had provided specifically that the landlord had these options in addition to any ordinarily available at law or equity.

Comment 2: The majority opinion responded to the dissent’s argument by noting that even if the language were to have been found ambiguous, it had been drafted by Winn Dixie, and that therefore it should be construed against the tenant’s interest. Readers will recall that the general rule that ambiguous provisions of commercial leases ought to be construed against the “drafter” is on the editor’s list of really dumb ideas. All sides to a commercial real estate agreement ought to be viewed as equally responsible for any ambiguities remaining after they have studied and agreed upon the lease language, regardless of which party’s scrivener actually wrote the words. Other DIRTers have disagreed. The New York decision in Citibank v. 666 Fifth Ave. Ltd., 769 N.Y.S.2d 268 (A.D. 1 Dept. 2003), supports the editor’s position. It was the DD for 8/12/04, which should be on the DIRT website if the editor had an assistant who would be looking after these matters. He doesn’t just now.

LANDLORD/TENANT; COMMERCIAL; USE RESTRICTIONS: Provision in lease that premises in shopping center must be used for purposes “normally found in shopping centers” must be construed as of the time that the lease agreement is entered into. Consequently, proposed call center is a breach of the restriction, as such things didn’t exist at the time of the lease, even if modern shopping centers might incorporate such uses. Bowdoin Square v. Winn-Dixie Montgomery, Inc., 873 So. 2d 1091 (Ala. 2003), discussed in this Report under the heading: “Landlord/Tenant; Landlord’s Remedies; Waiver.”

Comment: For a different spin on this interpretative approach, see Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 02 Civ. 7378 ( S. D. N.Y. 2/25/04), the DD for 3/29/04, where the court held that a mortgage requirement for “all risk” insurance should not be viewed as requiring the same type of insurance that regularly was sold as “all risk” at the time of mortgage, but rather expressed the parties’ view that the mortgagor would be required to obtain that type of “all risk” insurance as traded in the market under that title from time to time as the insurance was renewed.

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