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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