Daily Development for
Monday, May 22, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/ TENANT; DUTY OF GOOD FAITH AND FAIR DEALING: Setting of rent for renewal periods of lease can constitute a breach of the implied covenant of good faith and fair dealing where landlord fixes rent on a basis that results in tenants theoretically paying twice for the same service, even though rent is stated as a flat amount and tenants have the choice to reject the renewal and avoid the rent. Ervin v. Amoco Oil Co., 885 P.2d 246 (Colo. App. 1994).

The case involved a suit brought by independent Amoco Oil dealers against Amoco. It appears to be a "pattern" class action - coming soon to your town. The Colorado Court of Appeals hit a home run for the dealers, affirming a damage award in excess of $2.5 million. Note, however, that the Colorado Supreme Court has granted certiorari.

The lease was for a one year renewable term. The landlord annually could adjust the rent for the renewal. The tenant got sixty days notice, and could terminate and refuse the renewal, thus avoiding the rent. In fact, the court does not make clear whether the objectionable rent figure was set on renewal or at the outset of the lease. One would assume that it was set on renewal, since otherwise it is even more difficult to understand what exactly the landlord might have done that breached its duty of good faith and fair dealing under the lease. How could the setting of the rent prior to the lease inception be a breach of that duty?

The problem with the rent was that, based upon its internal computations for establishing the rent, Amoco fixed the rent at a percentage of the value of all assets rented. Thereafter, however, Amoco added an additional charge for the service bays at the dealers' stations. Arguably the value of these bays was already reflected in the original rent computation. Note, however, that all of this was done internally at Amoco - the dealers were presented with a fixed rent that represented the sum of Amoco's figuring, whatever it was.

The Court of Appeals apparently regards this almost entirely as a jury issue, and does not indicate what actually gave rise to a duty to use any particular basis for determining what rent Amoco wished to demand. It does note that Amoco had a very powerful bargaining position, which made the implied duty of good faith and fair dealing "particularly applicable" - whatever that means. It approved a jury instruction that told the jury that the duty was "particularly applicable."

The court also ruled that merger and integration clauses in lease that stated that there were no implied covenants did not preclude recovery because the court found that a covenant of good faith and fair dealing is implied at law in every contract and the limitation of that implied covenant was not inconsistent with the terms of the agreement.

In another part of the case, the court found that there was also a cause of action when Amoco competed with its tenants by establishing company-owned gas stations that had lower costs and overhead, and thus charged less for their gasoline.

Comment: The editor's position on this case is predictable, at least on the good faith and fair dealing point. The duty of good faith and fair dealing, at least in commercial transactions, stops where the parties have specifically allocated contractual rights. Under this case, after the parties have agreed specifically to a specific rent (through the original negotiation or through acceptance of posted rent on renewal), the tenant can take the benefits of the contract and then argue that the price was too high. This sets freedom of contract on its head!!

Perhaps the court is saying that, notwithstanding the "renewal" language, the tenants were misled into making commitments and investments in year one that required them to accept any rent established in subsequent years, imposing some duty on the part of the landlord to charge rent only within reasonably predictable parameters. Such an analysis might be defensible. Note, however, that the case does not suggest that the landlord committed to charge only on the basis of a certain return on asset value - only that the landlord had voluntarily elected to use that method. The case is unclear as to whether and when this calculation method was made known to the tenants.

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