Daily Development for
Thursday, June 6, 1996

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

LANDLORD/TENANT; LANDLORD'S DUTY OF FAIR DEALING: Landlord has duty of good faith and fair dealing controlling its discretion in setting of rent for renewal periods of lease, and landlord breaches that duty when it establishes rent based upon a formula that court views as "unfair," even though rent is stated as a flat amount and tenants have the choice to reject the renewal and avoid the rent. Amoco Oil Company v. Ervin 908 P.2d 493 (Colo. 1995).

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. Ervin v. Amoco Oil Co., 885 P.2d 246 (Colo. App. 1994). The Colorado Supreme Court here affirms that portion of the decision dealing with good faith and fair dealing, but reverses other aspects of lower court ruling on the issue of tortious interference. In sum, the dealers still got a million dollar payday.

The terms of the leases in question varied from one to three years. The landlord customarily offered renewal terms. Even in the three year leases, the landlord annually could adjust the rent. The tenant got sixty days notice, and could terminate and refuse the renewal, thus avoiding the rent. 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. 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 concludes that the dealers had a legitimate expectation that Amoco would use a formula for setting the annual rent that fairly took into account the various costs and benefits of the parties. It reaches this conclusion not only with regard to the three year term leases, in which it could be argued that the landlord's rent setting "option" was a contract privilege (even though tenant could terminate if not satisfied) but also with regard to the annual leases, in which the setting of rent on renewal was not part of the old contract at all, but simply a new offer by the landlord.

The court also ruled that merger and integration clauses in lease that stated that there were no implied covenants did not preclude recovery because 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.

Comment 1: Colorado lawyers seem to view this case as sui generis - limited the the special circumstance of gasoline franchising. The editor, typically "Chicken Little" about precedential impact of supreme court opinions on the rough justice meted out by trial courts, is far less sanguine. The case sets a frightening precedent in several regards. First, landlords given absolute discretion in pricing, subject to notice and tenants' opportunity to cancel, have an implied duty to be "reasonable" in setting the price. How we reach the conclusion as to what is reasonable is a very difficult question, but certainly there are few business parties who would be comfortable with a jury's "second guessing" the reasonableness of their prices.

Comment 2: One particularly disturbing aspect of the case is the court's failure to differentiate between the one year leases and the three year leases. Although it might be argued that the landlord's setting of new annual lease rates is part of the parties' working out of the agreed upon three year arrangement (although the editor wouldn't agree) it does not appear that the same argument can even be raised when the landlord is setting the rent on renewal of a one year term.

The court must be concluding that there is, in fact, not only an "implied duty," but in fact an "implied lease," binding the landlord to a longer term than one year (although we have no idea how long that term might be.

Comment 3: Note that the Colorado Association of Trial Lawyers got involved in this case as amicus. They know where their bread is buttered. Isn't it past time that the organized real estate bar ought to be participating more actively in appealing the proliferation of irresponsible "good faith and fair dealing" cases around the country. Many of these cases show know apparent awareness of the expectation of parties in the real estate marketplace. That may be because most judges are former prosecutors or tort lawyers. If transactions lawyers aren't represented on the bench, then they must work to provide the necessary factual background to judges who lack it.

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