Daily Development for
Monday, September 9, 1996

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

The beginning of this report is just the narrow legal point addressed in the case, but the juicy parts come later.

LANDLORD/TENANT; COVENANT OF QUIET ENJOYMENT; USE RIGHTS: Landlord is liable to tenant for breach of tenant's quiet enjoyment when tenant is unable to carry out its principle business due to landlord's earlier agreement to a "radius clause" prohibiting such businesses on the premises.

Shop & Save Warehouse Foods v. Soffer, 918 S.W.2d 851 (Mo. App. 1996)

The case is full of interesting stories, and the actual legal issue at stake may not be as interesting as the byplay among the parties. Nevertheless, it is worth noting. Landlord argued that the covenant of quiet enjoyment should not apply because the tenant was not prohibited from occupying the premises, only from carrying out the grocery operation that was its purpose in leasing the premises to begin with. The lease contained a permissive use clause that did not restrict the tenant's activities to grocery uses. The court held, with very little discussion, that a restriction of the tenant's principle activity is the equivalent of an ouster and actionable as a breach of quiet enjoyment, even where the tenant was free to undertake other activities. The tenant was able to recover more than $1 million in damages for anticipated lost profits.

The landlord also argued that the tenant was barred from recovery because it knew of the radius clause prior to entering into the lease. The tenant did know of the clause, but the landlord had a little problem in that it had induced the tenant to look past the problem. The landlord had hands that might be described as "unclean." Here's the story:

Landlord operated a shopping center across the street from the subject property. The grocery tenant in that center had a radius clause restricting landlord's use of any property within a one mile radius for grocery purposes. The radius clause had an exception if the property was owned by the mortgagee. Obviously this exception was designed to give the mortgagee comfort should it be called upon to foreclose on the center. But the landlord's lawyers devised a scheme whereby the landlord basically would pay off existing mortgages, create new mortgages through controlled entities, and arrange for transfer of title to such entities (the court is vague about the precise details of the scheme). Thus the property would be "owned" by a mortgagee, and the landlord could dodge the radius clause.

As any thoughtful lawyer would know, a court of equity might see through such a subterfuge and refuse to apply the exception to the radius clause in such a case, viewing it as beyond the parties' true intent. The new tenant, aware of the radius clause, was properly dubious that the landlord's proposed scheme would work. But the landlord obtained a legal opinion from an attorney who apparently was a well known real estate specialist. This attorney wrote an opinion letter that stated:

"It is the unequivocal opinion of this office that the terms of the [old tenant's] lease . . . would not be violated and provide a reason for the [old tenant] to terminate the [old] lease if a Mortgagee of the Shopping Center in which the leased property is located acquired additional property within the one mile specified in the [radius clause] and leased the property to a food store . . .

There are any number of methods that could be used to arrange to have the Mortgagee hold the title to the property within the one mile radius to be used for food sales that would be permitted without causing the lease tenant to have the right to terminate the lease. Should you desire the assistance of this office in structuring such an arrangement, please feel free to call the undersigned."

In a cover letter transmitting this "unequivocal opinion," the attorney who wrote it informed the client landlord that there were many possible rebuttal arguments that might be used to counter the arguments upon which the lawyer based his opinion. Prominent among such arguments was the fact that the scheme might be seen as contrary to the language and intent of the lease.

The landlord supplied the proposed new tenant with a copy of the lawyer's formal "unequivocal" opinion, but failed to mention the qualifications set forth in the cover letter. The new tenant agreed to lease the property across the street, relying upon the exception in the radius clause.

The landlord then retained the attorney who wrote the "unequivocal opinion" to assist it in making the necessary transfers. This lawyer, after writing the letter but before working on the carrying out of the scheme, had joined a major and very prestigious law firm as a partner. We'll call the firm Big Firm. Big Firm represented the new tenant (although not on these lease negotiations), but nevertheless appeared to feel comfortable with its partner doing this work for the landlord, completing the scheme by which the landlord carried out a plan that it arguably had represented to the new tenant was safer than there was reason to believe.

Predictably, the old tenant sued to enforce the radius restriction. Big Firm represented the landlord, apparently having obtained waiver letters from the landlord [and possibly the hew tenant, although the court doesn't make this clear.] The old tenant won an injunction against the new lease. While this litigation was pending, Big Firm, in an audit letter in connection with its representation of the new tenant's parent, opined on the litigation and stated that if it was successful the new tenant likely would suffer no income loss because it would be able to recover in damages from the landlord.

Also predictably, the new tenant did sue the landlord (but not Big Firm) in the action reported here, and did win a million dollar verdict. The landlord cross complained against the lawyer and Big Firm for malpractice. On this aspect of the litigation, the jury found for the defendant lawyers. On appeal, there were several interesting rulings:

First, the landlord attempted to get the audit letter admitted into evidence, arguing that the letter influenced the new tenant to sue the landlord when the injunction was granted. The evidence showed that the new tenant's general counsel received a copy of the audit letter, but the general counsel testified that it did not influence him in deciding to sue the landlord. The court held that the trial judge was within his discretion excluding the letter, since it was apparent that the letter had not influenced the lawsuit against the landlord.

Second, the landlord argued that the letter was relevant to demonstrate that Big Firm had conflicting loyalties The court ruled that at the time the letter was written there was no conflict because the new tenant and the landlord had parallel interests and, in any event, the landlord had executed a waiver of conflict.

Comment 1: We should keep in mind that the jury found for the defendant lawyers. The plaintiff landlord didn't prove its case. Further, the skimpy report of the appeals court decision cannot possibly give the full context of the ethical decisions that were made here. Finally, the court does not indicate whether the lawyer who wrote the letter was aware of the uses to which the landlord intended to put it (although one wonders what other uses he could have foreseen.) Having said all that, the editor must comment that for a lawyer to deliver an "unqualified opinion," even though the lawyer in fact has - and expresses separately - qualifications to the opinion, appears to be highly questionable conduct, inviting others to use the lawyer's reputation to commit fraud.

Comment 2: At the time that the lawyer wrote the letter in question, he was not associated with Big Firm. Thereafter, however, if Big Firm continued to represent both parties with knowledge of what its partner had done, then the editor has difficulty understanding how it had not undertaken a conflict of interest that could not be resolved with waiver letters. Leaving aside the huge questions of loyalty, there is the issue of information. In the course of its representation of the landlord, Big Firm might have discovered numerous details of the landlord's plans to induce the new tenant to sign the lease without full knowledge of the risk. In the course of its representation of the tenant, Big Firm might have discovered information that would have been useful to the landlord in demonstrating that the tenant did not rely upon the landlord's representations. In either case, Big Firm would have had a duty of loyalty to make that information available to the other client, as it was fully aware that there would likely be a second lawsuit in which the parties would be adversaries.

Comment 3: The appeals court, relying heavily on the presumption of validity of the trial court's discretion in excluding the letter, does not have occasion to discuss either of the above issues at great length. But its opinion does appear to condone an ethical situation which, if the court's bare recitation of facts was all that occurred, should not be condoned.

As indicated above, there undoubtedly is more to the story, and the editor is not suggesting any actual malpractice or unethical conduct by anyone. We are dealing here with hypothetical facts. But these facts cry out for further explanation. This was not "business as usual."

The DIRT editor would love to hear from others who feel that the conduct described in the opinion does not raise important ethical issues. If we don't talk about ethical issues amongst ourselves, even when respected and prestigious lawyers are involved, then ultimately these issues will be discussed in less friendly terms in other forums, including the court of public opinion.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

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