Daily Development for
Friday, October 23, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; EXTENSIONS AND RENEWALS: Landlord has no good faith duty to negotiate over rental terms in extension options, even when parties have reached written agreement on other basic terms of lease and have agreed to finalize their agreement in a final written contract.

Brown's Shoe Fit Co. v. Olch, 955 P.2d 357 (Utah App. 1998).

Tenant brought an action to enforce specifically a document that it alleged constituted a commercial lease. In the alternative sought to recover damages for the breach of this agreement, and for fraud and breach of an implied duty of good faith and fair dealing.

The document, entitled "Basic Legal Terms," set forth reasonably complete rental and premises terms for a three year lease, and provided that the lessee would have two three year options to extend. The document, however, stated specifically that the parties would execute a further, final agreement, and that the rental terms of the lease extensions would be established by the parties in that agreement. (Specifically, the parties had not agreed upon the gross sales figure to be reached before percentage rent became payable.)

Tenant alleged that the landlord and tenant treated this document as a binding agreement, that landlord showed it to a lender as support for landlord's efforts to get a loan to build the premises to be leased, and that tenant, with landlord's knowledge, acquired $170,000 worth of inventory and made a number of other expenditures in reliance upon the belief that there was a binding agreement. Later, however, when the landlord proposed the final written lease, it contained a number of terms that the tenant deemed "in bad faith and commercially unreasonable." When tenant refused to agree to these, landlord rented to another tenant at a higher rent, but without these "unreasonable" other terms. (The opinion does not describe the terms).

On summary judgment, the trial court dismissed lessee's claims of specific performance as to the two three year option periods outlined in the lease documents and also dismissed the actions for fraud and breach of contract, including the good faith and fair dealing claim. The court noted that the Basic Legal Terms document might express an enforceable three year lease, but did not contain sufficient expression of an agreement on rental to be specifically enforceable or to form the basis for an action for damages. The tenant had stipulated that if it could not obtain specific performance of the whole lease, with extensions, it would not ask for specific performance, as the lease was a "loser" without the potential to extend the term.

On appeal: Held: Affirmed.

The Utah Court of Appeals found that the document that lessee viewed as a commercial lease was in fact an "agreement to agree" and not a lease since it stated on its face that the terms set forth in the document were to be incorporated into a final lease document to be executed by both parties. The court went on to state that an agreement to agree is subject to the same analysis as a contract with the additional step of determining whether the agreement to agree would be enforceable if determined to be a final agreement.

The essential parts of a lease to establish validity under the statute of frauds include: identification of the property to be leased; the term of the lease; the rental amount; and the time and manner of payment, citing English v. Standard Optical Co., 814 P.2d 613, 616 (Utah App. 1991). The documents for the two extension periods did not specify the rental amounts nor did they provide for any mechanism to determine the amount of the rent. Without any way to determine the rental amount for the extension periods, the court held that the lease extension documents were too vague and indefinite for enforcement.

On lessee's claim for damages, the court held that since the lessee did not have an enforceable right to lease the premises during the two extension periods, lessee was not entitled to damages. The court did recognize that in some cases damages may be computed even if the terms of a contract are not certain enough to be specifically performed. The court speculated that the tenant's claimed damages for breach of the contract amounted to its reliance expenditures, but it concluded that the tenant had no reasonable basis to form a belief that it had a binding contract for the extensions, and it admitted itself that, absent the extensions, it would not have undertaken the reliance.

Finally, the court held against the lessee on its claims of fraud and breach of the covenant of good faith and fair dealing. As to the fraud claim, the court pointed out that the original document made quite clear that it was not the final statement of agreement of the parties and that the critical terms of rental for the extension periods had yet to be resolved. Further, the good faith and fair dealing duty applied only to the carrying out of contract obligations, and there was no contract obligation to grant an extension at any given rent.

Comment 1: It should be noted that the court discusses at some length the issue of whether it is appropriate to enforce a contract calling for "reasonable rent." Ultimately, it concludes that this would lead to too great a degree of judicial contract making. But it should be noted that this case did not involve such an agreement by the parties. They did not agree to fix a "reasonable rent." If anything, they agreed to negotiate a rent.

Comment 2: The discussion of the good faith duty to negotiate issue is very interesting. Note the tenant's allegations that the landlord had "phonied up" some issues to drive the tenant from the table so that it could enter into a more lucrative lease with others. These were dismissed on summary judgment. Utah is a strong "good faith and fair dealing" state, but the court here felt that the landlord had no duty to follow through and negotiate in good faith on the renewal rent term.

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