THE COVENANT OF GOOD FAITH AND FAIR DEALING IN LEASES (USE PROVISIONS)

Mark A. Senn, Esq.

TABLE OF CONTENTS

Page

I. INTRODUCTION...... 1

II. IMPLIED COVENANTS ...... 1

III. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING ...... 1

IV. WHERE THE COVENANT APPEARS ...... 2

V. SCHOLARLY VIEWS...... 3

VI. CASE LAW ...... 4

A. CONTINUOUS OPERATION...... 4 1. There is no implied covenant of good faith and fair dealing...... 4 2. There is no covenant where there is a contrary provision ...... 4 3. When there is no implied covenant of continuous operation, the covenant of good faith and fair dealing will not support it ...... 5 4. The covenant does not apply when there is a change in the manner of use ...... 5 5. The covenant does not require the landlord to lose money...... 6 6. Occasionally, the covenant requires continuous operation...... 7 B. CHANGES IN USE (NON-RETAIL LEASES)...... 8 C. LANDLORD’S USE OF ITS PROPERTY ...... 9 D. LANDLORD’S RIGHT OF ACCESS ...... 10 VI. CONCLUSION ...... 10

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I. INTRODUCTION

The implied covenant of good faith and fair dealing arises often in the enforcement of use provisions in leases. The ensuing discussion considers the covenant as it arises in leases generally and in use provisions specifically. After an examination of the origins and scholarly views of this covenant, the case law illustrates its role and effect. The case law permits the conclusion that the covenant invites judges to redraft leases but rarely leads to that result and that the covenant is not necessary to the decision of the cases in which it is involved.

II. IMPLIED COVENANTS

A leading California case held that implied covenants will be found if (A) after examining the lease as a whole the covenant is so obvious that the landlord and tenant had no reason to state it, (B) an implication arises from the language of the lease, and (C) there is a legal necessity. Lippman v. Sears, Roebuck & Co., 44 Cal.2d 136, 280 P.2d 775 (1955). That case involved a lease in which the minimum rent was insubstantial and the expected percentage rent was intended to bring the total rent to a fair market rent. In that situation, the court said, the tenant’s covenant to operate in good faith will be implied in order to assure that the landlord receives percentage rent. To be more precise, the tenant was required to operate as the lease contemplated or as it had and not to discontinue operations. Good faith was immaterial. The loose employment of those words recurs. This doctrine is also called the substantial (or insubstantial) minimum rent doctrine.

III. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

As early as 1933, a New York case suggested that in every contract there is an implied covenant to refrain from conduct calculated to or having the effect of injuring or destroying the rights of the other party to receive the fruits of the contract; this was called “good faith.” Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 188 N.E. 163 (1933).

The Restatement (Second) of Contracts, § 205 provides “every contract imposes on each party a duty of good faith and fair dealing in its performance and its enforcement.” The comments to § 205 refer to the definition of “good faith” in the Uniform Commercial Code, which says, “‘good faith’ means honesty in fact in the conduct or transaction concerned.”

A Connecticut court has described good faith in this way:

The phrase “good faith” is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith”

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because they violate community standards of decency, fairness or reasonableness.

MC Corp v. Deprofio, 1991 W.L. 303793 (Conn. Super. 1991) at 17.

Professor Corbin has described the covenant: “While it is true that courts impose an obligation of good faith in every aspect of the contractual relationship . . . the obligation of good faith is ‘constructive’ rather than ‘implied’ because the obligation is implied by law and cannot be disclaimed.” Corbin on Contracts, § 654A(B) (2nd ed. 1993).

Despite the nearly universal implication of this covenant in leases, a Texas appellate court has followed that state’s supreme court in specifically rejecting the implication of a general duty of good faith and fair dealing in all contracts where there is no special relationship between the parties. Trinity Professional Plaza Assoc. v. Metrocrest Hospital Authority, 987 S.W.2d 621 (Tex. – Eastland 1999). A United States district court has concluded that Indiana law does not imply a covenant of good faith in an unambiguous contract, suggesting that the covenant is an aid to construction of an ambiguous one, but not a rule of law. Rothe v. Revco D.S., Inc., 976 F. Supp. 784 (S.D. Ind. 1997).

The covenant is applicable to the exercise of discretion in the performance of a lease and, conversely, is not relevant to required conduct as to which no discretion is allowed. Consequently, as the cases often say, an express covenant will preclude an implied covenant on the same matter. The problems arise, however, when the covenant of good faith and fair dealing creates an obligation to act in a way that was not expressly required and perhaps impliedly not required.

IV. WHERE THE COVENANT APPEARS

The covenant arises in leases in connection with provisions dealing with (in approximate descending order of frequency): use; assignments1; renewals2; options3; subordination4; pass-throughs5; franchisor-franchisee relations when a lease is also involved6; condition of the premises7; holding-over8; termination for convenience9; satisfaction of contingencies10; mitigation11; conduct12; changes in signage13; and recapture.14

This discussion considers only the role of the covenant in use provisions. However, use provisions and assignment provisions often arise in tandem because a tenant proposes to assign its lease for a different use after its own use has proven unsuccessful. As a result, many of the cases in this discussion involve both uses and assignments. The common joinder of these provisions is best illustrated by the two California statutes that treat them quite similarly. Civil C. §§ 1997.240 – 1997.270 (regarding use) and Civil C. §§ 1995.010 – 1995.340 (regarding assignments).

Almost all of these cases arise in retail leases in which the nature of the user and use is an important part of the agreement. Two cases arose in leases of medical space in which the user was, of course, a significant consideration.

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V. SCHOLARLY VIEWS

In an early and influential law review article, Professor Summers offered what has become known as the “excluder analysis”:

Good faith, as judges generally use the term in matters contractual, is best understood as an “excluder” – a phrase with no general meaning or meanings of its own. Instead, it functions to rule out many different forms of bad faith. It is hard to get this point across to persons used to thinking that every word must have one or more general meanings of its own – must be either univocal or ambiguous.

Summers, “‘Good Faith’ in General Contract Law and the Sales Provisions of the Uniform Commercial Code,” 54 VA L. Rev. 195 (1968). Although instances of bad faith are perhaps easier to see, good faith can be defined – perhaps vaguely – as it was in comment a to § 205 of the Restatement (Second) of Contracts as being “faithfulness to an agreed common purpose and consistency with the justified expectation of the other party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness.” See Mc Corp., 1991 W.L. 303793 at 17.

A scholarly comment by Professor Burton is:

The good faith performance doctrine may be said to permit the exercise of discretion for any purpose – including ordinary business purposes – reasonably within the contemplation of the parties. A contract thus would be breached by failure to perform in good faith if a party uses its discretion for a reason outside the contemplated range – a reason beyond the risks assumed by the party claiming a breach.

Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faith,” 94 Harv. L. Rev. 369, 385-86 (1980).

Believing that those scholarly approaches and the case law did not provide sufficient guidance, Professors Diamond and Foss proposed standards to reduce the ad hoc adjudication of these matters. Diamond and Foss, “Proposed Standards for Evaluating When the Covenant of Good Faith and Fair Dealing has Been Violated: A Framework for Resolving the Mystery,” 47 Hastings L.J. 585 (1996). Those standards are divided into one category involving commercial unreasonableness and into another involving dishonesty. They would suggest that is commercially unreasonable to cause material injury to another unless it is necessary to avoid material injury to oneself and that it is commercially unreasonable to use a harsher alternative than another that would give oneself the same result. Dishonesty would involve misrepresentation of facts or circumstances when evaluation is up to the actor’s

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discretion, the inducement of an inadvertent surrender of contractual rights, the failure to disclose before contracting the actor’s intention to act in a way that would have led the other party not to contract with the actor, and unconscionable conduct.

One practitioner has suggested that tenants who do not have reasonable periodic access to the operations of their buildings or the related books and records should be able to assert tortious breach of the covenant and recover punitive damages. Barak, “Protecting Tenants with an Implied Covenant of Good Faith,” Prac. Real Est. Law. (July 1987), 27. There was not then, and is not now, case law to support this suggestion.

Finally, of particular relevance to this discussion is Patrick A. Randolph, Jr.’s “Going Dark Aggressively,” Prob. & Prop. (November/December 1996), 6. Professor Randolph concludes in part: “Once the principle of good faith and fair dealing raises its head, however, lease language often goes out the window.”

VI. CASE LAW

A. Continuous operation

Although there are a great many cases addressing an implied covenant of continuous operation, this discussion considers only those in which the covenant of good faith and fair dealing is one of the bases, or the only basis, for requiring continuous operation.

1. There is no implied covenant of good faith and fair dealing.

The existence of a covenant of good faith and fair dealing is reduced to a ritual recitation in almost all the cases. However, Texas seems to have rejected it, Trinity Professional Plaza, and Indiana seems to have made it an aid to construction, Rothe.

2. There is no covenant where there is a contrary provision.

In an early New York case, the tenant moved its operations across the street nine months before the end of its term while continuing to pay its base rent but not, of course, percentage rent. The court did not believe it could imply an obligation to occupy the premises or pay the percentage rent. It said: “The requirement of good faith and fair dealing, though always incumbent upon contracting parties, cannot, however, be turned into a vehicle for the wholesale supplying of terms to an agreement that a disappointed party might, in retrospect, have inserted.” Tuttle v. W.T. Grant Co., 171 N.Y.S.2d 954 (1958). Unfortunately, the court continued by saying: “The obvious example in invoking the covenant of good faith is where the tenant retains the advantage of the leased location, but causes a diversion of sales to another location to keep gross sales from the premises at a minimum.” Id. at 959. That statement was not only the situation before the court (despite its contrary ruling), but has become the recurrent circumstance in which the covenant has been alleged. The court was persuaded by the tenant’s right to sublease the premises and by the absence of an express covenant that the lease could easily have included.

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Similarly, the Supreme Court of Oklahoma found that the express provisions of the lease agreement negated the implication of a covenant to operate. Mercury Investment Co. v. F.W. Woolworth Co., 706 P.2d 523 (Okla. 1985). Curiously, there was no express provision that tenant did not have to operate continuously, but rather the implication from the express provisions that it was not obligated to do so. The court mentioned the absence of a guaranteed level of sales, the integration of all previous negotiations into the lease document, and the specific remedy provided in the event of the tenant’s vacation of the premises. Both Tuttle and Mercury Investment are clear in not enforcing an obligation that was not expressed in the lease.

3. When there is no implied covenant of continuous operation, the covenant of good faith and fair dealing will not support it.

Several cases have reached the sensible conclusion that, when there is no implied covenant of continuous operation on the basis of the terms of the lease, there is no continuous operation on the basis of the covenant of good faith and fair dealing. Carter v. Safeway Stores, Inc., 744 P.2d 458 (Ariz. App. 1987); Frederick Business Properties Co. v. Peoples Drug Stores, Inc., 445 S.E.2d 176 (W. Va. 1994); Plaza Associates v. Unified Development, Inc., 524 N.W.2d 725 (Minn. App. 1994). In each of these cases, the tenant prevailed. In Carter, the tenant closed its store because the space was insufficient and competition was eroding its sales; it had never paid percentage rent. In Frederick Business Properties, the tenant relocated near its vacated space and the landlord lost percentage rent that the tenant had been paying. The court was persuaded by the substantial minimum rent, the active negotiation of the lease, the tenant’s rights of transfer, and the merger provision. In Plaza Associates, the court relied on many of the factors present in Frederick Business Properties. These cases decline to use the vague covenant of good faith and fair dealing in lieu of the clear and implied covenant of continuous operation when the latter is not found.

4. The covenant does not apply when there is a change in the manner of use.

When the landlord is paid a percentage rent based on gross sales, the landlord’s goal is for the tenant to maximize gross sales. On the other hand, the tenant’s goal is to increase profits. When the tenant can increase its profits while decreasing its gross sales, tension will unavoidably arise. This occurs when the tenant does not use all of the rented space for retail sales, Goldblatt Bros., Inc. v. Beneficiaires of American Nat’l Bank and Trust Co. of Chicago Land Trust No. 7906, 766 F.2d 1136 (1985), or when the tenant begins to sell lower quality goods of the same kind permitted under the lease, B.M.B. Corp. v. McMahan’s Valley Stores, 869 F.2d 865 (5th Cir. 1989). Coincidentally, both cases involved furniture stores. In Goldblatt, the court said only that it was not bad faith and not a default requiring cure and compensation as a condition to the assignment of the lease in bankruptcy. In B.M.B. Corporation, the landlord was unreasonable in declining its consent to an assignment to a lower quality furniture store because the tenant had not promised to maximize percentage rent. To rule otherwise would have been to allow the landlord to improve its position as a result of the assignment.

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5. The covenant does not require the landlord to lose money.

Courts have held repeatedly that the landlord’s refusal to consent to an assignment in order to improve its position breaches the covenant of good faith and reasonableness. Toys-R-Us, Inc. v. NBD Trust Co. of Illinois, 1995 W.L. 591459 (N.D. Ill.). On the other hand, when the landlord’s consent is required, the landlord is reasonable to refuse a change in use that will result in reduced percentage rent. John Hogan Enterprises, Inc. v. Kellogg, 231 Cal. Rptr. 711 (Cal. App. 4 Dist. 1986) (the landlord refused to consent to a change from a ready-to-wear shop to an antique store that was not expected to generate percentage rent); Jones v. Andy Griffith Products, Inc., 241 S.E.2d 140 (N.C. 1978) (in which the landlord refused a change in the use from a successful restaurant that was paying percentage rent to a radio store that was not expected to do so); Haack v. Great Atlantic & Pacific Tea Co., 603 S.W.2d 645 (Mo. App. 1980) (in which the landlord refused to allow a sublease in which it was not likely that the furniture distributor subtenant would approach the gross sales necessary to generate percentage rent under the grocery store – sublandlord’s lease); Newman v. Hinky Dinky Omaha-Lincoln, Inc., 512 N.W.2d 410 (Neb. App. 1994) (in which the landlord could not be liable for refusal to consent to a sublease to a subtenant that was unlikely to pay percentage rent). The court in Newman held:

We hold that in the context of a percentage lease, where a percentage rent provision is a crucial component of the lease and where a lessor withholds consent to an assignment or a sublease on grounds that the proposed assignee or sublessee will be unable to provide the anticipated income from percentage rent, the lessee bears the burden of proving that the lessor was unreasonable in refusing to consent to the assignment or sublease. Although we have given deference to the trial court in our review of its factual findings, . . . we find clearly wrong the trial court’s determination that [landlord] was unreasonable in withholding consent. Instead, we find that [tenant] failed to meet its burden of proving that [landlord] was unreasonable in refusing to consent to the transactions at issue.

Id. at 419.

Although these cases mention the covenant of good faith and fair dealing, there seemed to be no need to rely upon it because they were decided on the basis of reasonableness with the covenant used in a supporting role or carelessly in loose language. It was mentioned, in fact, only to be negated as a basis to challenge landlord’s reasonable conduct. On the other hand, in Worcester-Tatnuck Square CVS, Inc. v. Kaplan, 601 N.E.2d 485 (Mass. App. Ct. 1992), a Massachusetts appellate court did not find it necessary to reach good faith in holding that it was reasonable for a landlord to refuse a proposed sublease in which it was not assured of receiving the same percentage rent that it had been receiving.

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In line with these decisions in which the landlord stood to loose money as a result of the proposed change of use, a California case held that a landlord was not in breach of the covenant for its refusal to consent to a sublease to a user that competed with it. The landlord was not improving its position, but maintaining the agreement it had reached with the tenant. Pay ‘n Pak Stores, Inc. v. Superior Court, 258 Cal. Rptr. 816 (Cal. App. 6 Dist. 1989). Again, the covenant was unsuccessfully alleged as a way to frustrate reasonable conduct.

When the tenant has an unrestricted right to sublease, the landlord cannot successfully allege an implied covenant that the tenant will only assign to a user that is likely to pay the same percentage rent as the tenant. Williams v. Safeway Stores, Inc., 424 P.2d 541 (Kan. 1967). The court gratuitously mentioned that the tenant’s conduct did not amount to “bad faith,” there being no allegation of an implied covenant of good faith.

6. Occasionally, the covenant requires continuous operation.

The cases implying continuous operation on the basis of a covenant of good faith do so either because of imprecise writing or because of an inexplicable need to support a conclusion that has been reached otherwise. In College Block v. Atlantic Richfield Co., 254 Cal. Rptr. 179 (Cal. App. 2 Dist. 1988), a California appellate court considered a gallonage lease with 39 months remaining before the end of the term. Although it did not use the expression “good faith and fair dealing,” it did say that there was an obligation to operate in good faith, which meant that it could not close without paying the lost percentage rent, relying on Lippman.

In Slater v. Pearle Vision Center, Inc., 546 A.2d 676 (Pa. Super. 1988), the court again did not use the term “good faith and fair dealing,” but rather the “doctrine of necessary implication,” which provides:

In the absence of an express provision, the law will imply an agreement by the parties to contract to do and perform those things that according to reason and justice they should do in order to carry out the purpose for which the contract was made and to refrain from doing anything that would destroy or injure the other party’s right to receive the fruits of the contract.

Id. at 679; Lippman mentions “legal necessity” as a base for implied covenants. The court was influenced by the New Jersey cases regarding the interdependence of a development and the insubstantial minimum rent. Columbia East Associates v. Bi-Lo, Inc., 386 S.E.2d 259 (S.C. App. 1989) involved a tenant “going dark aggressively,” that is, moving to a competing shopping center, continuing to pay rent, and refusing the use of its old space for use competitive with it. Despite its conclusion that the tenant was obligated either to operate a supermarket or sublet to another for operation of a supermarket, the court went on to say that, “[w]e further find that the requirement of continuous operation is one of good faith.” Id. at 263. This is unnecessary to its decision, but recited nevertheless.

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In Lagrew v. Hooks-Superx, Inc., 905 F. Supp. 401 (E.D. Ky. 1995), the tenant again went dark aggressively opening a new store while keeping its old premises vacant. The court found an implied covenant of continuous operation because the shopping center was designed to be full of going concerns, the fixed rent did not provide a hedge against inflation, the percentage rent became substantial in relation to base rent, the lease permitted only a small range of subtenants, and the tenant had an exclusive use. The lease stated, “[n]o obligation not stated herein shall be imposed by either party hereto.” Id. at 407. The supermarket tenant relied on this provision and its right to retain fixtures in negating any implied covenant. The court called the quoted language “an oblique reference” and characterized the tenant’s conduct as bad faith. Id. This case does not turn so much on the covenant of good faith and fair dealing as it does on the tenant’s bad faith and the court’s dismissal of the tenant’s defense of “good faith” breach as no defense to the claim.

In a thoughtful decision, again involving a tenant’s decision to go dark aggressively by the substitution of a warehouse discount box store in place of a well-known grocery operator, a Utah appellate court upheld the jury’s determination that the tenant breached the covenant of good faith and fair dealing by changing the use of the premises in that way. Despite the lease provision allowing the tenant to operate “any retail selling business,” the court found that the exercise of its discretionary power had breached the covenant because the substitute operator was a subsidiary of the tenant that had not previously operated, that the tenant did not want to be associated with it by name, that it had not expected would operate at a break-even point or produce percentage rent, and that was inappropriately placed in the shopping center. Olympus Hills Shopping Center, Ltd. v. Smith’s Food & Drug Centers, Inc., 889 P.2d 445 (Utah App. 1994). This case turns entirely on the covenant of good faith and fair dealing because it seemed incontrovertible that the lease gave the tenant the right to make the changes that it had. Opinions of this case will divide along the lines of personal preference when Professor Randolph’s observation is recalled: “Once the principle of good faith and fair dealing raises its head, however, lease language often goes out the window.”

B. Changes in use (non-retail leases)

Although almost all of the cases involve retail uses, two cases arose in the context of medical services. In one, Trinity Professional Plaza, the Texas appellate court said there was no implication of a covenant in leases and ruled that the landlord did not have to be unreasonable in considering a proposed transfer even though the number of permissible transferees was extremely small. In Tucson Medical Center v. Zoslow, 712 P.2d 459 (Ariz. App. 1985), the court adopted the Restatement (Second) of Property, § 15.2(2):

A restraint on alienation without the consent of the landlord of the tenant’s interest in the leased property is valid, but the landlord’s consent to an alienation by the tenant cannot be withheld unreasonably, unless a freely negotiated provision in the lease gives the landlord an absolute right to withhold consent.

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Tucson Medical Center, 712 P.2d at 461. With the adoption of that Restatement provision, the issue of good faith was irrelevant to the decision.

C. Landlord’s use of its property

In some circumstances, tenants assert that the landlord’s use of its own property has breached the covenant. In three cases, tenants have unsuccessfully claimed that the landlord’s entry into leases with competitors of the tenant breached the covenant. In two of those, MC Corp. v. Deprofio and TS 1 Partnership v. Allred, 877 P.2d 156 (Utah App. 1994), the tenant had no protective provision at all. In the third, the landlord agreed with the tenant not to lease other premises “as a greeting card or stationary store.” When it did so to a company whose sales of those items were 2% and 13%, respectively, of its total sales, the court held that the landlord had not breached the obligation of good faith and fair dealing, but rather that the protection was meant to prevent leasing to a tenant whose primary use was the sale of greeting cards and stationary. Cheng v. Brewran Village Hudson Assoc., 580 N.Y.S.2d 740 (A.D. 1 Dept. 1992).

A landlord’s conversion of retail space to office space and the resultant change of the shopping center to an office center did not breach the covenant, the court holding there was no evidence of bad faith in the landlord’s making of the change. IRT Property Co. v. Papagayo, Inc., 435 S.E.2d 565 (N.C. App. 1993). When a lease gives the landlord the right to make changes to the common areas, the landlord did not breach the covenant when it did so. Winrock Inn Co. v. Prudential Ins. Co. of America, 928 P.2d 947 (N.M. App. 1996). On the other hand, when the landlord has no right to change certain parts of the common areas, the tenant is not obligated by the covenant to negotiate reasonably and in good faith with respect to a change that the landlord wants to make to them. Cafeteria Operators, L.P. v. Coronado- Santa Fe Assoc., L.P. and A.P., 952 P.2d 435 (N.M. App. 1997). In Winrock and Cafeteria Operators, the express rights precluded the implication of contrary duties.

In two cases involving expansions of shopping centers and the resultant conflict between an exclusive use granted to a tenant in the first phase of the development and a conflicting use in the expanded phase, courts have come to the aid of the tenants. Alexander’s Dept. Stores of New Jersey, Inc. v. Arnold Constable Corp., 250 A.2d 702 (N.J. 1969) (“[t]here is necessarily a mutual covenant, whether expressed or not, of extreme good faith by each party, both as to the interpretation and as to the performance of the lease agreement”); Edmond’s of Fresno v. MacDonald Group, Ltd., 217 Cal. Rptr. 275, 171 Cal. App. 3d 598 (1985) (“The restrictive covenant is also made applicable to the new development by the implied covenant of good faith and fair dealing.”).

Both the Alexander’s Department Stores and Edmond’s of Fresno cases concluded that the protection afforded by the exclusive use extended to the expanded shopping center without reliance on the covenant. The covenant supported the decision but was not necessary for it.

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D. Landlord’s right of access

A California court has held that good faith and fair dealing compels a tenant that has agreed to comply with laws to allow the landlord reasonable means to assure itself as to the status of environmental hazards which may be the result of the tenant’s activities. Sachs v. Exxon Co., USA, 12 Cal. Rptr.2d 237 (Cal. App. 4 Dist. 1992). This case creates a duty where none is expressed and in fact contradicts a covenant of quiet enjoyment (which was not discussed by the court – although it was mentioned by the tenant in a letter to the landlord – and was presumably either expressed or implied).

VI. CONCLUSION

Despite its noble lineage and the frequency with which it is alleged, the implied covenant of good faith and fair dealing is rarely the basis for a court’s decision about the use of the premises. In fact, if one dismisses a few aberrations (Lagrew, in which the court stressed the tenant’s bad faith, rather than the covenant, Olympus Hills, and Sachs which is simply inexplicable and only tangentially related to use), the covenant buttresses a ruling that has been reached on other grounds. Its role as a makeweight is apparent from the court’s use of a word such as “further,” Columbia East Associates, or “also,” Edmond’s of Fresno, when referring to the effect of the covenant.

In a difficult case when the covenant seems to be helpful to reach a just outcome, it is still not necessary. For example, in Berkeley Development Co. v. Great Atlantic & Pacific Tea Co., 518 A.2d 790 (N.J. Super. L. 1986), a grocery store tenant assigned its lease to a drugstore subtenant that subsequently endeavored to enforce the grocery exclusive against a new supermarket proposed for the shopping center. The court’s decision turned on a consideration of the reasonable expectations of the landlord and original grocery store tenant and a simple conclusion that it did not make “any economic sense for the court to permit [the drugstore subtenant] to assert [the grocer’s restriction].” Id. at 797. See also Worcester- Tatnuck Square Cvs., Inc. v. Kaplan, 601 N.E.2d 485 (Mass. App. Ct. 1992), and Williams that reach a conclusion by construing the lease.

The covenant was alleged in Westside Center Associates v. Safeway Stores 23, Inc., 49 Cal. Rptr. 2d 793 (Cal. App. 5 Dist. 1996). The trial court ruled that the tenant was obligated to exercise its renewal rights in good faith. The issue evidently reached the appellate court, but the decision was affirmed on other grounds with the issue of the implied covenant not being certified for publication pursuant to California’s rules of court. Again, the covenant appeared unnecessary to reach the result, although no certain conclusion can be drawn from the decision.

The covenant came to life with loose wording in which reasonableness and good faith were mentioned in the same phrase, Lippman and Tuttle, even though good faith is a subjective standard and reasonableness is an objective standard, Zankel, “Commercial Lease Assignments and the Age of Reason: Cohen v. Ratinoff,” 7 Real Prop. L. Rep. 29 (1984) (discussing the law before Kendall), and good faith is not a defense to a breach of contract,

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Toys-R-Us and Lagrew. This careless conjunction is evident in Cohen in which the phrase “good faith reasonable objection” was used. In Kendall v. Ernest Pestana, Inc., 220 Cal. Rptr. 818 (Cal. 1985), the California Supreme Court resolved the inconsistent decisions in the California law, including Cohen, and used the phrase again. In doing so, the California Supreme Court continued the confusion with its ruling. Many of the cases in this discussion implied the covenant based upon Kendall. Ironically, Kendall was overruled by California’s statutory scheme, Civil C. § 1995.270, thus depriving many of these cases of the principal precedent supporting them.

Although one can scarcely deny a duty to act in good faith, one can object to a covenant that arises because it was so obvious that no one saw fit to mention it. As courts and practitioners ask, “if it’s so obvious and important, why wasn’t it written?,” Tuttle and Williams, and, of equal force, “if it was omitted, perhaps it was deliberately omitted.” This brings the cases to the merger provision, although only a few mention it or the legal principle that implies it in its absence, Mercury Investment and Frederick Business Properties. Still, in a dreadful decision that defies any rationale, the Lagrew court called an express merger provision “oblique” in a rush to reach its outcome.

The covenant of good faith and fair dealing is not necessary to the decisions in which it is mentioned and the basis for a poor decision in the very few cases in which it is employed.

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1 Johnson v. Yousoofian, 930 P.2d 921 (Wash. App. Div. 1 1996); Cohen v. Ratinoff, 195 Cal. Rptr. 84 (Cal. App. 2 Dist. 1983); Schweiso v. Williams, 198 Cal. Rptr. 238 (Cal. App. 1 Distr. 1984); 1010 Potomac Associates v. Grocery Manufacturers of America, Inc., 485 A.2d 199 (D.C. App. 1984); Ilkhchooyi v. Best, 45 Cal. Rptr.2d 766 (Cal. App. 4 Dist. 1995); Pacific First Bank v. New Morgan Park Corporation, 876 P.2d 761 (Or. 1994); Warner v. Konover, 553 A.2d 1138 (Conn. 1989); Fernandez v. Vazquez, 397 So.2d 1171 (Fla. App. 1981); First Federal Savings Bank of Indiana v. Key Markets, Inc., 559 N.E.2d 600 (Ind. 1990); Julian v. Christopher, 575 A.2d 735 (Md. 1990); Boss Barbara, Inc. v. Newbill, 638 P.2d 1084 (NM 1982); Park Place Center Enterprises, Inc. v. Park Place Mall Associates, L.P., 836 S.W.2d 113 (Tenn. App. 1982).

2 Brown’s Shoe Fit Co. v. Olch, 955 P.2d 357 (Utah App. 1998); City of Kenai v. Ferguson, 732 P.2d 184 (Alaska 1987); Nentwig v. United Industry, Inc., 845 P.2d 99 (Mont. 1992); Ellis v. Chevron, U.S.A., Inc., 246 Cal. Rptr. 863 (Cal. App. 4 Dist. 1988).

3 Hawthorne’s, Inc. v. Warrenton Realty, Inc., 606 N.E.2d 908 (Mass. 1993); Vincent v. Doebert, 539 N.E.2d 856 (Ill. App. 2 Dist. 1989); Cantrell-Waind & Associates, Inc. v. Guillaume Motorsports, Inc., 968 S.W.2d 72 (Ark. App. 1998); Central Nat’l Bank in Chicago v. Fleetwood Realty Corp., 441 N.E.2d 1244 (Ill. App. 1982).

4 Oak Park Development Co., Inc. v. Snyder Bros. of Minnesota Inc., 499 N.W.2d 500 (Minn. App. 1993); Dover Mobile Estates v. Fiber Form Products, Inc., 270 Cal. Rptr. 183 (Cal. App. 6 Dist. 1990).

5 CH2M Hill Northwest, Inc. v. Parktel I, Inc., 812 P.2d 840 (Or. App. 1991); P.V Properties, Inc. v. Rock Creek Village Assoc. L.P., 549 A.2d 403 (Md. App. 1988).

6 Barn-Chestnut, Inc. v. CFM Development Corp., 457 S.E.2d 502 (W.Va. 1995); Amoco Oil v. Ervin, 908 P.2d 493 (Colo. 1995).

7 Neiditz v. Housing Authority of the City of Hartford, 654 A.2d 812 (Conn. Super. 1994).

8 Brooks v. Networks of Chattanooga, Inc., 946 S.W.2d 321 (Tenn. App. 1996).

9 Aluevich v. Harrah’s, 660 P.2d 986 (Nev. 1983); Commonwealth of Pennsylvania Department of Transportation v. E-Z Parks, Inc., 620 A.2d 712 (Pa. Cmwith. 1993); Texaco Refining and Marketing, Inc. v. Crown Plaza Group, 845 S.W.2d 340 (Tx. App. – Houston [1st Dist.] 1992); KHK Associates v. Department of Human Services, 632 A.2d 138 (Me. 1993).

10 Dasenbrock v. Interstate Restaurant Corp., 287 N.E.2d 151, 7 Ill. App. 3d 295 (1972).

11 New Towne L.P. v. Pier 1 Imports (U.S.) Inc., 680 N.E.2d 644 (Ohio App. 6 Dist. 1996).

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Mark A. Senn, Esq.

12 Oaksmith v. Brusich, 774 P.2d 191 (Alaska 1989).

13 Just-Irv Sales Inc. v. Air-Tite Business Center, 655 N.Y.S.2d 131 (A.D. 3 Dept. 1997).

14 Carma Developers (California), Inc. v. Marathon Devel. California, Inc., 826 P.2d 710 (Cal. 1992).

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Mark A. Senn, Esq.