Covenant of Good Faith And ... - Retail Real Estate Law Ruminations

Have you ever seen a lease that grants a tenant certain exclusive use rights and then offers, as the tenant?s sole remedy, that the tenant (eventually) can go to half rent (or something like that) and then if the violation persists, the tenant can terminate its lease? Of course you have.

Have you ever then seen the following scenario. A larger, more important, much higher rent paying tenant comes along, but its use just tramples that of the existing tenant with the exclusive use rights? Then, the landlord decides to sign up with the new, larger, more important, much higher rent paying tenant and justifies it by saying ? ?it?s OK with me if the old tenant goes to half rent (because, I?ll be much, much better off anyway). It?s even OK if the older, smaller, lower rent paying tenant terminates its lease because I?ll still be better off.?

So, the objective observer shouts out, ?but that not right. It isn?t fair. You?ll kill the little guy. Etc., etc.? And, the landlord responds ? ?there is nothing unfair about it. That was the deal. The older, smaller, less valuable tenant made its deal ? its remedy is what it is. That was the deal.?

The newer, larger, richer, more valuable tenant doesn?t care. After all, the landlord will take the lumps. It will lose the smaller tenant?s rent, and maybe it will lose the smaller tenant. But, ?we?ll? be selling the prohibited items.

Are the landlord and the new tenant ?off the hook?? What about the covenant of good faith and fair dealing implied in every contract, such as a lease? Maybe it didn?t mean much in the past, but that may not be true at the leading edge (which has cut fairly deeply into jurisprudence around the country). New Jersey, our home state, has a seminal decision from its Supreme Court ? Sons of Thunder, Inc. v. Borden, Inc., 121 NJ 520 (1997). It said: ?[a] party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to ? .? This decision is now 15 years old and its application has been expanded several times since then. (And for the grammarians, the court didn?t say it was OK to breach the contract; it said it was still possible to do so even if the contract expressly gave it the right to take the ?breaching? action.)

So, what do you think? Even though the older, smaller tenant?s lease said that the stated remedies were its sole remedies, will the landlord be liable for damages? What about the newer, larger tenant ? how about the tort of ?intentional interference with [the smaller tenant?s] prospective economic advantage??

I?m not aware of any cases, but I am aware of the scenario described above. Are you? What do you think the law WOULD ?say?? What do you think the law SHOULD ?say?? There are no right or wrong answers. Post your comments to www.retailrealestatelaw.com and help move the discussion forward. Ruminate with all of us, if you will.

Source: http://www.retailrealestatelaw.com/2011/09/covenant-of-good-faith-and-exclusive-use-rights/?utm_source=rss&utm_medium=rss&utm_campaign=covenant-of-good-faith-and-exclusive-use-rights

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