First Federal Sav. Bank of Indiana v. Key Markets, Inc., 45S03-9009-CV-590

CourtSupreme Court of Indiana
Citation559 N.E.2d 600
Docket NumberNo. 45S03-9009-CV-590,45S03-9009-CV-590
PartiesFIRST FEDERAL SAVINGS BANK OF INDIANA, Appellant (Defendant), v. KEY MARKETS, INC., an Indiana Corporation, Appellee (Plaintiff).
Decision Date10 September 1990

PIVARNIK, Justice.

This cause comes to us on a petition to transfer from the Third District Court of Appeals. Petition is brought by Defendant-Appellant First Federal Savings Bank of Indiana.

The action arises from development of real estate known as Sheffield Commons Shopping Center, located in Dyer, Indiana. Development plans for Sheffield Commons began in 1975 by Joseph McLoughlin, who later sold a one acre tract of land to Trust No. 3375 for the purpose of adding as part of the shopping center a grocery supermarket to be operated by Burger's Supermarkets, Inc. This one-acre tract did not contain sufficient parking space and access, so McLoughlin agreed to lease additional land in Sheffield Commons to Burger's for this purpose but was not willing to surrender his control of this additional land. One of the provisions of the parking lot lease at issue in this cause is Section 10.01(a) which is as follows: "Except for an assignment to a 'Corporate Affiliate' of Tenant, Tenant shall not assign this lease or sublet all or a portion of the demised premises without the consent of Landlord."

Subsequently, Burger's and McLoughlin entered into a common area easement agreement in order to provide for a fully integrated shopping center and parking lot. Burger's thereafter constructed the supermarket and parking lot while McLoughlin constructed the remainder of the shopping center. The supermarket in Sheffield Commons was opened in 1977.

The business enterprise of Sheffield Commons did not go well in the ten years, more or less, before the present parties acquired their interests. Defendant-Appellant First Federal Savings Bank of Indiana succeeded to the interest of McLoughlin through foreclosure proceedings; Key Markets represents one of a number of parties succeeding to Burger's interest in the supermarket property and the parking lot lease. In each of the several assignments from Burger's to succeeding parties, consent of McLoughlin was sought and given pursuant to the contract. Key Markets succeeded to Burger's interest in January, 1985. In October, 1985, First Federal succeeded to the interest of McLoughlin in the entire shopping center by way of mortgage foreclosure.

In the fall of 1987, Key Markets entered into negotiations with Babincsak Enterprises, Inc., who proposed to obtain Key Markets' interest for Certified Grocers, Inc., who would, in turn, sublet the supermarket and parking lot to Babincsak. Key Markets sent a letter to First Federal requesting its consent to assign the parking lot lease and common area easement agreement to Certified Grocers, Inc. First Federal refused to consent.

There was some evidence that there were negotiations between First Federal and Certified Grocers to purchase the entire mall although testimony as to these negotiations seemed to be much in conflict. At any rate, negotiations between First Federal and Key Markets for the proposed assignment failed, and on December 11, 1987, First Federal notified Key Markets by letter that it was cancelling the parking lot lease by reason of the proposed assignment, relying on Article X, Section 10.01(b) of said lease. Before Key Markets received this notice, it had vacated the supermarket premises in accordance with its agreement with Babincsak. The closing of Key Markets' sale to Babincsak was scheduled for December 14 but never occurred because of First Federal's refusal to consent to the assignment of the parking lot lease.

On December 21, 1987, Key Markets filed a complaint in Lake Superior Court seeking declaratory and injunctive relief as well as damages stemming from First Federal's cancellation of the lease. The trial court conducted a hearing upon Key Markets' application for a preliminary injunction on January 5, 1988. At the conclusion thereof, the trial court granted Key Markets' motion to consolidate and advance the hearing on the merits for the issues of whether First Federal could unreasonably withhold consent to assignment and whether First Federal had the right to cancel the lease.

The trial court found First Federal had a legal duty not to unreasonably withhold consent to assignment and further had no right to cancel the lease. First Federal was permanently enjoined from enforcement of its cancellation of the lease on the sole motivation of a requested assignment in connection with the sale of business. The Court of Appeals affirmed the trial court in its application of the "reasonableness test" concerning the consent provision of the lease agreement even though the lease agreement did not require the landlord to be reasonable in refusing to consent to assignment of the leasehold interest. As the Court of Appeals stated:

The trial court determined that consent may not be unreasonably withheld notwithstanding the absence of limiting language in the lease so requiring, thus engrafting on the end of this provision the phrase "which consent shall not be unreasonably withheld."

First Federal Savings Bank of Indiana v. Key Markets, Inc. (1988), Ind.App., 532 N.E.2d 18, 20. We hold the Court of Appeals applied improper standards in the construction of this contract and, accordingly, vacate the opinion of the Court of Appeals and reverse the trial court on this issue.

The Court of Appeals opted to follow the holding in Fernandez v. Vasquez (1981), Fla.Dist.Ct.App., 397 So.2d 1171. The Florida court in Fernandez opted to adopt what they called an emerging modern trend of contract construction which imposes reasonableness of consent to assignment of a lease by the lessor even though such limiting language does not appear in the lease. The Florida court held:

[A] lease is a contract and, as such, should be governed by the general contract principles of good faith and commercial reasonableness. One established contract principle is that a party's good faith cooperation is an implied condition precedent to performance of a contract. Where that cooperation is unreasonably withheld, the recalcitrant party is estopped from availing herself of her own wrongdoing.... [A] lessor may not arbitrarily refuse consent to an assignment of a commercial lease which provides, even without limiting language, that a lessee shall not assign or sublease the premises without the written consent of the lessor. A withholding of consent to assign a lease which fails the tests for good faith and commercial reasonableness, constitutes a breach of the lease agreement.

Id. at 1173-74.

These broad general statements of contract construction do not accurately describe the duties and responsibilities of courts in interpreting contracts, or they should at least be applied in very limited and specific instances where such a question of construction is apparent, particularly when one uses such expressions as "good faith cooperation," "recalcitrant party" and "wrongdoing."

First Federal contends, and all parties agree, including the Florida court in Fernandez and the Court of Appeals, that, under traditional common law principles, absent a recital in the lease that the lessor's consent could not be unreasonably withheld, the lessor was not required to pass the test of reasonableness and could refuse consent without any explanation. First Federal also correctly points out that this traditional common law view is still endorsed by a majority of jurisdictions, including Indiana. The seminal case addressing the corresponding rights, duties and obligations regarding assignments between landlords and tenants in the State of Indiana is The Indianapolis Mfg. and Carpenters Union v. The Cleveland, C., C., & I. Ry. (1873), 45 Ind. 281. This Court found in that case that in the absence of limiting language in the lease, the tenant has a right to assign or sublet freely. The Court found that to restrain the tenant's use under these circumstances from exercising his rights in the use of his leasehold interest would be in restraint of alienation. The Court further found, however, that a limiting assignment clause in the lease that gave the power to the lessor to accept or reject assignment was enforceable, since the purpose of the clause was to reserve to the lessor the unilateral right to say who would occupy the premises. The restraint of alienation concern would be resolved in such a case. Id. at 288-89. See also, Pittsburgh, C., C., & St. L. R.R. v. Mexico Elevator and Live Stock Co. (1925), 85 Ind.App. 42, 48, 149 N.E. 573, 575. Simply stated, if the lease contains no provision with reference to transfer or assignment of the leasehold interest, the lessee is in control, and if the lease contains the consent requirement the lessor is in control. Parties wishing to soften the effect of unilateral control of either party can cause to have engrafted on the consent provision "which consent shall not be unreasonably withheld." In such situations, standards have been provided to determine reasonableness pursuant to such provision when such an issue arises. Fernandez, 397 So.2d at 1174.

The law of contract construction by courts is well settled. It is the duty of courts to interpret a contract so as to ascertain the intent of the parties. It must accept an interpretation of the contract which harmonizes its provisions as opposed to one which causes the provisions to be conflicting. R.R. Donnelley & Sons v. Henry-Williams, Inc. (1981), Ind.App., 422 N.E.2d 353, 356. In interpreting a written contract the court will attempt to determine the intent of the parties at the time the contract was made as disclosed by the language used...

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