First Federal Sav. Bank of Indiana v. Key Markets, Inc.

• Decision Date: 27 December 1988
• Docket Number: No. 45A03-8803-CV-79,45A03-8803-CV-79
• Citation: 532 N.E.2d 18
• Parties: FIRST FEDERAL SAVINGS BANK OF INDIANA, Appellant (Defendant Below), v. KEY MARKETS, INC., an Indiana Corporation, Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 18

532 N.E.2d 18

FIRST FEDERAL SAVINGS BANK OF INDIANA, Appellant (Defendant Below),

v. KEY MARKETS, INC., an Indiana Corporation, Appellee (Plaintiff Below).

No. 45A03-8803-CV-79.

Court of Appeals of Indiana Third District.

Dec. 27, 1988.

R. Brian Woodward, Anderson & Tauber, P.C., Merrillville, Stephen E. Smith, Siemon, Larsen & Purdy, Chicago, Il., for appellant.

Nick Katich, Lucas, Holcomb & Medrea, Merrillville, for appellee.

STATON, Judge.

First Federal Savings Bank of Indiana (First Federal) brings this interlocutory appeal from a declaratory judgment and permanent injunction entered in the Lake Superior Court in favor of Key Markets, Inc. ¹ Two issues are presented for our consideration on appeal:

1. Whether the trial court erred in determining that a landlord may not unreasonably withhold consent to assignment of a lease where the lease required consent but was silent on whether consent could be unreasonably withheld?

2. Whether the trial court erred in determining that a landlord was not entitled to cancel a lease where a tenant requested consent to an assignment?

Affirmed.

This action involves certain real estate known as Sheffield Commons Shopping Center (Sheffield Commons) located in Dyer, Indiana. The original development plans for Sheffield Commons began in 1975, and included the construction of a supermarket to be operated by Burger's Supermarkets, Inc. (Burger's). A one acre tract of land within the area comprising Sheffield Commons was sold to Trust # 3375 by Joseph McLaughlin, the original real estate developer, for the purpose of building a supermarket. However, McLaughlin retained title to the adjoining property in order to maintain control of the real estate. The supermarket real estate lacked adequate parking and had limited access but for the remainder of the Sheffield Commons real estate. In light of this, McLaughlin agreed to lease additional land in Sheffield Commons to Burger's for the purpose of parking and access. A parking lot lease was entered into by both parties on March 1, 1976. On March 2, Burger's and McLaughlin entered into a common area easement agreement in order to provide for a fully integrated shopping center and parking lot.

Having secured access and parking, Burger's entered into a lease with Trust # 3375 for the supermarket real estate on May 11, 1976. Burger's thereafter constructed the supermarket and parking lot while McLaughlin constructed the remainder of the shopping center. Burger's opened its supermarket in Sheffield Commons in 1977.

In January of 1985, Key Markets succeeded to Burger's interests in the supermarket lease, parking lot lease and common area easement agreement following a series of prior assignments. All lease and easement assignments leading up to and including Key Markets were consented to by McLaughlin. In October of the same year, First Federal succeeded to the interests of McLaughlin in the parking lot lease, common area easement agreement, and remainder of the shopping center by way of mortgage foreclosure.

Key Markets entered into negotiations with Babincsak Enterprises, Inc. (Babincsak) for the sale of its supermarket business at Sheffield Commons in the fall of 1987. On November 18, 1987, while verbal agreements between Key Markets and Babincsak were being reduced to writing, Key Markets sent a letter to First Federal requesting its consent to assign the parking lot lease and common area easement agreement to Certified Grocer's, Inc., who would in turn sublet the supermarket and parking lot to Babincsak. An anticipated closing date of December 5, 1987, was indicated.

Negotiations between First Federal and Key Markets for the proposed assignment failed. 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 notice of the lease cancellation, it 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 the 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. ²

On March 1, 1988, the trial court entered its order determining that 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. Reserved for subsequent trial on the merits were the issues of: (1) whether the need to seek consent to an assignment was waived; (2) whether First Federal unreasonably withheld consent to assignment, and; (3) the amount of damages and attorney's fees to be awarded, if any.

I. Consent Clause

The first issue of this controversy concerns provision 10.01(a) of the parking lot lease, which reads 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.

The trial court determined that consent may not be unreasonably withheld not withstanding 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 contends that, absent a recital in this provision of the intent that the lessor's consent could not be unreasonably withheld, the lessor may arbitrarily and capriciously refuse consent. First Federal correctly points out that this traditional common law view is still endorsed by a majority of jurisdictions. See 21 ALR4th 188, "Withholding Consent--Assignment of Lease," Sec. 3. However, we agree with the trial court that the better reasoned, more equitable rule is that requiring commercial reasonableness in refusal of consent to assignment by the lessor absent a stated intent to the contrary.

This appeal comes to us with the benefit of a detailed memorandum provided by the trial court, within which is incorporated a comprehensive analysis of the issue at hand we would be hard pressed to improve upon and will refer to in salient portion. However, as this involves a matter of pure legal construction, we are not bound by the conclusions of the trial court. See Ohio Casualty Insurance Co. v. Ramsey (1982), Ind.App., 439 N.E.2d 1162, trans. denied.

Each of the parties to this case present an Indiana case which they argue is dispositive of the issue. In support of its argument, First Federal relies on the holding of F.W. Woolworth Co. v. Plaza North, Inc. et al. (1986), Ind.App., 493 N.E.2d 1304, trans. denied. In Woolworth, a landlord leased a portion of its shopping center to Woolworth so that it might operate a Woolco Department Store. The portion of the lease pertaining to assignments and subleases provided the following:

Except as hereinafter provided, the Tenant agrees not to assign, mortgage, pledge or encumber this lease without first obtaining the written consent of the Landlord.... The Tenant is hereby given the right to assign this lease to a corporation substantially all of the stock of which is owned by the Tenant, and to sublet the demised premises or any part thereof, but not withstanding such assignment or subletting the Tenant shall continue liable for the performance of the terms, conditions and covenants of this lease. The Tenant agrees that Tenant will not without the prior written consent of the Landlord, which consent the Landlord agrees not unreasonably to withhold, sublet to a supermarket so long as Standard Supermarket occupies and continues doing business in the space designated 'Standard Supermarket' on the drawing attached to and made a part of Schedule "A" hereof.

Id. at 1308. (Our emphasis.)

After Woolworth ceased operations and entered into an agreement to sublease the premises to a third party, the landlord filed a complaint for injunctive and declaratory relief on the grounds that the sublease was actually an assignment in violation of the lease. The court of appeals held the transaction to be a sublease not prohibited by the overlease.

First Federal bases its argument that "reasonableness" cannot be read into a lease assignment provision on the implicit holding in Woolworth that, had the transaction been determined to have been an assignment, the landlord's refusal of consent could have been arbitrarily and capriciously withheld. First Federal's argument is correct but only as a matter of contractual construction limited to the facts of the Woolworth case. The trial court in the case before us made a distinction we agree with. The highlighted portions of the assignment sublease quote, supra, indicate a freely negotiated agreement that only where a sublease was contemplated would reasonableness be required of the landlord in withholding his consent. The use of a "reasonableness" requirement in regard to subletting and, in the same paragraph, failure to require reasonableness in the face of a proposed assignment clearly indicates that the parties chose where reasonableness would be required and where it would not. Conversely, the First Federal lease agreement neither negatively nor affirmatively indicates...