Food Pantry, Ltd. v. Waikiki Business Plaza, Inc.

• Decision Date: 10 February 1978
• Docket Number: No. 5747,5747
• Citation: 575 P.2d 869,58 Haw. 606
• Parties: FOOD PANTRY, LTD., Plaintiff-Appellant, Cross Appellee, v. WAIKIKI BUSINESS PLAZA, INC., Defendant-Appellee, Cross Appellant.
• Court: Hawaii Supreme Court

Page 869

575 P.2d 869

58 Haw. 606

FOOD PANTRY, LTD., Plaintiff-Appellant, Cross Appellee, v. WAIKIKI BUSINESS PLAZA, INC., Defendant-Appellee, Cross Appellant.

No. 5747.

Supreme Court of Hawai'i.

Feb. 10, 1978.

William H. Dodd, Honolulu (Chun, Kerr & Dodd, Honolulu, of counsel, Carroll S. Taylor, Honolulu, on brief), for appellant.

Ronald W. K. Yee, Honolulu (Case, Stack, Kay, Clause & Lynch, Honolulu, of counsel), for appellee.

Before RICHARDSON, C. J., and KOBAYASHI, OGATA, MENOR and KIDWELL, JJ.

MENOR, Justice.

This is an action for a declaratory judgment. The plaintiff below is the lessee, Food Pantry, Ltd. The defendant is the lessor, Waikiki Business Plaza, Inc. The controversy stems from the Lessee's assignment and subleasing of the premises without the prior written consent of the lessor which, upon subsequent request, the lessor refused to give. In its complaint the lessee sought an adjudication requiring the lessor to consent to the assignment and subleases. The lessor responded to the lessee's complaint with a counterclaim asking the court to find that the lessor had the right to terminate the lease and praying that it be allowed damages, costs, and attorney's fees.

The trial court found that the lessee was in material breach of the non-assignment provision of the lease and awarded the lessor damages based upon what the court considered to be the fair market rental for the leased premises at the time of the first of such unpermitted assignments and subleases. The trial court also found that the lessor was entitled to terminate the lease for breach of the non-assignment covenant; however, it refused to allow the lessor to terminate the lease so long as the lessee rescinded the transactions constituting the breach or, in the alternative, paid the lessor the fair market rental for the balance of the term. It also awarded the lessor damages based on fair market rental for breach of the non-assignment covenant. The trial court, however, denied the lessor's request for costs and attorney's fees. Judgment was entered by the trial court on May 15, 1974. Both parties appeal.

I

In 1965, Waikiki Business Plaza leased to Food Pantry, for a term of ten years expiring May 31, 1975, certain space on the ground floor of a building in Waikiki, with the lessee's use limited to the maintenance and operation of a business described as "(a) specialized gourmet and grocery store selling items normally sold in such stores; and liquor, drugs and a fountain." By the lease, the lessee covenanted that it would not assign or sublease without the prior written consent of the lessor, which consent should not be arbitrarily or unreasonably withheld or conditioned on the payment of money or anything else of value, except reasonable costs. By a letter agreement between the parties, of May 23, 1969, the lessor consented to the use of the premises for a McDonald's restaurant, upon the express understanding that the franchise would be in the name of the lessee, which would not assign the lease without the prior written consent of the lessor, "and that the Lessor may withhold such consent in its discretion". The letter stated that the lease would be amended appropriately to incorporate the terms of the letter agreement. A subsequent letter agreement of July 18, 1969, provided for review and approval by the lessor of all franchise documents pertaining to the operation of the premises and provided that the lease should be amended to provide expressly that any default under such documents would constitute a default under the lease. No other documents were executed to effect the amendments of the lease agreed upon in these letters.

By documents effective as of July 1, 1970, the lessee assigned an undivided one-half interest in the lease to Franchise Realty Interstate Corp. (FRIC). The lessee and FRIC then subleased the restaurant area of the leased premises to McDonald's of Waikiki, Hawaii, Inc. and the balance of the area to the lessee. Both FRIC and McDonald's of Waikiki were wholly owned subsidiaries of McDonald's Corporation. Either as of October 14, 1970, or an earlier date, the lessee's and FRIC's respective one-half interests in the lease were assigned to a limited partnership, McDonald's of Hawaii Development Co., of which FRIC was one of the general partners. Pursuant to these transactions, McDonald's of Waikiki and the lessee paid to FRIC a rental higher than that fixed in the lease, and FRIC in turn paid such rental to McDonald's of Hawaii Development Company.

By letter dated July 1, 1971, the lessee's attorney advised the lessor in general terms of these transactions and requested the consent of the lessor to the assignment and the two subleases above mentioned. The lessor replied by a letter calling attention to the March 23, 1969, letter agreement and stating that an increase in rent had not been insisted upon at the time consent was given to the change of use to a McDonald's restaurant "as a personal favor." The lessor's letter went on to say: "However, inasmuch as a large mainland chain is now actually involved in your ownership and operations, we feel that it is only fair that such operations should pay the current fair market rental." A new rental was proposed, effective July 1, 1970, which included a minimum fixed rent and a percentage of gross sales. After meetings and correspondence failed to resolve the matter, the lessor wrote to the lessee on December 8, 1971, in part as follows: "Unless your said defaults are cured or another arrangement satisfactory to us is agreed upon, on or before December 17, 1971, we intend to terminate your lease." The lessee's response was to file its action for declaratory judgment on December 20, 1971.

II

The basic issue raised by the lessee in its appeal is, whether the lessor was entitled to withhold its consent to the assignments and subleases which gave rise to the present controversy. The lessee argues that the lessor was not entitled to withhold its consent to these transactions because, regardless of the lease language, a lessor may not unreasonably withhold its consent, and further suggests that the sole motive of the lessor for withholding its consent was to compel the lessee to agree to an increase in rent.

There is no doubt that a covenant by the lessee not to assign the lease or sublet the premises will be given effect, though subject to strict construction. 1 American Law of Property P 3.58 (1952). Our first inquiry, therefore, seeks the intent of the parties as expressed in their documents. Absent the letter agreements, the terms of the lease would have placed the lessor's insistence on an increase in the lease rent, as a condition to its consent, outside the freedom which it reserved to itself to withhold consent, and would raise the question whether the breach by the lessee was cured by the lessor's later invalid refusal of consent. However, we regard the letter agreements, as also apparently did the parties, as effective amendments of the lease despite the unfulfilled intention of the parties to embody them in formal amendatory documents. It is necessary to read these documents together to ascertain what agreement the parties expressed with respect to the freedom of the lessor to withhold its consent.

The lease qualified the lessor's freedom by providing "that the Lessor shall not arbitrarily or unreasonably withhold such consent and provided further, that the Lessor shall not require the payment of money or anything else of value as a condition of giving such consent, except for reasonable costs and expenses . . . ." The letter agreement of May 23, 1969, however, which arose out of the lessee's request for consent to install a McDonald's restaurant, premised the giving of consent to this change in use upon the incorporation of the following into the lease:

"It is understood, of course, that the franchise deal will be in the name of the Lessee. It is further understood that inasmuch as this is a franchise deal under a large mainland chain, that the Lessee will not assign nor mortgage the lease or sublet the whole or any part of the demised premises or any of the Lessee's rights thereunder, without the prior written consent of the Lessor, and that the Lessor may withhold such consent in its discretion."

The lessee argues that notwithstanding this language, the lease continued to provide that the lessor could not seek the payment of money as a condition to giving its consent to an assignment. This result is reached by treating the words "and that the Lessor may withhold such consent in its discretion" as in substitution for the first lease proviso, "provided, however, that the Lessor shall not arbitrarily or unreasonably withhold such consent", and as leaving untouched the second proviso," provided, further, that the Lessor shall not require the payment of money or anything else of value as a condition of giving such consent." The trial court found as fact and also concluded as law that both provisos of the lease had been superseded by the letter agreement. Among other indications of the parties' intent which were before the trial court is a letter from the lessor to the lessee, dated May 9, 1969, which states that a review of the requested change in use which is consented to by the May 23, 1969, letter "will necessarily entail a complete study of the terms of your lease, including the rental charged thereunder." In construing the lease and the amendments the trial court was required to take into consideration the circumstances under which they were entered into by the parties. Hokma v. Relinc Corp., 57 Haw. 470, 559 P.2d 279 (1977). In addition to the May 9, 1969, letter to which we have referred, the trial court heard testimony dealing with these circumstances. We conclude that we should accept the trial court's resolution of the ambiguities in the lease documents. This conclusion extends to the trial court's determination of the question...