Olympus Hills Shopping Center, Ltd. v. Smith's Food & Drug Centers, Inc.

• Decision Date: 29 December 1994
• Docket Number: No. 930531-CA,930531-CA
• Court: Utah Court of Appeals
• Parties: OLYMPUS HILLS SHOPPING CENTER, LTD., a Utah limited partnership, Plaintiff, Appellee and Cross-Appellant, v. SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation, Defendant, Appellant and Cross-Appellee.

Page 445

889 P.2d 445

OLYMPUS HILLS SHOPPING CENTER, LTD., a Utah limited partnership, Plaintiff, Appellee and Cross-Appellant, v. SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation,

Defendant, Appellant and Cross-Appellee.

No. 930531-CA.

Court of Appeals of Utah.

Dec. 29, 1994.

Rehearing Denied Feb. 27, 1995.

James S. Jardine, Rick B. Hoggard, and Brent D. Wride, Salt Lake City, for appellant.

Robert S. Campbell and E. Barney Gesas, Salt Lake City, for appellee.

Before BENCH, GREENWOOD and JACKSON, JJ.

OPINION

JACKSON, Judge:

Smith's Food & Drug Centers, Inc. (Smith's) appeals the trial court's denial of its motions for summary judgment and directed verdict concerning claims by Olympus Hills Shopping Center, Ltd. (Olympus Hills) that Smith's breached its lease with Olympus Hills, as well as the covenant of good faith and fair dealing associated with the lease. Smith's also challenges certain admissions of evidence and jury instructions by the trial court, along with the trial court's rulings concerning the sufficiency of Olympus Hills's notices of default and termination. Smith's also challenges the trial court's ruling concerning whether Olympus Hills waived its right to claim default of the lease. In its cross-appeal, Olympus Hills challenges the trial court's bifurcation of the determination of Olympus Hills's damages from the determination of Smith's liability. We affirm.

FACTS

Olympus Hills owns a 13.9 acre shopping center in Salt Lake County, the development of which began in the early 1960s. Smith's leased 23,000 of the 160,000 total square feet of the shopping center from Olympus Hills in the 1960s to operate a grocery store. In January 1979 Smith's began negotiating with Olympus Hills for additional space. After extended negotiations, Smith's signed a thirty-year lease, obtaining an additional 22,000 square feet of space, for a total of 55,000 square feet.

In December 1989, Smith's purchased a building about 1.5 miles from the Olympus Hills location, and on March 7, 1990, announced its plan to close its Olympus Hills store. Olympus Hills negotiated with Smith's, attempting to convince Smith's to remain at the shopping center. When these negotiations failed, Olympus Hills filed a complaint on March 9, 1990, seeking monetary damages and injunctive relief. Smith's filed a counterclaim seeking a declaratory judgment of its rights under the lease. In its motion for summary judgment on its counterclaim, Smith's argued that the unambiguous language of the use clause gave Smith's the right to operate any "lawful retail selling business" at the shopping center. On April 3, 1990, the trial court determined that the lease's use clause, which provided that Smith's may use the building for "any other lawful retail selling business not directly in conflict or competition with another major tenant in the shopping center," allowed Smith's to operate any retail business that did not compete with other tenants.

On April 13, 1990, Smith's announced its intention to operate a "warehouse discount box store" to be known as "Buy 'N Save" on the premises. On April 23, 1990, Olympus Hills filed a second amended complaint, contending that Smith's proposed warehouse box store was a breach of the covenant of good faith and fair dealing. Smith's filed an answer along with a counterclaim for declaratory judgment to authorize Smith's to temporarily close the leased premises to implement its change of use. In the meantime, Olympus Hills, on April 27, 1990, served a notice of default on Smith's. Smith's filed a motion for summary judgment on the covenant of good faith claim; however, the trial court determined that this issue was one for the jury to determine.

Smith's shut down the entire leasehold premises on April 24, 1990, for sixty-three days while it remodeled the premises. On June 22, 1990, Olympus Hills filed its third amended complaint seeking termination of the lease and damages for breach of the continuous operation clause for closure of the store for remodeling, unlawful detainer, and declaratory relief regarding Smith's right to operate the Buy 'N Save. Smith's filed a motion for summary judgment and on August 24, 1990, the trial court determined that a jury should decide whether a complete closure of the premises of any length was reasonable and, if so, whether the length of closure was reasonable. The court later denied Smith's motion concerning waiver and after trial, denied Smith's motion concerning the notice issues.

At the trial held in September 1990, the court ruled that Olympus Hills could not put on evidence before the jury concerning consequential damages, including diminution of value of the shopping center from the time the lease was breached to its termination. The court reasoned that any future damages incurred by Olympus Hills were speculative, and that it would retain jurisdiction and try the damage issues in the future, after determining whether Olympus Hills was entitled to terminate the lease.

At the end of Olympus Hills's case before the jury, Smith's moved for a directed verdict. The trial court denied the motion and sent the issues to the jury. The jury found that Smith's breached the covenant of good faith and fair dealing by changing the use of the premises from a supermarket to the Buy 'N Save. The jury also determined that although it was reasonably necessary for Smith's to close the premises in order to change its use, the closure for sixty-three days was unreasonably long and constituted a material breach of the lease and also a breach of the covenant of good faith and fair dealing. ¹

ISSUES

This case raises the following issues: (1) whether the trial court properly submitted to the jury the issue of whether Smith's operation of the Buy 'N Save breached the covenant of good faith and fair dealing even though Smith's had the express right to operate any retail selling business in the leased space; (2) whether the trial court improperly admitted evidence at trial concerning the reduced traffic flow at the shopping center and the "highest and best use" of the leased space; (3) whether the trial court properly rejected Smith's proffered jury instructions and whether the jury instructions given were legally sufficient; (4) whether the trial court properly submitted to the jury the issue of whether Smith's closure of the premises for sixty-three days breached the express provisions of the lease and the covenant of good faith and fair dealing; (5) whether the trial court properly determined that Olympus Hills's notices of default and termination were sufficient; (6) whether the trial court erred in determining that Olympus Hills's acceptance of Smith's May rent check during the cure period did not waive Olympus Hills's right to claim a default under the lease; and (7) whether the trial court improperly separated Olympus Hills's damages claims from the determination of Smith's liability under the lease. ²

ANALYSIS

A. Good Faith Covenant v. Express Lease Provision

Smith's asserts that the trial court improperly denied its motion for summary judgment and later its motion for directed verdict on the issue of whether Smith's breached the covenant of good faith and fair dealing by choosing to operate the Buy 'N Save in the leased space. Smith's asserts the trial court could have decided the issue as a matter of law but instead, improperly submitted the issue to the jury. Specifically, Smith's claims that because the express provision of the lease allowed it to operate any retail selling business, it could not have breached the covenant of good faith and fair dealing by operating the Buy 'N Save. Smith's argues that as long as the changed use is to "any other lawful retail selling business," its discretion as to what type of business to operate could not be hampered by any duty of good faith. ³ A trial court may properly grant a motion for summary judgment or directed verdict only when reasonable minds could not differ on the facts to be determined from the evidence presented. Heslop v. Bank of Utah, 839 P.2d 828, 838 (Utah 1992); West One Trust Co. v. Morrison, 861 P.2d 1058, 1060 (Utah App.1993); see Nay v. General Motors Corp., 850 P.2d 1260, 1263 (Utah 1993). The trial court must assess those facts in a light most favorable to the party opposing the motions and must conclude, as a matter of law, that they do not support the claim presented. Heslop, 839 P.2d at 838.

Smith's argument poses the question of whether parties who retain express power or discretion under a contract can exercise that power or discretion in such a way as to breach the covenant of good faith and fair dealing. ⁴ We believe that they can. Our courts have determined that a party must exercise express rights awarded under a contract reasonably and in good faith. See Brehany v. Nordstrom, Inc., 812 P.2d 49, 55 (Utah 1991) (contract rights should be exercised in good faith); Resource Management Co. v. Weston Ranch and Livestock Co., 706 P.2d 1028, 1037 (Utah 1985) (party must exercise rights under contract reasonably and in good faith); Leigh Furniture and Carpet Co. v. Isom, 657 P.2d 293, 311 (Utah 1982) (party has duty to exercise all rights under contract reasonably and in good faith); Ted R. Brown and Assocs., Inc. v. Carnes Corp, 753 P.2d 964, 970 (Utah App.1988) (party must exercise express rights in good faith).

At first blush, this concept seems to contravene good sense because "if contracting parties cannot profitably use their contractual powers without fear that a jury will second-guess them under a vague standard of good faith, the law will impair the predictability that an orderly commerce requires." Southwest Sav. and Loan Ass'n v. Sunamp Sys., Inc., 172 Ariz. 553, 838 P.2d 1314, 1319 (Ct.App.Div. 1 1992). However, contracting parties, hard as they may try, cannot reduce every understanding to a stated term. Id. Instances inevitably arise in which one party exercises discretion retained in...