Covenant of Good Faith and Fair Dealing Doesn’t Help Owner

September 13, 2017
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Sometimes, no matter how well-negotiated your lease is, you could still be subject to a tenant’s whim regarding certain issues, like the tenant giving its consent to changes at your shopping center or office building. And you might think that because you and the tenant are sophisticated parties, it’ll be reasonable about consent. You might even think that the covenant of “good faith and fair dealing” applies in such a scenario—which would require the tenant to not withhold consent as leverage to get other advantages. But a Maine court determined that an owner couldn’t rely on that, in a case that serves as a good lesson for commercial real estate owners.  

There, a shopping center owner decided to construct a new set of buildings within the shopping center grounds, which would house tenants that would be beneficial to its anchor store, a national clothing retailer. The retailer’s lease contains a clause that requires the owner to get the retailer’s approval before constructing any new building or structure within the shopping center. The retailer refused to consent to the construction—but offered to give its consent in exchange for additional options to extend its lease, which had only one renewal option left.

The retailer’s current rent is significantly less than the market value for its leased space. The owner claimed that further extensions of the current lease terms would be economically untenable for it. It also alleged that the retailer is withholding its consent to the new construction for the sole purpose of using its leverage to extract additional favorable extensions of the lease, and that it has no legitimate business reason for opposing the new construction.

The owner asked a court for an injunction to prevent the retailer from withholding approval of the construction. The retailer asked the court to dismiss the claim. A Maine trial court refused to grant the injunction and dismissed the claim.

The owner claimed that the lease must be regarded as containing an implied covenant of “good faith and fair dealing for all commercial engagements including commercial real estate leases.” It argued that the retailer’s refusal to consent to the new construction violates the terms of the lease when the lease is read in the context of that implied covenant. The retailer countered that treating the lease as including an implied covenant is foreclosed by state court precedent.

The trial court noted that on numerous occasions cases had addressed the question of whether Maine law recognizes an implied covenant of good faith and fair dealing in contracts not governed by the Uniform Commercial Code and its answer has consistently been “no.”

But the owner argued that the court should exercise its equitable powers to interpret the lease against that background presumption of good faith and reasonableness and find that the retailer’s refusal to consent to the new construction is unreasonable.

“Faced with repeated and unambiguous holdings from Maine’s highest court that there is no implied covenant of good faith and fair dealing in Maine contract law outside of the Uniform Commercial Code, we must apply that rule to this case,” said the court. Because Maine law does not recognize the implied covenant in connection with commercial real estate leases, the tenant is not subject to an implied reasonableness or good faith requirement in its exercise of its contractual rights under the lease, it added. Thus, the court denied the owner’s request for an injunction [Rosenthal v. J.C. Penney Corp., August 2017].