Malecki v. Desert Palms Professional Properties, L.L.C. (CA1 7/28/09)

This is a commercial landlord/tenant case that probably reaches the right result but in the wrong way, with possible consequences for the law.

Malecki leased an office from Desert Palms, with a right to renew “so long as [he] is in compliance with the terms” of the lease. Desert Palms asked him to move out so that it could take over his space. He declined and announced that he intended to renew the lease. The next month he got a letter from Desert Palms saying that it had mistakenly calculated the square footage of the office, that the office was larger than he was paying for,  and that he owed some $8000 in back rent. Squabbling followed, during which Malecki gave notice of renewing his lease. Desert Palms replied that he could pay all the disputed amount to avoid being evicted immediately but that his lease would not be renewed in any event.

Was this one of those half-clever landlords who think themselves legally cunning? Who knows. The opinions’ recitation of the facts is loaded in favor of Malecki, going out of its way to explain and justify his actions. Those with commercial landlord/tenant experience will read between the lines and guess that there was more going on than meets our eye but by the end of the fifth paragraph its pretty clear who the hero and villain of the opinion are.

Malecki sued for a DJ and a TRO (which the court granted), and for breach of contract and of the duty of good faith and fair dealing. Desert Palms counterclaimed for the alleged back rent. At trial (a bench trial, apparently), the court found that although the space actually was larger than he had been paying for, Malecki was in compliance with the lease when he renewed it and that Desert Palms’ claim was a bad-faith contrivance to get him out of the space. The court awarded Malecki his attorney’s fees, reduced by the amount of back rent it found he owed.

Desert Palms appealed. The issue was whether Malecki was sufficiently in compliance with the lease to exercise the renewal option.

Desert Palms argued that Malecki could not renew unless he was in strict compliance with the lease, citing law to the effect that there must be strict compliance with the terms of an option agreement. The Court of Appeals swallowed the bait, proceeding as if the question were how “strict” “strict compliance” must be. It first discussed a 1947 federal case holding – although this doesn’t seem to be quite the way the court understood it – that “faithful compliance “ (the wording of the contract in that case) doesn’t require strict compliance. It then cited an Arizona case called Loehmann’s holding that the statute on a landlord’s right of re-entry, though it says you can do it for “any violation” of the lease, doesn’t mean a trivial violation. Under Loehmann’s , the court says, “a tenant’s right to possession may not be conditioned on perfect performance of a commercial lease.”

Okay, before we get any farther off the beam let’s review the right analytical track. This is a contract case. The basic question is the intent of the parties. To find that you look at the contract language. The contract says “in compliance.” Did the parties mean “strict compliance?” Did they mean “reasonable compliance?” Presumably they never thought about it and the language was boilerplate they paid no attention to.  That means, for reasons that it should not take a court long to explain,  that the contract will be held to have meant “reasonable compliance.” No matter how strictly the law wants to apply the terms of an option provision, “strictly reasonable” is still “reasonable.” A contract that says “faithful compliance” is of marginal interest. The meaning of a statute depends on what the legislature intended and has nothing to do with what the parties to a contract intended.

The court does eventually get back to mentioning, almost in passing, the “in compliance” contract language. But then it says “we view Malecki’s contingent right to renew as analytically similar to the right of possession at issue in Loehmann’s” (par. 24). “Analytically similar?” No, it might be factually similar but the involvement of a statute on Loehmann’s makes it analytically different.

The court also, in a footnote quoting Loehmann’s, lists the Restatement factors for judging the materiality of a breach. This does, arguably, have something to do with the reasonableness of compliance and should have been a better part of the analysis than a parenthetical reference to a problematic case.

The court concluded that substantial evidence supported the conclusion that Malecki did not materially breach the lease and that Desert Palms acted in bad faith.

Desert Palms also disputed the award of attorney’s fees, either for incomprehensible reasons or for reasons that merely sound so in the opinion.

Is it now the law that “a tenant’s right to possession may not be conditioned on perfect performance of a commercial lease?” Before now we would have said that the parties to such a contract, though they probably wouldn’t do so, had a perfect right to agree to such a thing.