Tuesday, June 22, 2010

Thrifty Payless v. Mariners Mile Gateway (Cal. Ct. App. - June 21, 2010)

Here's what happens when you write a bad contract.

Mariners Mile owns a fancy piece of commercial land in Newport Beach. It proposes to build a Rite-Aid store on the property, and enters into a lease with Thrifty for a specified rent. Mariners then starts to build the building. So far so good.

But then Mariners decides that it can probably get more rent from someone else. It asks Rite-Aid to pay more, but Rite-Aid isn't interested in renegotiating a deal the parties had already signed.

But the provisions of the lease provide that if the building hasn't been finished by a certain date, unless it's Rite-Aid's fault, both of the parties have a right to terminate the contract. So Mariners essentially says: "Dude, if you don't pay more than the contract requires, we're not finishing the building by the specified date, at which point we'll cancel the contract." Rite-Aid responds that that'd be a breach of the contract, and calls Mariners' bluff. But it's no bluff. They slow things down, don't build it on time, and then get a different tenant -- Walgreens -- at a higher rent, and terminate the contract. At which point Rite-Aid sues.

But the trial court dismisses the complaint on a nonsuit, and the Court of Appeal affirms. These are sophisticated parties. They wrote a contract that says either side gets to terminate. In such settings, the Court of Appeal held, there's no implied covenant of good faith and fair dealing, since it would conflict with the contract terms, so even if Mariners deliberately slowed down the building so it could terminate, that was its right. And, yes, even if there may be some extrinsic evidence that shows that the parties intended the contract only to allow Rite-Aid to terminate the contract if the lease didn't start on time, that's not what the final version of the contract said. So Rite-Aid can't sue even if it was -- as it assuredly was -- held up and then screwed over.

Watch what you sign.