Covenant of Good Faith in Contracts: When It Does Not Apply

Sunshine Gasoline Distributors v. Biscayne Enterprises, 39 Fla. L. Weekly D1239

This opinion is an exceedingly clear opinion concerning an exceedingly clear contract. It addresses a partial summary judgment on a declaratory action entered by Judge Norma S. Lindsey on a lease renewal option. Judge Rothenberg, writing for the 3rd District Court of Appeal, affirmed Judge Lindsey in all respects.

De Novo Review of the Contract

The underlying contract called for an initial five-year lease term with an option of seven five-year lease extensions. The lease provided for a specific notice of extension and gave the lessee, Sunshine Gasoline Distributors (Sunshine), the right to exercise the renewal option.

Subsequent to the initial lease, the parties entered into a lease modification which modified the extension option provision: “…any extension…in order to be binding upon the parties, requires written approval of Lessor, which approval shall be within the sole discretion of Lessor.”

Seven years later, Sunshine became the assignee of the lease and took possession of the property. Thereafter, Sunshine notified Biscayne Enterprises (Biscayne) that it wanted to exercise a lease extension, but Biscayne refused to renew the lease.

Sunshine filed its declaratory action to have its rights declared to exercise its renewal option and remain on the property. Biscayne countered by seeking an eviction, claiming that the clear and unambiguous terms of the contract gave it full discretion to refuse the lease renewal. Judge Lindsey reviewed the contract and granted Biscayne a partial summary judgment.

On appeal, Judge Rothenberg agreed with Judge Lindsey that the lease terms were clear and unambiguous. Judge Rothenberg keyed in on the clear language that gave Biscayne “sole discretion” to approve of the extension. Judge Rothenberg also highlighted the lease language that stated: “The parties further agree that the purpose [of the extension provision]… serves to provide the parties with an efficient mechanism for extension of the lease if desired by both Lessor and Lessee.” (emphasis added).

This Case Gets Interesting

The interesting part of what should be a straightforward and rather mundane opinion is how Judge Rothenberg dealt with Sunshine’s claim to renew the lease under the duty of good faith and fair dealing. Good faith and fair dealing is inherent and woven into all contracts in Florida. Yet, in spite of the duty, there is a paucity of cases that apply it. This case is one that discusses when “sole discretion” can impose a duty of good faith and fair dealing. Hyman v. Ocean Optique Distribs., Inc., 734 So. 2d 546 (Fla. 3d DCA 1999).

Judge Rothenberg, although relegating this discussion of good faith and fair dealing to a footnote, makes this the crux of the entire case. The footnote states: “The duty of good faith, however, is imposed in these instances only to protect the reasonable expectations of the parties to the contract when a broad range of authority is reposed in one of those parties.

The footnote goes on to state: “Where, as here, a contract provides a binary choice – to renew the lease or not – the duty of good faith and fair dealing is unnecessary to protect the parties’ interests, particularly when the lease terms make clear that the renewal provisions are simply to provide an efficient mechanism for extension of the lease if desired by both lessor and lessee.”

Thus, writes Judge Rothenberg:

“Contrary to Sunshine’s assertion, imposing a duty of good faith and fair dealing in this instance would frustrate the parties’ expectations, not protect them. The term sole discretion, in this instance, simply means that both parties have the choice whether to renew the contract for any reason.”

This case is testament to the proposition that when contracts are absolutely clear on their face and that the parties know where they stand vis-à-vis their rights (or lack of rights), a court will not protect them from the contract they signed. Thus, rewriting the contract’s clear terms under the guise of good faith and fair dealing negates the obvious intention of the parties.

What is not Clear

Although this case makes perfect sense in all respects, it only tells the reader what is not good faith and fair dealing in the face of a clear and unambiguous contract. This case, like so many others, skirts the nebulous area of contract law that applies good faith and fair dealing to contracts—be they absolutely clear – or not. Perhaps a case will soon appear that will give judges and practitioners a better feel for when good faith and fair dealing applies to
contracts.

 

More by | David M. Gersten David M. Gersten , Law.com Contributor
LOAD MORE
Industry: