Car Wash Specialties, LLC v. Turnbull – Improper Drafting Turns Settlement Agreement into Soap Scum

Below is a student submission by Wes Dagestad

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The majority of legal disputes are often resolved outside of the hands of a judge or jury. Settlement arrangements offer quick and cost effective alternatives to doing battle for years in a courtroom. However, when drafting settlement agreements, care should be taken in expressing the exact details the parties just resolved. If the details of the resolution aren’t properly ironed out, overly broad handwritten settlements may lead right back to the parties taking arms against one another. This is the situation a landlord and tenant find themselves in, currently re-waging a legal war they thought they settled back in 2009. Car Wash Specialties, LLC v. Turnbull, 2015 WL 581782 (Mo.App. E.D.) (App. Br.) Ambiguity in settlement agreements can present a chance for a contractual debacle, because settlements typically reference prior agreements between parties, and involve some sort of payment or performance to settle the dispute. Meticulous drafting is necessary so that both parties understand what the exact terms of their new agreement is, and if the settlement involves a condition to performance or payment, avoidance of ambiguity is vital to have the condition upheld.

More after the break ….

The owner/landlord of property (“Turnbull”), and their tenant (“Car Wash”), entered into a commercial lease in 1997. The lease was for a 5-year term, and granted Car Wash four additional options to extend the lease each for 5-year periods (25 years in total). To validly exercise each option, the lease required Car Wash to provide 90-days advance notice to Turnbull prior to the lease lapsing.

In 2006 a dispute arose between the parties regarding Turnbull’s failure to provide rights of access to Car Wash’s business. After three years of litigation, the parties entered into a settlement agreement. The agreement was hand drafted by Turnbull’s counsel and expressed the parties would continue to perform under the terms of the lease until Turnbull found a developer who wanted to purchase the land, in which case Turnbull would pay Car Wash $200,000 for prior damages, and Car Wash would vacate the premises. The settlement agreement was formed during the second of the 4 option periods, and in May of 2013, Turnbull sent a notice to Car Wash to vacate the premises for failure to properly exercise its third option.

Turnbull asserted that the lease technically expired in December 2012 and because Car Wash failed to give 90 days notice according to the lease, Turnbull possessed the right to terminate the lease without paying the $200,000 upon the expiration of the lease. Car Wash argues that the terms of the settlement agreement supersede the lease, and allege that they had no remaining options under the lease but were merely staying in possession of the premises until Turnbull found a developer to purchase the land. The relevant portions of the settlement agreement read:

3. Defendants (Car Wash) will continue to pay rent to Plaintiffs (Turnbull) until such time Defendants are notified Plaintiffs have entered into contract with a third party to develop the carwash tract with Plaintiffs’ surrounding ground south of Jason Drive and west of Turnbull Trail. At such time Plaintiffs will pay to Defendant the sum of $200,000 and Defendant will remove their fixtures, both within 60 days.

4. Until such time the carwash is closed due to the terms as outlined above, Defendant will continue to pay rent and the parties will perform according to the Lease and any assignment or amendments thereto.

The circuit court agreed with Turnbull and held that Car Wash’s failure to provide notice under the terms of the lease relieved Turnbull of any obligation to pay Car Wash $200,000 because the lease had been properly terminated. On appeal, Car Wash argues the circuit court misinterpreted the language of the settlement agreement, in that: (1) the settlement agreement should supersede the terms of the lease as to not render the parties 2009 resolution meaningless, (2) the Turnbulls acted in bad faith by breaching the settlement agreement; and (3) the lack of an express term in the settlement agreement does not violate the rule against perpetuities.  The first portion of this post will examine the legal nature of the landlord-tenant relationship in relation to lease option periods, and how conditions must be structured to be upheld as such. The second post will focus on whether the settlement agreement violates the rule against perpetuities in Missouri.

A.  Failure to Extend or Landlord Waiver?

Car Wash asserts that courts must “attribute a reasonable meaning to each clause and harmonize all provisions, rather than leave some provisions non-functional or nonsensical.” Mo. Rental & Leasing, Inc. v. Walker, 14 S.W.3d 638, 641 (Mo. App. E.D. 2000).  Thus Car Wash contends that when taken as a whole and considering the parties’ intent at the time of the settlement agreement, the terms “continue to pay rent…and perform according to the Lease” strike any further lease extension rights.

Under Missouri law, while an “option to extend [a] lease is for the benefit of of the lessee…[a] written notice requirement is for [the] benefit of a lessor and may be waived.” Pelligreen v. Century Furniture & Appliance Co., 524 S.W.2d 168 (Mo. App. St.L. 1975).  Further, “if a lease specifies the kind of notice and the manner in which it is to be given for lessee to exercise an option to extend the term, there must be compliance with it to bind the lessor.” M.D. & Associates, Inc. v. Sears, Roebuck & Co., 749 S.W.2d 454 (Mo. App. 1988). However, a notice requirement in a lease may be waived by act, conduct, and knowledge of circumstances on the part of a landlord. Beck v. Strong, 572 S.W.2d 484, 490 (Mo. App. K.C. 1978). While the facts of Beck are distinguishable from the dispute between Car Wash and Turnbull, the concept of landlord waiver is not discussed in either the Car Wash or Turnbull briefs.

Beck involved a situation where the landlord and tenant had entered into a contract for the tenant to purchase the property. 572 S.W.2d at 485. After the lease had lapsed and tenant had defaulted, tenant made substantial improvements to the property, and the landlord continued accepting tenant’s rent. Id. The landlord then brought suit seeking to quiet tenant’s title, claiming that due to the tenant’s failure to give 60 days’ notice to extend the lease the lease and sale contract were no longer valid. Id. Finding in favor of the tenants, the court held that “the payment of rent and the acceptance thereof after expiration of the lease show only an exercise of the option to extend or renew it for an additional [term].” Id. at 491. Thus, turning to the landlord tenant relationship between Turnbull and Car Wash, a question arises as to what types of communications the parties had after the lease would have lapsed under the disputed extension term.

The lease would have lapsed in December of 2012, and Turnbull’s attorney did not notify Car Wash to vacate until May of 2013. The facts seem to indicate that Car Wash continued to pay rent but no other communications during the 5 months following the lapse of the lease are discussed. Missouri law indicates in a circumstance of a tenant holding over “[t]he general rule is that a holding over by the lessee and waiver of notice by the lessor combine to exercise an option to extend a lease. The law then implies a continuation of the original tenancy upon the same terms, conditions, and covenants as provided in the original lease.” Beck, 572 S.W.2d at 491.

While the lease in the case at hand has been modified by the settlement agreement rather than a simple holdover tenant without notice, Car Wash’s contention that the settlement agreement supersedes the lease, and that the court should step in to “not render any terms meaningless;” the Missouri Supreme Court has held “[n]o implied provision can be inserted to supply an obligation concerning which the contract is intentionally silent, even though without such provision the contract would be unwise or even operate unjustly.” Glass v. Mancuso, 444 S.W.3d 467, 478 (Mo. 1969).

Without any additional information on the communications or circumstances between Turnbull and Car Wash, the settlement agreement’s direct reference to performing according to the lease suggests that the settlement agreement acted as a supplemental rather than a superseding document to the original lease. Typically amendments modify the initial agreement, not strike them altogether. The real crux of the parties’ dispute however is what exactly the nature of the $200,000 payment is, and when or what conditions must be satisfied for Turnbull to pay the amount to Car Wash.

B. $200,000 Settlement: Promise to Pay or Condition Precedent?

Car Wash asserts that the $200,000 in damages they were entitled to would be forfeited and unjustly enrich Turnbull should the court construe the settlement agreement as unambiguous. Turnbull claims that the $200,000 would have been consideration for Car Wash to vacate the premises upon Turnbull finding a developer to purchase the property, despite Car Wash possessing two remaining 5-year extensions. The exact nature of the negotiation of the $200,000 is unclear in the facts discussed in the briefs, as well as the vague handwritten provisions in the settlement agreement. Turnbull’s brief refers to the payment of the $200,000 being subject to a condition precedent (payment of the $200,000 conditioned on Turnbull receiving a third party offer to develop the land). Car Wash responds that they are owed the $200,000 and, should the court hold otherwise this would result in forfeiture.

When considering conditions precedent, “[p]arties to an agreement may make one party’s performance contingent on the satisfaction of a condition, and if the condition does not or cannot occur then performance is not required.” Sternberg v. Sec’y, Dep’t of Health & Human Servs., 299 F.3d 1201 (10th Cir. 2002) (citing Restatement (Second) of Contracts §§ 225(1,2), 226). In analyzing whether parties have expressly agreed to a condition, “the purpose of the parties is given great weight (§202(1)), and, in choosing between reasonable meanings, that meaning is generally preferred which operates against the draftsman (§206).” Restatement (Second) of Contracts § 226 (1981). Further considerations in construing provisions purporting to either be conditions or duties are found in § 227 of the Restatement.

1. Principal Purpose § 202(1)

Section 202(1) of the Restatement indicate that “words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.” Restatement (Second) of Contracts § 202 (1981). Therefore, the nature and principal purpose of the $200,000 must be ascertained to fully understand the parties’ intentions of the settlement agreement. Did the $200,000 amount represent prior damages sustained to Car Wash’s business operations as a result of Turnbull’s misconduct? Or was the payment amount on account of the remaining leasehold interest Car Wash possessed, conditioned on Turnbull selling the land to a developer?

Missouri follows the “principal purpose” line of interpretation “[i]n construing a contract of doubtful meaning, the courts will also consider the object or purpose which the parties sought to have accomplished by it.” Glass, 444 S.W.2d at 476. However, due to the vague nature of the settlement agreement, the nature of the $200,000 is unclear, and the parties find themselves right back in court. The “principal purpose” of the settlement agreement seems to suggest that the contract is (1) a settlement agreement; and (2) that the parties will continue to perform under the lease. Other than those two broad terms the agreement leaves too many lease loopholes open to already sore landlord-tenant litigation wounds.

2. Construction Against Draftsman & Condition Interpretation

While an interpretation that avoids forfeiture is preferred, “the agreement of the parties should be honored even though forfeiture results.” Restatement (Second) of Contracts § 227, cmt. b (1981). Additionally, a provision containing a clause that expresses that a “duty is to be performed ‘when’ an event occurs, it may be doubtful whether it is to be performed only if that event occurs, in which case the event is a condition.” Id. If however the event is one that ordinarily occurs, the event is likely referencing the passage of time and is to be interpreted as a duty. Id.

Therefore the terms “until such time” and “at such time” in the settlement agreement must be examined to interpret whether the payment of the $200,000 upon third party development expresses a condition or duty. An argument could be made that due to the nature of the parties’ settlement discussions the “until such time” referenced the mere passage of time and this would be a duty rather than a condition. On the other hand, Turnbull would likely argue that the sale of his land is not an event that ordinarily occurs, and thus does not refer to a measure of time when the $200,000 payment will be made, but rather conditioned the $200,000 upon receiving the development offer.

Conversely to the settlement agreement, one thing that is clear is that the language referencing payment of the $200,000 ambiguously (at best) creates a condition precedent. A basic principle in interpreting conditions is that “[w]here the intention or meaning of a contract is in question as to whether it should be construed as a covenant, or, in the alternative, a condition precedent, the tendency of the courts is to construe it as a covenant or a promise rather than a condition unless it is plain that a condition precedent was intended.” Mularz v. Greater Park City Co., 623 F.2d 139, 142 (10th Cir. 1980).

An example of a settlement agreement that was carefully drafted and did create a condition can be found in Kansas Housing Resources Corp. v. N.E.A.R., Inc., 2006 WL 208690 at *1 (D. Kan. Jan 26, 2006). The parties had a prior dispute involving the development of low-income housing where Kansas Housing Resources Corp (“KHRC”) would finance the project, and NEAR construct the development. Id. After prior litigation, KHRC brought a declaratory judgment seeking to enforce the settlement agreement the parties had, NEAR counterclaimed arguing it was not performing because they were owed certain funds for performance. KHRC replied that NEAR was not to be paid until certain conditions were met. The relevant provision pertaining to the disputed conditions read:

[KDCH] shall release to [NEAR] an additional allocation of HOME funds in the amount of $63,851.60 when the following conditions are met: (a) [NEAR] meeting the requirements in Paragraphs 1 through 7 of this agreement within six (6) months of the date of execution of the Agreement; (b) [NEAR] becoming recertified as a Community Housing Development Corporation (CHDC); and (c) [NEAR] providing a detailed itemization of the expenses, which must be properly reimbursable under HUD regulations and in a form satisfactory to [KDCH], for which the additional allocation will be expended.

The court held, “the parties language clearly expressly conditioned KHRC’s obligation to pay additional funds on NEAR’s performance of the acts set forth in subparagraphs (a), (b) and (c). While the court recognizes the general rule that ambiguous contract language should be interpreted as a promise rather than a condition, that rule is inapplicable in this case because… the language is not ambiguous.” Id. at *2.  KHRC left nothing to chance by expressly identifying the three events as “conditions” eliminating any ambiguity that may end up creating a covenant rather than a condition.

Regardless of the outcome of the interpretation of the lease technicalities and the settlement agreement; it seems clear that something as sensitive as an agreement to settle litigated claims should be more carefully drafted than vague terms doodled on courthouse loose-leaf. Neither Car Wash nor Turnbull should have allowed their attorneys to memorialize their settlement without fully addressing the nature of (a) their current dispute; (b) how that dispute modified any prior engagements the parties were bound (or not bound) by; and (c) express the future intentions their business relationship and what document governed that relationship. Lengthy contracts may seem tedious at the time parties are in the drafting stage, but a carefully drafted agreement is typically less of a headache than multiple courtroom battles.

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