Zimmer, Duncan & Cole

Just Close Your Eyes and Sign on the Dotted Line

After an ice cream parlor shut its doors and stopped paying rent, the landlord and tenant soon discovered that neither of them had ever read the lease.
The trial court and our Supreme Court were left to sort out the confusion in the case, Arrowhead Ridge I, LLC, v. Cold Stone Creamery, Inc. (2011 S.D. 38).
When Cold Stone Creamery first arrived in Sioux Falls, my daughter and I made weekly trips to stand in line for their yummy creations. The chain makes ice cream fun with two, unique sales gimmicks.
First, your choice of ice cream and toppings are smeared and swirled together on a frozen slab of granite (the "cold stone") before being spaded into a fresh-baked waffle cone.
Second, the entire staff randomly breaks into boisterous song every few minutes.
The company prides itself in "contagious" happiness, and it has successfully expanded its chain into 1,400 stores around the world. As with any business, however, there were some bumps along the way.
In 2004, Cold Stone expanded into Sioux Falls with two stores. Both were situated in strip malls very close to the city's two Wal-Mart stores. After just a couple of years, the struggling east-side Cold Stone store closed its doors. (The west-side shop is still in business today.)
When Cold Stone stopped making lease payments, the landlord filed an eviction action. In legalese, these cases are known as "forcible entry and detainer actions".
During that lawsuit, the landlord and tenant soon discovered that the lease contradicted itself in a couple of very important areas.
First, and most importantly, the length of the lease was unclear. One paragraph at the beginning of the document said that Cold Stone would be responsible for ten full years of lease payments. Another paragraph near the very end, however, indicated that Cold Stone would only be responsible for 18 months of payments if the store closed at any time.
A second discrepancy involved the interest rate for late payments. One section of the lease set it at 18%, while another used the Wells Fargo prime rate plus 3%, which lately has hovered around 4%.
Both sides agreed about the source of these contradictions: nobody had ever bothered to read the entire 44-page lease.
Both sides had used brokers to negotiate and handle the lease transaction. Neither party gave much oversight to the brokers.
Only after the lawsuit was filed was the lease finally read. The trial court would need to sort things out.
When a signed contract contains errors and contradictions like this, a trial court can declare it to be "ambiguous". This same rule applies when words or phrases used in the lease can be interpreted in multiple ways.
In those situations, the trial court then investigates beyond the four corners of the written contract. Sources of evidence about the true meaning can include the parties' negotiations, trade customs, and testimony about what each side thought or how the parties acted after the contract was signed.
Unfortunately for Cold Stone, the only witness it called to testify about the company's original understanding was a woman from the Cold Stone's headquarters in Arizona...who was hired several years after the lease was signed.
As a result, the trial judge determined that there was no credible evidence about what Cold Stone believed the lease meant. And, in line with this, the trial judge sided with the landlord's view. The court required Cold Stone to pay all ten years of the broken lease, along with interest at the 18% rate.
There was a glimmer of hope, however. In almost all contracts (including leases) the law requires someone injured by a breach of contract to "mitigate damages".
In simplest terms, an injured party can't just sit by idly and let the damages pile up. Instead, he or she must use their best efforts to minimize the financial impact.
In a landlord-tenant situation, this means that a landlord must try to find a new tenant after the old tenant defaults.
Here, the landlord had advertised its empty space and tried to negotiate replacement leases with a bank, a pizza buffet, and a couple of sandwich shops. Even though none of those potential tenants ever signed a lease, the court determined the landlord had at least tried to mitigate its damages.
Cold Stone was required to pay the full amount of the remaining lease.
Daniel K. Brendtro is a trial attorney and a partner in the law firm of Zimmer, Duncan & Cole. Contact him through the online question form at www.zdclaw.com.