Tech Center 2000, LLC v. ZRII, LLC ( 2015 )

2015 UT App 281THE UTAH COURT OF APPEALS
TECH CENTER 2000, LLC,
Plaintiff and Appellee,
v.
ZRII, LLC; AMALAKI, LLC; AND WILLIAM F. FARLEY,
Defendants and Appellants.
Opinion
No. 20130848-CA
Filed November 27, 2015
Third District Court, Salt Lake Department
The Honorable John Paul Kennedy
No. 090908334
James E. Magleby, Christine T. Greenwood, and
Bernard J. Nussbaum, Attorneys for Appellants
Florence M. Vincent and Spencer H. Reed, Attorneys
for Appellee
JUDGE STEPHEN L. ROTH authored this Opinion, in which
JUDGE J. FREDERIC VOROS JR. concurred. JUDGE GREGORY K.
ORME concurred in parts II, III, and IV, and dissented as to
parts I and V.
ROTH, Judge:
¶1 Zrii, LLC, (Zrii) appeals the district court’s judgment in
favor of Tech Center 2000, LLC (Landlord). We affirm.
BACKGROUND
¶2 Zrii leased office space in a multi-building complex that
Landlord was developing. Eventually, Zrii occupied space in
two different buildings. In October 2008, Landlord and Zrii
entered into a lease (the Lease) for a third building that had yet
to be constructed (the Building). Zrii agreed to lease the Building
Tech Center 2000 v. Zrii
for three years beginning on April 1, 2009. Rent was set at
approximately $21,000 per month for the first year, with the
amount increasing to approximately $25,000 per month by the
third year. In addition to providing a structural “shell” and
utility access, Landlord agreed to construct leasehold essentials
such as an elevator, restrooms, and lobby areas. Landlord also
agreed to provide up to $40 per square foot, or $611,760, in
additional “tenant improvement[s]” and customization (the
tenant improvement allowance). Zrii was responsible for the cost
of any further improvements or modifications to the Building.
The Lease was personally guaranteed by William F. Farley, Zrii’s
CEO.
¶3 In February 2009, Zrii experienced a company-wide
“walkout” of the majority of its distributors and employees.
Shortly afterward, Zrii announced it would no longer be able to
occupy the Building. Landlord filed suit against Zrii a few weeks
later, asserting claims for breach of the Lease—principally
unpaid rent—and enforcement of the personal guarantee. A
bench trial was held and the district court ruled in favor of
Landlord. The district court determined that Landlord was
entitled to $795,871.04 in damages. It arrived at this number by
first calculating the amount of rent due from the date of the
breach until March 31, 2012—three years after the
commencement of the Lease—and subtracting the amount
Landlord received in mitigation from renting the Building to
replacement tenants. The district court also noted that in an
invoice to Zrii following the breach, Landlord had provided Zrii
a monthly credit of $4,690.39. The district court found that the
amount represented “an amortization of the tenant
[improvement] allowance, for a total credit over the life of the
lease,” which the court calculated to be $168,854.04. 1 In the
1. While the district court did not explicitly state the time period
over which the amortization had occurred, Zrii states that the
$4,690.39 monthly credit can be arrived at by amortizing the
(continued…)
20130848-CA 2 2015 UT App 281Tech Center 2000 v. Zrii
damages calculation, the district court also included late fees,
interest, and realtor commissions. Finally, the court ruled that
Farley’s guarantee was enforceable under the circumstances.
¶4 Zrii filed a motion to amend the order, arguing that the
district court erred in four respects: (1) by finding that Landlord
had adequately mitigated its damages; (2) by giving Zrii credit
against the unpaid rent for only the amortized amount of the
tenant improvement allowance rather than the entire $611,760
provided in the Lease agreement; (3) by rejecting Zrii’s
impracticability and frustration of purpose defense despite the
financially “devastating” company-wide “walkout” of Zrii’s
personnel and distributors; and (4) by determining that Farley
was liable under the personal guarantee for damages from Zrii’s
breach of the lease agreement and for Landlord’s attorney fees.
After a hearing on the motion, the district court entered an
amended order rejecting Zrii’s contentions. Zrii appeals.
ISSUES AND STANDARDS OF REVIEW
¶5 Zrii first argues that the Lease was unenforceable because
the tenant improvement allowance rendered the base rental rate
indefinite, and that even if the Lease was enforceable, the district
court erred in calculating damages because it did not give Zrii
credit for the full tenant improvement allowance of $611,760.
“’Questions of contract interpretation which are confined to the
language of the contract itself are questions of law, which we
review for correctness.’” Hillcrest Inv. v. Sandy City, 2010 UT App
201, ¶ 7, 238 P.3d 1067 (quoting Mellor v. Wasatch Crest Mut. Ins.
Co., 2009 UT 5, ¶ 7, 201 P.3d 1004). “If a contract is deemed
ambiguous, and the trial court allows extrinsic evidence of
(…continued)
tenant improvement allowance over a twenty-five year period—
a statement Landlord does not appear to contest.
20130848-CA 3 2015 UT App 281Tech Center 2000 v. Zrii
intent, interpretation of the contract becomes a factual matter
and our review is strictly limited.” Id. (citation and internal
quotation marks omitted). “[T]he adequacy of a damage award
is a factual question” and “we will not reverse the trial court’s
findings unless they are clearly erroneous.” Lysenko v. Sawaya,
2000 UT 58, ¶ 13, 7 P.3d 783 (citation and internal quotation
marks omitted); see also id. ¶ 16; Utah R. Civ. P. 52(a) (providing
that findings of fact “shall not be set aside unless clearly
erroneous”).
¶6 Second, Zrii argues that Landlord failed to adequately
mitigate its damages. “[W]e review a trial court’s conclusions as
to the legal effect of a given set of found facts for correctness.”
Watkins v. Ford, 2010 UT App 243, ¶ 11, 239 P.3d 526 (alteration
in original) (citation and internal quotation marks omitted), aff’d,
Watkins v. Ford, 2013 UT 31, 304 P.3d 841.
¶7 Third, Zrii argues that the district court improperly
rejected its impracticability and frustration of purpose defenses.
“Whether impracticability affords a party relief from its
obligations under a contract is a question of law that we review
for correctness.” Central Utah Water Conservancy Dist. v. Upper E.
Union Irrigation Co., 2013 UT 67, ¶ 27, 321 P.3d 1113.
¶8 Fourth, Zrii contends that the district court erred in
determining that Farley’s personal guarantee was enforceable.
As we have stated above, “’Questions of contract interpretation
which are confined to the language of the contract itself are
questions of law, which we review for correctness.’” Hillcrest,
2010 UT App 201, ¶ 7 (quoting Mellor, 2009 UT 5, ¶ 7).
ANALYSIS
I. Claims Related to the Tenant Improvement Allowance
¶9 Zrii challenges two of the district court’s determinations
related to the tenant improvement allowance. Zrii first claims
20130848-CA 4 2015 UT App 281Tech Center 2000 v. Zrii
that the tenant improvement allowance renders the Lease’s
rental provision too indefinite to be enforced. Zrii also argues
that the district court erred in failing to credit the full tenant
improvement allowance toward the damages Zrii owed to
Landlord under the Lease. We address each claim in turn.
A. Indefiniteness of the Lease
¶10 Zrii argues that the lease provision for a tenant
improvement allowance rendered “the amount of the payable
rent . . . too indefinite to be enforced.” Zrii makes several
arguments in connection with this contention. We are not
persuaded.
¶11 First, Zrii contends that under the Lease, “the amount of
payable Base Rent was directly dependent upon the Tenant
Improvement Allowance.” “When interpreting a contract, we
first look at the plain language to determine the parties’ meaning
and intent.” Meadow Valley Contractors, Inc. v. Utah Dep’t of
Transp., 2011 UT 35, ¶ 64, 266 P.3d 671. “An agreement cannot be
enforced if its terms are indefinite or demonstrate that there was
no intent to contract.” Richard Barton Enters., Inc. v. Tsern, 928
P.2d 368, 373 (Utah 1996). Here, Article 3 of the Lease, titled
“Rent, Operating Expenses,” clearly set forth the amount of
“Monthly Base Rent” due each month to Landlord. The tenant
improvement allowance, on the other hand, was provided for in
the Lease under Article 2, titled “Term, Commencement, Tenant
Improvements.” The Lease contains no language connecting the
amount of rent Zrii was obligated to pay under the Lease with
the amount Landlord agreed to pay for additional improvements
to the Building. Rather, the plain language and organization of
the Lease demonstrate that the tenant improvement allowance
was a separate element of the contract between the parties and
not, as Zrii contends, connected to the Lease’s rental rate. Simply
put, Article 3 specifically describes Zrii’s monthly rental
obligation for each year of the three-year lease, while Article 2
describes Landlord’s obligation to provide a specified tenant
20130848-CA 5 2015 UT App 281Tech Center 2000 v. Zrii
improvement allowance. Zrii has not otherwise shown that the
two obligations are tied to each other in any way, much less that
the monthly lease payments are dependent on the amount
ultimately expended for tenant improvements. Accordingly,
there is no indefiniteness in the rent provision of the Lease itself
that would make it unenforceable.
¶12 Zrii’s remaining arguments are somewhat amorphous,
but all seem to rely on the theory that the Lease provided for a
deduction of the tenant improvement allowance from Zrii’s
rental obligations. 2 Having already concluded that the Lease
itself unambiguously provided for no such deduction, resolution
of Zrii’s remaining claims hinges on determining, as Zrii appears
to contend, whether the parties modified the Lease after the
breach in a way that linked the tenant improvement allowance
to the amount of rent due. In support of its arguments, Zrii
points us to an invoice and accompanying correspondence that
Landlord sent during the post-breach negotiations in which
Landlord applied a monthly credit of $4,690.39, purportedly
based on amortization of the then-unspent tenant improvement
allowance. In a letter sent a few weeks later, Landlord stated, “In
accordance with Lease terms, the Landlord amortized and
deducted the Tenant Improvement allowance of $611,760.00 (i.e.,
$4,690.39/month) from the Tenant’s rent.” Zrii does not persuade
us that Landlord’s post-breach credit for the tenant
2. For example, Zrii contends that the Lease was only the
“starting point” in determining the rent to be paid and that the
tenant improvement allowance should have been deducted from
the rent. Zrii also argues that the amount that would be spent on
tenant improvements was indefinite “until the very end,” thus
rendering the amount of rent due indefinite. Zrii, however,
argues that while the amount of tenant improvements was
indefinite, the amount would have been at least the $611,760
provided in the Lease and so the full amount of the allowance
should have been deducted from its rental obligations.
20130848-CA 6 2015 UT App 281Tech Center 2000 v. Zrii
improvement allowance amounted to a modification of the
Lease’s unambiguous terms.
¶13 “[P]arties to a contract may, by mutual consent, modify
any or all of a contract.” Harris v. IES Assocs., Inc., 2003 UT App
112, ¶ 46, 69 P.3d 297 (alteration in original) (citation and
internal quotation marks omitted). “A valid modification of a
contract or lease requires a meeting of the minds of the parties,
which must be spelled out, either expressly or impliedly, with
sufficient definiteness.” Richard Barton Enters., 928 P.2d at 373
(citation and internal quotation marks omitted). The party
claiming the modification bears the burden of showing that a
meeting of the minds occurred. Id.
¶14 Zrii has not met that burden here. As in Harris, the
statement that Zrii points us to was not “accompanied by terms
and conditions” as was the “signed initial contract,” nor was it
“titled as an addendum or modification” or signed by both
parties. See Harris, 2003 UT App 112, ¶ 47. Indeed, the line-item
invoice containing a monthly credit to which Zrii directs us is
similar in nature to the “list of equipment with price estimates”
the court in Harris determined was not a valid contract
modification. See id. And in our view, the statement by Landlord
that the tenant improvement allowance was deducted and
amortized “accord[ing to] the Lease terms” is, at best, a generous
misinterpretation of the Lease in the context of Zrii’s breach, not
a valid agreement to modify its terms. Indeed, Zrii itself
concedes that, in connection with its argument that the district
court should have credited it with the full amount of the
allowance rather than accepting Landlord’s lower amortization
calculation, “there was no meeting of the minds as to
amortization of the Tenant Improvement Allowance.”
Essentially Zrii appears to argue that the Lease was modified by
the Landlord’s invoice and letter in a way that provides Zrii the
benefit of a deduction from the rental amount of the tenant
improvement allowance, but not at the amortized rate specified
in the very statement providing that deduction. Neither the
20130848-CA 7 2015 UT App 281Tech Center 2000 v. Zrii
language of the Lease nor the post-breach dealings of the parties
support this position. 3
¶15 Accordingly, we conclude that the district court did not
err in determining that the Lease was enforceable on its terms.
B. Calculation of Damages
¶16 Zrii next argues that even if the Lease was enforceable as
written, the district court should have deducted the full tenant
improvement allowance from any damages Zrii owed to
Landlord.
¶17 When one party breaches a contract, the injured party is
entitled to recover damages
as measured by (a) the loss in the value to him of
the other party’s performance caused by its failure
or deficiency, plus (b) any other loss, including
incidental or consequential loss, caused by the
breach, less (c) any cost or other loss that he has
avoided by not having to perform.
3. To the extent Zrii may be asserting that the invoice and letter
amounted to an interpretation of the Lease that linked the rent
with the tenant improvement allowance, that argument is no
more persuasive. We have already determined that the Lease’s
plain meaning does not encompass such a link, and Zrii has not
demonstrated that Landlord’s post-breach conduct is legally
sufficient to warrant an interpretation of the Lease that diverges
from its unambiguous language. See Flores v. Earnshaw, 2009 UT
App 90, ¶ 13, 209 P.3d 428 (“[A]dmission of parol evidence to
determine intent is allowed only if there is a finding of facial
ambiguity; otherwise, the parties’ intentions must be determined
solely from the language of the contract.”) (citation and internal
quotation marks omitted).
20130848-CA 8 2015 UT App 281Tech Center 2000 v. Zrii
Restatement (Second) of Contracts § 347 (1981); accord TruGreen
Cos., L.L.C. v. Mower Bros., Inc., 2008 UT 81, ¶ 10, 199 P.3d 929.
Zrii contends that its breach saved Landlord from having to
expend the $611,760 that the Lease obligated Landlord to
provide in tenant improvements and therefore the full tenant
improvement allowance should have been credited as an offset
against the amount of rent Zrii owed. Landlord responds that
the district court was correct in determining that the
contemplated improvements amounted to simply “capital
expenditures” that would have provided Landlord value far
beyond the life of the three-year lease with Zrii. We agree.
¶18 The Building itself was essentially a hollow shell with
concrete floors; the tenant improvements contemplated by the
Lease were necessary to provide a useable space for a tenant to
conduct its business. In part because Zrii was to be the first
occupant of the space, Landlord agreed to provide a specified
tenant improvement allowance for basic needs, including
flooring, paint, and individual offices. These were expenses that
Landlord would have had to expend regardless of which tenant
it had contracted with for construction of the Building; and the
improvements would be Landlord’s property once the Lease’s
term ended, resulting in an improved building that could be
offered to prospective future tenants. Landlord’s offer to cover
the cost of these basic improvements appears to be essentially a
guarantee that Landlord would be providing Zrii leased space
that contained the basic infrastructure needed to conduct
business. Thus, Landlord did not “save” these expenses as a
result of Zrii’s breach. And after Zrii’s breach Landlord was still
left with the expense of improving the space in order to rent the
Building to replacement tenants. 4 Accordingly, we find no error
in the district court’s determination that it was “not appropriate
4. Landlord claims it had to expend nearly $280,000 to construct
tenant improvements needed to rent out just a portion of the
space left vacant by Zrii’s breach.
20130848-CA 9 2015 UT App 281Tech Center 2000 v. Zrii
to view the maximum amount of proposed tenant improvements
as simply an expense that was saved by [Landlord] upon Zrii’s
breach” and in declining to credit the entirety of the tenant
improvement allowance against the damages Zrii owed. 5
¶19 Zrii correctly points out that the district court offset the
damages award to Landlord by $168,854—an amount the district
court calculated based on a monthly credit Landlord offered to
Zrii in an invoice following Zrii’s breach and that the district
court found “represent[ed] an amortization of the tenant
[improvement] allowance.” Zrii appears to argue that this offset
is evidence that the district court agreed that the tenant
improvement allowance should have been credited against the
damages Zrii owed. Zrii’s position therefore seems to be that
once the district court decided that Zrii was entitled to some
offset against the rent based on the tenant improvement
allowance, there was no basis for the court to then credit an
amount less than the total allowance by simply accepting
Landlord’s twenty-five year amortization calculation.
¶20 Zrii seems to misunderstand the basis for the district
court’s decision. There is no indication, as Zrii contends, that the
district court provided the $168,854 credit because it had
concluded that the Lease or any post-Lease negotiations entitled
Zrii to have any or all of the tenant improvement allowance
credited against the damages resulting from Zrii’s breach.
Instead, it is clear from the district court’s express finding that
“[Landlord] was not required under the Lease Agreement to
5. We note that Landlord may have saved some expenses because
of Zrii’s breach. However, both below and on appeal, Zrii has
taken an all-or-nothing approach and claimed that Landlord was
spared the expense of the entire tenant improvement
allowance—a claim we have already explained the district court
correctly rejected. And Zrii has not provided evidence
supporting a credit of any other amount.
20130848-CA 10 2015 UT App 281Tech Center 2000 v. Zrii
provide this credit to Zrii” and that the district court merely
applied the credit in recognition of the fact that Landlord had
voluntarily provided Zrii with such an offset during post-breach
negotiations. The district court seemed to treat this credit as a
sort of concession on the part of Landlord that the court itself
was willing to put into effect in the judgment, rather than as an
obligation that the court determined Landlord was required to
provide. Landlord has not appealed the district court’s decision
in this regard, and Zrii has thus benefited in the amount of
$168,854, which it might not otherwise have been entitled to
under the Lease alone. Accordingly, we conclude that Zrii has
not shown that the district court erred in determining the
amount of the tenant improvement allowance credit
incorporated in the court’s damages calculation.
II. Mitigation of Damages
¶21 Zrii contends that Landlord failed to mitigate damages
caused by Zrii’s breach when it allowed a pending sale of the
property to fall through. Landlord urges us to affirm the district
court’s finding that Landlord adequately mitigated its damages
through other means. We agree with Landlord, and conclude
that it was not required to sell the property, but rather was
required only to make reasonable efforts to relet the property.
¶22 In Reid v. Mutual of Omaha Insurance Co., 776 P.2d 896(Utah 1989), our supreme court held that, “[A] landlord who
seeks to hold a breaching tenant liable for unpaid rents has an
obligation to take commercially reasonable steps to mitigate its
losses, which ordinarily means that the landlord must seek to
relet the premises.” Id. at 906. The court went on to say,
A further word about the standard by which a
landlord’s efforts to mitigate are to be measured:
the standard is one of objective commercial
reasonableness. A landlord is obligated to take
such steps as would be expected of a reasonable
20130848-CA 11 2015 UT App 281Tech Center 2000 v. Zrii
landlord letting out a similar property in the same
market conditions.
Id. at 906–07 (citations omitted). And “the objective commercial
reasonableness of mitigation efforts is a fact question that
depends heavily on the particularities of the property and the
relevant market at the pertinent point in time.” Id. at 907
(citations omitted).
¶23 Here, the district court determined that Landlord
“reasonably and adequately mitigated its damages by
attempting to relet the premises, by working with Zrii to allow
them to sublet the premises, and by attempting to sell the
premises after Zrii breached its obligations.” The court made this
determination based on its findings that both Landlord and “Zrii
worked with listing agents and brokers to sublease or relet” the
Building; that by April 1, 2012, Landlord had been able to relet
sixty-one percent of the Building; that Landlord’s property
management arm moved into the Building with a corresponding
offset to Zrii’s rental obligation; and that Landlord had
attempted to sell the Building, but that it was never sold. The
court also specifically found that Landlord’s failure “to close on
a potential sale does not negate the Court’s finding of
commercial reasonableness in light of the other mitigation efforts
pursued by [Landlord].”
¶24 Zrii contends, however, that Landlord’s abandonment of
a potential sale constitutes a failure to mitigate damages. In
January 2010, Landlord accepted an offer from a real estate
company to sell the Building for $3.245 million. However, by
March 2010, Landlord had abandoned the sale and returned the
earnest money. When asked under oath about why the sale had
failed, Landlord’s representative stated, “We let it drop. It
expired and that was it.” Zrii contends that this failure to pursue
the sale violates principles regarding mitigation established in
Mahmood v. Ross, 1999 UT 104, 990 P.2d 933.
20130848-CA 12 2015 UT App 281Tech Center 2000 v. Zrii
¶25 Mahmood involved a loan taken out by three partners that
was secured by real property owned by one of them. Id. ¶¶ 3–4.
The loan went into default after two of the partners failed to
fulfill their obligations; the lender then foreclosed and sold the
third partner’s property at a trustee’s sale. Id. ¶¶ 5, 9–11. The
third partner brought suit against one of the two defaulting
partners claiming that the default had caused him to lose his
property. Id. ¶¶ 9–11. The supreme court disagreed, concluding
that, because the third partner had refused an intervening offer
to purchase one half of the property for an amount sufficient to
have paid off the lender, he had “failed to mitigate his
damages.” Id. ¶ 37. Zrii asserts that the district court erred in not
coming to a similar conclusion here.
¶26 However, we conclude that Mahmood is distinguishable
from the circumstances here. In Mahmood, the court determined
that mitigation principles required the owner to accept an offer
to sell his property where that property was going to be sold
against his will at a trustee’s sale anyway. Here, however,
external circumstances did not require sale of the property;
rather, Landlord built the property for the purpose of leasing it
out to produce rental income or even to sell it under favorable
circumstances. While sale of the property in this case could have
fully mitigated Landlord’s damages from Zrii’s breach of the
Lease, Zrii has not presented any authority that suggests that a
landowner currently in the business of leasing its property is
required to sell that property in order to maximize mitigation,
even if that landowner might be willing to sell its property as a
general matter. Rather, “the standard is one of objective
commercial reasonableness.” Reid, 776 P.2d at 906. And even
assuming that Landlord had entered into a sale-purchase
agreement that might have been specifically enforceable in the
face of the buyer’s unwillingness to proceed with the purchase,
Zrii presented no evidence to show that it was commercially
reasonable to pursue the sale through a lawsuit or that selling
the property was more commercially reasonable for “a
reasonable landlord letting out a similar property in the same
20130848-CA 13 2015 UT App 281Tech Center 2000 v. Zrii
market conditions” than continuing to lease it in the ordinary
course of its commercial leasing business. See id. at 907. Rather,
commercial reasonableness would seem to allow a property
owner faced with a tenant’s default to choose, based on the
owner’s assessment of benefits and risks, whether to relet the
property or to sell it, even if either option might be reasonable.
¶27 Moreover, the principle of mitigation is meant to temper
the harm flowing from a wrong by encouraging an injured party
to take reasonable steps to reduce the impact of the other party’s
breach. See Restatement (Second) of Contracts § 350 (1981); accord
Utah Farm Prod. Credit Ass’n v. Cox, 627 P.2d 62, 64 (Utah 1981).
To require a landlord to maximize mitigation beyond reasonable
efforts to relet the premises would thwart this ameliorating
purpose by subordinating the injured party’s broader business
interests to the needs of the defaulting party. We think this
imposes an additional and unjustified burden on a landlord.
Thus, we conclude that a landlord who chooses to meet his or
her mitigation responsibility by reletting the premises must
“take such steps as would be expected of a reasonable landlord
letting out a similar property in the same market conditions.”
Reid, 776 P.2d at 907.
¶28 The district court found that Landlord had taken such
steps in this case, and Zrii does not challenge that finding.
Accordingly, we conclude that the district court did not err in
determining that Landlord had adequately mitigated its
damages. Landlord was not required to pursue the offered sale
of the Building, and we see no error in the district court’s factual
determinations that led to its conclusion that Landlord had taken
commercially reasonable steps to relet.
III. Impracticability and Frustration of Purpose
¶29 Zrii next argues that the district court improperly rejected
its defenses of impracticability and frustration of purpose. We
20130848-CA 14 2015 UT App 281Tech Center 2000 v. Zrii
conclude that under the circumstances of this case Zrii was not
entitled to avail itself of either defense.
A. Impracticability
¶30 “The impracticability principle is generally identified in
case law as the contractual defense of impossibility.” Kilgore
Pavement Maint., LLC v. West Jordan City, 2011 UT App 165, ¶ 9,
257 P.3d 460 (citations omitted). “Under the contractual defense
of impossibility, an obligation is deemed discharged if an
unforeseen event occurs after formation of the contract and
without fault of the obligated party, which event makes
performance of the obligation impossible or highly
impracticable.” Id. (citation and internal quotation marks
omitted). Zrii contends that the company-wide walkout it
experienced occurred “without warning” and rendered it unable
to pay rent and occupy the Building because “[m]onthly sales
dropped almost 80%” and “Zrii was never profitable again.”
¶31 The walkout may indeed have made it impossible for Zrii
to follow through on its obligation to Landlord. However, “a
party may not defend on grounds of impracticability when that
party takes on the risk that a supervening event will occur and
render performance impracticable or impossible.” Central Utah
Water Conservancy Dist. v. Upper E. Union Irrigation Co., 2013 UT
67, ¶ 28, 321 P.3d 1113. We conclude that internal disputes
within a company, as well as the potential for a decline in a
company’s monthly profits or sales, are the type of normal risks
and supervening events inherent in operating a business. As
between two contracting parties, it is not reasonable to expect
that a landlord will bear the risk of the tenant’s business
reversals, especially those originating from conflict within the
business itself, at least in the absence of an agreement to do so.
Thus, the walkout was the type of supervening event for which
Zrii bore the risk under the Lease. See id. Accordingly, we
conclude that the defense of impracticability is not available to
Zrii under these circumstances.
20130848-CA 15 2015 UT App 281Tech Center 2000 v. Zrii
B. Frustration of purpose
¶32 “Frustration of purpose differs from the defense of
impossibility only in that performance of the promise, rather
than being impossible or impracticable, is instead pointless.”
Western Props. v. Southern Utah Aviation, Inc., 776 P.2d 656, 659
(Utah Ct. App. 1989). “The applicability of this doctrine depends
on the total or nearly total destruction of the purpose for which,
in the contemplation of both parties, the transaction was made.”
Castagno v. Church, 552 P.2d 1282, 1283 (Utah 1976). “Where,
after a contract is made, a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an
event the non-occurrence of which was a basic assumption on
which the contract was made, his remaining duties to render
performance are discharged . . . .” Restatement (Second) of
Contracts § 265 (1981).
¶33 Zrii contends that “the underlying assumption was that
Zrii would be able to continue conducting its business in the
normal course (subject, of course, to economic conditions), for
which it needed more space” and an “unforeseen ‘crippling
blow’ obliterated that assumption.” The “crippling blow” to
which Zrii refers was the company-wide walkout. This was not
an “event the non-occurrence of which was a basic assumption
on which the contract was made.” See id. While the walkout may
have made Zrii financially unstable, it did not obliterate “the
purpose for which . . . the transaction was made”—to provide
Zrii space to operate its business and to fulfill Landlord’s need
for a tenant. See Castagno, 552 P.2d at 1283. And while the
walkout may have made honoring its obligation under the Lease
more difficult, it did not render the Lease “pointless.” See
Western Props., 776 P.2d at 659. Accordingly, we conclude that
the frustration of purpose defense is also not available to Zrii.
20130848-CA 16 2015 UT App 281Tech Center 2000 v. Zrii
IV. Personal Guarantee
¶34 Zrii’s final argument is that the district court erred in
determining the personal guarantee signed by Farley was
enforceable. We affirm the district court’s ruling.
¶35 As part of the Lease, Farley signed a “Personal Guarantee
of Lease” (the Guarantee) wherein he “unconditionally
guarantee[d] the full performance of each and all of the terms,
covenants, and conditions” of the Lease, “including the payment
of all rentals, liens against the building, and other charges to
accrue thereunder.” The Guarantee was to “continue in favor of
Landlord for the period notwithstanding any extension,
modification or alteration” of the Lease.
¶36 Zrii focuses on the phrase “shall continue in favor of
Landlord for the period” and argues that once the three-year
term under the Lease ended, “so[] did the Guarantee.” Here,
Landlord filed suit in May 2009, just one month after the Lease
period was to begin in April 2009. So while it is not explicitly
stated, Zrii appears to be arguing that Farley cannot be held
liable under the Guarantee for the judgment entered against Zrii
because it was not entered until January 2013, well after the
April 2012 date Zrii contends the Guarantee expired. But
because Landlord’s original claim was brought well within the
relevant time period, and because we agree with Landlord that
Zrii has “cite[d] no authority to indicate that if a guaranty
‘expires’ after a suit has been brought to enforce that
guaranty, . . . the guarantor somehow escapes liability,” we
conclude that the Guarantee was enforceable against Farley.
V. Attorney Fees
¶37 Landlord requests an award of its attorney fees on appeal.
“[W]hen a party who received attorney fees below prevails on
appeal, the party is also entitled to fees reasonably incurred on
appeal.” Valcarce v. Fitzgerald, 961 P.2d 305, 319 (Utah 1998)
(internal citation and quotation marks omitted). Because
20130848-CA 17 2015 UT App 281Tech Center 2000 v. Zrii
Landlord was awarded attorney fees below and has successfully
prevailed on appeal, we grant its request. We therefore remand
to the district court for a determination of what reasonable
attorney fees were incurred by Landlord on appeal. 6
CONCLUSION
¶38 The district court did not err in determining that the Lease
was enforceable and that Zrii was not entitled to have the full
amount of the tenant improvement allowance credited against
the damages awarded to Landlord. Nor did the district court err
in determining that Landlord adequately mitigated its damages,
rejecting Zrii’s impracticability and frustration of purpose
defenses, and enforcing Farley’s obligations under the
Guarantee. We grant Landlord’s request for attorney fees on
appeal, and remand for further proceedings on that issue.
¶39 Affirmed.
6. Zrii takes issue with a conclusion in the district court’s ruling
that under the Guarantee “Farley agreed to pay [Landlord’s]
reasonable attorney’s fees . . . regardless of whether [Landlord]
prevails” and asks us to “clarify that [the court’s] ‘winner pays’
conclusion is not law.” We need not determine whether the court
mischaracterized the attorney fee provision of the Guarantee
because, as the district court noted, “[w]hether Farley would be
liable for these amounts if [Landlord] did not prevail is moot
because [Landlord] did prevail.”
20130848-CA 18 2015 UT App 281