Arrowhead Ridge I, LLC v. Cold Stone Creamery, Inc.

#25770, #25787-rev & rem-GAS
2011 S.D. 38IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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ARROWHEAD RIDGE I, LLC, Plaintiff and Appellant,
v.
COLD STONE CREAMERY, INC.,
Franchise location: 5416 E. Arrowhead Pkwy
Sioux Falls, SD 57110, Defendant and Appellee.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
* * * *
HONORABLE KATHLEEN K. CALDWELL
Judge
* * * *
TIMOTHY J. GRANDE of
Mackall, Crounse & Moore, PLC
Minneapolis, Minnesota
and
SAMUEL R. ASSAM
Sioux Falls, South Dakota Attorneys for plaintiff
and appellant.
STEVEN W. SANFORD of
Cadwell, Sanford, Deibert
& Garry, LLP
Sioux Falls, South Dakota Attorneys for defendant
and appellee.
* * * *
ARGUED ON MAY 24, 2011
OPINION FILED 07/06/11
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SEVERSON, Justice
[¶1.] Arrowhead Ridge I, L.L.C. initiated this forcible entry and detainer
action when its tenant, Cold Stone Creamery, Inc., defaulted on its lease. The trial
court granted Arrowhead partial summary judgment, concluding that it was
entitled to seventeen months of unpaid rent and late fees. The issues of mitigation
of damages, interest, and attorneys’ fees proceeded to trial. After a court trial, the
trial court concluded that Arrowhead failed to mitigate its damages due solely to an
exclusivity provision in a lease with another tenant. The trial court also concluded
that Arrowhead could not recover its attorneys’ fees under either the terms of the
lease or South Dakota law. The trial court denied the parties’ motions for a new
trial. We reverse and remand.
Background
[¶2.] F&K Assam Family, L.L.C. owned a parcel of land in a growing
commercial area in eastern Sioux Falls. Between 2002 and 2004, F&K sought to
develop the property by building a retail center. Because F&K’s lender required
signed leases for approximately half of the retail center before funding the project,
F&K solicited and obtained executed leases with three national or regional
companies before construction.
[¶3.] Cold Stone was one of three tenants F&K acquired before construction.
In February 2004, Cold Stone contacted F&K to negotiate a lease and delivered a
draft letter of intent for lease of space in the retail center. The letter proposed “Cold
Stone Creamery Leasing, Inc., a company with no assets and no liabilities,” as the
tenant for the property. The letter proposed no guarantors. F&K notified Cold
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Stone that it would only lease to a substantial tenant who had the financial ability
to pay rent over the full term of the lease. Cold Stone thus informed F&K that it
would be the tenant. Negotiations continued through May 2004 with both parties
making changes to a proposed lease. Subsequent drafts of the proposed lease
identified Cold Stone as the tenant.
[¶4.] In June 2004, Cold Stone notified F&K that company policy required a
twelve-month limitation of liability in the event of default. F&K was willing to limit
Cold Stone’s liability to eighteen months if Cold Stone’s prospective franchisees, Ed
and Cindy Reesman, signed the lease and provided current financial statements
demonstrating their financial ability to fully perform the lease. F&K forwarded a
draft incorporating this agreement to Cold Stone but left Cold Stone as the tenant
and primary obligor on the lease until it received the Reesmans’ financial
statements. In August 2004, Cold Stone informed F&K that it need not worry about
the Reesmans’ financial statements because it would be liable for the entire lease
term. Cold Stone signed the lease as both tenant and guarantor. F&K assigned its
interest in the lease to Arrowhead in October 2005.
[¶5.] Cold Stone sublet the leased premises to the Reesmans, who operated
a Cold Stone franchise at the location until early 2007. When Cold Stone defaulted
on the lease in June 2007, Arrowhead commenced this forcible entry and detainer
action. Neither Cold Stone nor the Reesmans were in actual possession of the
leased premises when Arrowhead commenced this action.
[¶6.] Arrowhead began efforts to lease the premises to another tenant. It
posted signs indicating that the space was available, circulated a data sheet to
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commercial real estate brokers in Sioux Falls, and made calls to advise that the
premises was available. A variety of possible tenants contacted Arrowhead about
the premises, including a cigar lounge, a beauty parlor, a tanning salon, two
sandwich restaurants, a pizza buffet restaurant, two Chinese restaurants, a cell
phone distributor, and a bank. Although the pizza buffet restaurant was interested,
Arrowhead was unable to lease the premises due to an exclusivity provision in its
lease with HuHot, an Asian-style buffet restaurant located in the retail center. 1 By
the time of trial, the premises had been vacant for nearly two years.
[¶7.] In January 2009, the trial court granted Arrowhead partial summary
judgment, concluding that it was entitled to seventeen months of unpaid rent and
late fees. The issues of mitigation of damages, interest, and attorneys’ fees
proceeded to trial in April 2009. After hearing evidence about the lease
negotiations and Arrowhead’s efforts to lease the premises to another tenant, the
trial court concluded that Arrowhead failed to mitigate its damages due solely to the
exclusivity provision in its lease with HuHot. The trial court also concluded that
Arrowhead could not recover its attorneys’ fees under either the terms of the lease
or South Dakota law. The trial court denied the parties’ motions for a new trial.
1. Cold Stone’s lease also contained an exclusivity provision:
Landlord agrees not to sell, lease, let use or permit to be used,
any other property owned or controlled by it within the Retail
Center now or at any time during the period of this Lease or any
extension to any entity whose primary business is retail sales of
ice cream, frozen yogurt, frozen desserts or any other directly
competing products. This includes but is not limited to; other ice
cream stores, other frozen yogurt stores and ice cream/yogurt
vending units whether freestanding or in kiosks.
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Standard of Review
[¶8.] Arrowhead and Cold Stone appeal from the trial court’s denial of their
motions for a new trial. SDCL 15-6-59(a) provides that a new trial may be granted
for:
...
(6) Insufficiency of the evidence to justify the verdict or other
decision or that is against law;
(7) Error of law occurring at the trial; provided, that in the
case of claim of error, admission, rejection of evidence, or
instructions to the jury or failure of the court to make a
finding or conclusion upon a material issue which had not
been proposed or requested, it must be based upon an
objection, offer of proof, or a motion to strike.
“The decision to grant a new trial is left [to] the sound judicial discretion of the trial
court” and is therefore reviewed under the abuse of discretion standard. Sherburn
v. Patterson Farms, Inc., 1999 S.D. 47, ¶ 8, 593 N.W.2d 414, 416 (citing Harter v.
Plains Ins. Co., Inc., 1998 S.D. 59, ¶ 9, 579 N.W.2d 625, 629).
Analysis and Decision
Appeal #25787
[¶9.] Cold Stone filed a notice of review, challenging the trial court’s denial
of its motion for a new trial.
[¶10.] 1. Whether Arrowhead and Cold Stone entered into a valid
and enforceable lease.
[¶11.] Cold Stone moved for a new trial on the basis that the trial court erred
by concluding that Arrowhead and Cold Stone entered into a valid and enforceable
lease. “To form a contract, there must be a meeting of the minds or mutual assent
on all essential terms.” Melstad v. Kovac, 2006 S.D. 92, ¶ 21, 723 N.W.2d 699, 707
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(quoting Jacobson v. Gulbransen, 2001 S.D. 33, ¶ 22, 623 N.W.2d 84, 90). “‘Mutual
assent refers to a meeting of the minds on a specific subject’ and ‘does not exist
unless the parties all agree upon the same thing in the same sense.’” Id. (quoting
Read v. McKennan Hosp., 2000 S.D. 66, ¶ 25, 610 N.W.2d 782, 786). “To determine
whether there was mutual assent, ‘the court looks at the words and conduct of the
parties.’” Id. (quoting Jacobson, 2001 S.D. 33, ¶ 22, 623 N.W.2d at 90). “Whether
the parties had a meeting of the minds is a question of fact” reviewed under the
clearly erroneous standard. Id. (citation omitted).
[¶12.] Cold Stone argues that the lease provisions regarding the limitation of
liability and interest rate chargeable on unpaid rent and fees are inconsistent,
demonstrating a lack of mutual assent on all essential terms of the lease. The lease
provides that Cold Stone is liable for the entire lease term, but the lease guaranty
limits Cold Stone’s liability as guarantor to eighteen months. And while one lease
provision sets the chargeable interest rate at eighteen percent, another provision
sets the interest rate at three points over Wells Fargo’s then-prevailing prime
interest rate.
[¶13.] Recognizing the ambiguity these inconsistencies create, Arrowhead
presented evidence at trial regarding the parties’ intent when signing the lease.
Ordinarily, “[p]arol or extrinsic evidence may not be admitted to vary the terms of a
written instrument or to add to or detract from the writing.” Brookings Mall, Inc. v.
Captain Ahab’s, Ltd., 300 N.W.2d 259, 262 (S.D. 1980) (quoting Jensen v. Pure
Plant Food Int’l, Ltd., 274 N.W.2d 261, 263-64 (S.D. 1976)). “When the writing is
uncertain or ambiguous, however, such evidence is admissible to explain the
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instrument.” Id. (citing Christiansen v. Strand, 81 S.D. 187, 192-93, 132 N.W.2d
386, 388-89 (1965)). “In other words, [parol] evidence is resorted to where the
ambiguity may be dispelled to show what [the parties] meant by what they said but
not to show that [they] meant something other than what they said.” Id. (citation
omitted).
[¶14.] Cold Stone offered no credible evidence or testimony regarding its
intent when entering into the lease. 2 As to the limitation of liability, Arrowhead
established that the parties intended that the lease contain no limitation of liability.
As to the interest rate chargeable on unpaid rent and fees, Arrowhead established
that it used a lease for one of its Iowa properties as a template for the lease in this
case. The lease provision setting the chargeable interest rate at three points over
Wells Fargo’s then-prevailing prime interest rate was mistakenly inserted. The
trial court thus found that the parties intended that Cold Stone be liable for the
entire lease term and that the chargeable interest rate be eighteen percent.
Because the record supports these findings, the trial court did not abuse its
discretion by denying Cold Stone’s motion for a new trial on the basis that the
parties did not enter into a valid and enforceable lease.
Appeal #25770
[¶15.] 1. Whether Arrowhead failed to mitigate its damages
due solely to an exclusivity provision in a lease with
another tenant.
2. Cold Stone offered business records evidencing its intent at the time it signed
the lease into evidence, but the trial court placed little weight on the records
because they lacked foundation and Cold Stone offered no admissible
testimony interpreting them.
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[¶16.] Arrowhead moved for a new trial on the basis that the trial court erred
by concluding that it failed to mitigate its damages due solely to the exclusivity
provision in its lease with HuHot. We have generally described the duty to mitigate
damages caused by a breach of contract or tort:
The law imposes upon a party injured from another’s breach of
contract or tort the active duty of making reasonable exertion to
render the injury as light as possible. If, by his negligence or
willfulness, he allows the damages to be unnecessarily
enhanced, the increased loss, that which was avoidable by the
performance of his duty, falls upon him. This is a practical
duty under a great variety of circumstances, and, as the
damages which are suffered by a failure to perform it are not
recoverable, it is a duty of great importance.
Ducheneaux v. Miller, 488 N.W.2d 902, 917 (S.D. 1992) (quoting Gardner v. Welch,
21 S.D. 151, 110 N.W. 110, 112-13 (1906)). This Court has yet to specifically
consider whether a landlord must mitigate damages if a tenant defaults on a lease.
[¶17.] The traditional common-law rule dictates that a landlord has no duty
to mitigate damages. Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948
S.W.2d 293, 295 (Tex. 1997) (citation omitted). At common law, tenants possess an
interest in land and have the right to bring real property causes of action against
their landlord. Id. at 297 (citation omitted). “[T]he tenant is owner of the property
during the lease term[.]” Id. at 295-96 (citing Reid v. Mut. of Omaha Ins. Co., 776
P.2d 896, 902, 905 (Utah 1989)). “As long as a tenant has a right to possess the
land, [he] is liable for rent.” Id. at 296 (citation omitted). Thus, “a landlord is not
obligated to undertake any action following a tenant’s abandonment of the premises
but may recover rents periodically for the remainder of the term.” Id. (citing
Gruman v. Inv. Diversified Servs., 247 Minn. 502, 78 N.W.2d 377, 379-80 (1956)).
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Only a handful of states have explicitly retained the common-law rule that a
landlord has no duty to mitigate damages. Id. at 297.
[¶18.] The vast majority of modern jurisdictions recognize a landlord’s duty to
mitigate damages. Id. at 296. Because “leases have become more complex and the
structures on the land have become more important” than the land, “courts have
begun to recognize that a lease possesses elements of both a contract and a
conveyance.” Id. at 297-98 (citing Schneiker v. Gordon, 732 P.2d 603, 607-09 (Colo.
1987); Reid, 776 P.2d at 902-04). Due to the “contractual elements of the modern
lease,” many courts have held that a landlord has a contractual duty to mitigate
damages when a tenant breaches a lease and abandons the premises. Id. at 298. A
landlord is treated as any other aggrieved party to a contract. Id. at 299.
[¶19.] In the present case, the lease specifically addresses Arrowhead’s
affirmative duty to mitigate its damages in the event of Cold Stone’s default:
Notwithstanding the foregoing, if Tenant shall default under the
Lease beyond any applicable notice and cure period, Landlord
shall have an affirmative duty to mitigate its damages and in no
event may Landlord accelerate the rent due for a remainder of
the Lease Term.
Because the lease requires Arrowhead to mitigate its damages, we need not decide
whether a landlord has a common-law duty to mitigate damages in South Dakota.
[¶20.] We thus proceed to the question whether the trial court properly
concluded that Arrowhead failed to mitigate its damages due solely to the
exclusivity provision in its lease with HuHot. As the breaching party, Cold Stone
bore the burden of proving that Arrowhead’s damages “would have been lessened by
the exercise of reasonable diligence.” See Ducheneaux, 488 N.W.2d at 918 (citing
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Hepper v. Triple U Enter., Inc., 388 N.W.2d 525, 530 (S.D. 1986); Renner Elevator
Co. v. Schuer, 267 N.W.2d 204, 207 (S.D. 1978)). Although Cold Stone bore the
burden of proof, it did not present evidence on the issue of mitigation at trial.
Rather, Arrowhead presented undisputed evidence of its efforts to lease the
premises to another tenant. As a result of its efforts, a variety of possible tenants
contacted Arrowhead. Although a pizza buffet restaurant was interested,
Arrowhead was unable to lease the premises due to the exclusivity provision in its
lease with HuHot.
[¶21.] We cannot find any reported cases on the precise question whether a
landlord breaches his duty to mitigate damages solely by complying with an
exclusivity provision in a lease with another tenant. But courts widely agree that a
landlord is not required to lease the premises to just any willing tenant.
Frenchtown Square P’ship v. Lemstone, Inc., 99 Ohio. St. 3d 254, 259, 2003-Ohio-
3648, 791 N.E.2d 417, at ¶ 19 (emphasizing that a landlord is not required to accept
any available tenant); Austin Hill, 948 S.W.2d at 298 (“[T]he landlord therefore
should not be forced to lease to an unwanted tenant.”); Brennan Assoc. v. OBGYN
Specialty Grp., P.C., 127 Conn. App. 746, 754, 15 A.3d 1094, 1101 (2011) (“The duty
to mitigate damages does not require the landlord to sacrifice any substantial right
of [his] own or to exalt the interests of the tenant above [his] own.”). In determining
whether to lease the premises to a replacement tenant, a landlord may consider
whether the tenant is suitable under all the circumstances. Frenchtown Square, 99
Ohio St. 3d at 259, 791 N.E.2d at 421, at ¶ 19.
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[¶22.] The exclusivity provision in the lease with HuHot was the sole finding
supporting the trial court’s conclusion that Arrowhead failed to mitigate its
damages. But Arrowhead was only required to mitigate its damages “by the
exercise of reasonable diligence.” See Ducheneaux, 488 N.W.2d at 918. It was not
reasonable to require Arrowhead to breach its lease with HuHot and expose itself to
potential liability. Other than the exclusivity provision, the undisputed evidence at
trial established that Arrowhead made substantial efforts to lease the premises to
another tenant. The trial court abused its discretion by denying Arrowhead’s
motion for a new trial. But we do not believe that a new trial is necessary on the
issue of mitigation as the record establishes that Arrowhead mitigated its damages
by the exercise of reasonable diligence as a matter of law. See id.
[¶23.] 2. Whether Arrowhead may recover the attorneys’ fees it
incurred due to Cold Stone’s default under either the
terms of the lease or South Dakota law.
[¶24.] Arrowhead moved for a new trial on the basis that the trial court erred
by concluding that it could not recover the attorneys’ fees it incurred due to Cold
Stone’s default under either the terms of the lease or South Dakota law. The
decision to award attorneys’ fees in a particular case is within the trial court’s
sound judicial discretion and is therefore reviewed under the abuse of discretion
standard. Credit Collection Servs., Inc. v. Pesicka, 2006 S.D. 81, ¶ 5, 721 N.W.2d
474, 476 (citing In re S.D. Microsoft Antitrust Litig., 2005 S.D. 113, ¶ 27, 707
N.W.2d 85, 97).
[¶25.] In South Dakota, the recovery of attorneys’ fees is governed by the
American rule, which provides that each party bears his attorneys’ fees. Id. ¶ 6
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(quoting Crisman v. Determan Chiropractic, Inc., 2004 S.D. 103, ¶ 26, 687 N.W.2d
507, 513). But an award of attorneys’ fees is allowed when authorized by the
parties’ agreement or by statute. Id. (citation omitted). See SDCL 15-17-38. 3 Thus,
even if no statute authorizes an award of attorneys’ fees, “they are recoverable if the
parties’ contract so provides.” Pesicka, 2006 S.D. 81, ¶ 6, 721 N.W.2d at 477 (citing
Microsoft, 2005 S.D. 113, ¶ 29, 707 N.W.2d at 98) (additional citations omitted).
The party requesting an award of attorneys’ fees has the burden to show its basis by
a preponderance of the evidence. Id. (quoting Jacobson, 2001 S.D. 33, ¶ 31, 623
N.W.2d at 91).
[¶26.] Arrowhead first argues that an award of the attorneys’ fees it incurred
due to Cold Stone’s default is authorized by South Dakota law. Arrowhead
commenced a forcible entry and detainer action under SDCL 21-16-1(4) to terminate
Cold Stone’s legal right to possession of the premises. 4 As authorized by SDCL 21-
16-4, Arrowhead joined its claim for rents and damages to its forcible entry and
3. SDCL 15-17-38 provides in part:
The compensation of attorneys and counselors at law for services
rendered in civil and criminal actions and special proceedings is
left to the agreement, express or implied, of the parties.
However, attorneys’ fees may be taxed as disbursements if
allowed by specific statute.
4. SDCL 21-16-1(4) provides that a landlord may bring an action of forcible
entry and detainer if a tenant fails to pay his rent for three days after it is
due.
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detainer action. 5 Because SDCL 21-16-11 authorizes an award of attorneys’ fees in
forcible entry and detainer actions, Arrowhead contends that it is entitled to an
award of its attorneys’ fees.
[¶27.] SDCL 21-16-11 authorizes an award of attorneys’ fees for forcible entry
and detainer actions but does not specifically authorize an award for collateral
claims:
In any case of forcible entry and detainer, or detainer only, the
court may tax as part of the costs in the case, to the prevailing
party, reasonable attorney[s’] fees, whether a trial is had or not,
if [the] prevailing party is represented by a licensed attorney.
Arrowhead did not demonstrate for the trial court what portion of its attorneys’ fees
was attributable to the forcible entry and detainer action apart from its collateral
claim for rents and damages. We therefore review the trial court’s denial of an
award of Arrowhead’s attorneys’ fees under the terms of the lease.
[¶28.] Arrowhead argues that the lease authorizes an award of the attorneys’
fees it incurred due to Cold Stone’s default. The lease provision on which
Arrowhead relies provides:
All taxes, charges, costs, and expenses that Tenant assumes or
agrees to pay hereunder, together with all interest and penalties
that may accrue thereon in the event of the failure of Tenant to
pay those items, and all other damages, costs, expenses, and
sums that Landlord may suffer or incur, or that may become
due, by reason of any default of Tenant or failure by Tenant to
5. SDCL 21-16-4 provides:
An action under the provisions of this chapter cannot be brought
in connection with any other except for rents and profits or
damages but the plaintiff may bring separate actions for the
same if he so desires.
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comply with the terms and conditions of this Lease shall be
deemed to be additional rent, and in the event of nonpayment,
Landlord shall have all the rights and remedies as herein
provided for failure to pay rent.
This lease provision does not expressly mention attorneys’ fees.
[¶29.] In examining the plain language of the lease provision, we disagree
with Arrowhead’s contention that it contains an agreement authorizing an award of
its attorneys’ fees. It is true that an implied agreement may authorize an award of
attorneys’ fees. See SDCL 15-17-38 (the compensation of attorneys is left to the
express or implied agreement of the parties). But this lease not only fails to
expressly mention attorneys’ fees, it also does not imply an agreement regarding
attorneys’ fees. Thus, the trial court did not abuse its discretion by denying
Arrowhead’s motion for a new trial on the basis that it could recover the attorneys’
fees it incurred due to Cold Stone’s default.
[¶30.] Reversed and remanded to enter judgment consistent with this
opinion.
[¶31.] GILBERTSON, Chief Justice, and KONENKAMP and ZINTER,
Justices, and MEIERHENRY, Retired Justice, concur.
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