M. Edward Nicholson, Respndent, vs. University of Minnesota Federal Credit Union, defendant and third party plaintiff, Appellant, vs. Paul E. McQuaid, Third Party Defendant.
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may not be cited except as provided by
Minn. Stat. § 480 A. 08, subd. 3 (2006).
STATE OF MINNESOTA
IN COURT OF APPEALS
A06-652
M. Edward Nicholson,
Respondent,
vs.
University of Minnesota Federal Credit Union,
defendant and third party plaintiff,
Appellant,
vs.
Paul E. McQuaid,
Third Party Defendant.
Filed February 6, 2007
Affirmed Willis, Judge
Hennepin County District Court
File No. 27-CV-05-000210
Timothy R. Thornton, Timothy G. Gelinske, Valerie T. Herring, Briggs and Morgan, P.A., 2200 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for respondent)
Brian M. Sund, Eric G. Nasstrom, Morrison Fenske & Sund, P.A., 5125 County Road 101, Suite 202, Minnetonka, MN 55345 (for appellant)
Considered and decided by Willis, Presiding Judge; Peterson, Judge; and Ross, Judge.
U N P U B L I S H E D O P I N I O N
WILLIS, Judge
On appeal from summary judgment in this commercial-lease dispute, appellant argues that the district court erred as a matter of law when it declined to order rescission. Appellant claims that rescission is appropriate because (1) the lease was executed as a result of a mutual mistake, (2) the lease was executed as a result of a unilateral mistake, (3) the purpose of the lease was frustrated, and (4) respondent materially breached the lease. We affirm.
FACTS
In April 2004, the CEO of appellant University of Minnesota Federal Credit Union contacted the real-estate broker for respondent M. Edward Nicholson regarding commercial property that Nicholson was offering to lease. The property, located on Oak Street in Minneapolis, consists of half of the ground floor of a two-story building, the second floor of the building, and the parking lot behind the building. The parking lot is accessible from Oak Street by a 12-foot-wide paved driveway on the south side of the building. There are seven parallel-parking spots along the driveway, four of which were leased to the business that occupied the other half of the ground floor of the building. The parking lot is also accessible from Washington Avenue by a second driveway at the back of the parking lot.
Credit Union's CEO toured the property three times, and after nearly two months of negotiations, Credit Union entered into a lease for the property with Nicholson. The ten-year lease term began on October 1, 2004, and Credit Union made the October rent payment when it signed the lease. The lease provides: "Landlord disclaims any warranty that the Premises are suitable for Tenant's use and Tenant acknowledges that it has had a full opportunity to make its own determination in this regard." And "Premises" is defined to include the building as well as "the limited use of the adjacent parking lot." The lease also provides that Credit Union leases the property "AS IS" and "WITH ALL FAULTS," and "LANDLORD SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE."
Credit Union hired an architect to design and oversee the renovations necessary for Credit Union to use the property as a credit union. The architect submitted a preliminary site plan to the city of Minneapolis and met with city officials to discuss the plan. At that meeting, the architect was told that (1) the driveway from Oak Street to the parking lot was too narrow for two-way traffic and that widening the driveway would require an easement to encroach on neighboring property to the south; (2) the driveway from Washington Avenue to the parking lot was noncompliant and would also require an easement; and (3) several parking spaces in the parking lot would have to be eliminated to provide the room necessary for vehicles to back out of parking spaces. Although city officials expressed the city's preference for easements to bring the property into compliance, they said that the city would consider waiving the width requirement with respect to the Oak Street driveway and allow two-way traffic if the parking lot were used for employee parking only and the parallel-parking spaces along the driveway were eliminated. The city refused to issue a building permit until the property was compliant.
Credit Union's architect and Nicholson discussed options for bringing the property into compliance so that the city would issue a building permit, but they failed to reach an agreement. Nicholson rejected the option of acquiring easements for the driveways because he did not want to approach the property's neighbor to the south, and he rejected the option of restricting the parking lot to employee parking and eliminating the parallel-parking spaces along the driveway because he had leased the parallel-parking spaces to the building's other tenant. Credit Union rejected a suggestion by Nicholson that Credit Union obtain a "variance" from the city's requirements by agreeing to allow only employee parking but then ignore the agreement and allow customer parking because following Nicholson's suggestion would require continued crossing over neighboring property without an easement, placing the risk on Credit Union of discovery by the city, and would unduly delay renovations. Credit Union's architect was investigating the feasibility of Nicholson's suggestion that Credit Union seek a license from the property's neighbor to the south when Credit Union ceased discussions because of Nicholson's refusal to attempt to secure easements from the neighboring property owners. Credit Union failed to pay rent to Nicholson in November. In a letter dated December 6, 2004, Credit Union attempted to terminate the lease, effective November 3, 2004.
Nicholson filed suit against Credit Union, alleging breach of contract, and Credit Union counterclaimed against Nicholson. The parties filed cross-motions for summary judgment. The district court granted Nicholson's motion for summary judgment and denied Credit Union's motion. In a subsequent order, the district court added an award of attorney fees to Nicholson's judgment. This appeal follows.
D E C I S I O N
"A motion for summary judgment shall be granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that either party is entitled to a judgment as a matter of law. On appeal, the reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993) (citation omitted). This court asks two questions when reviewing a district court's decision to grant summary judgment: (1) whether there are any genuine issues of material fact and (2) whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). Credit Union does not claim that genuine issues of material fact preclude affirming summary judgment for Nicholson but argues instead that the district court erred by declining to order rescission of the lease as a matter of law.
A lease is a contract. Amoco Oil Co. v. Jones, 467 N.W.2d 357, 360 (Minn. App. 1991). And interpretation of an unambiguous contract is a question of law, which this court reviews de novo. City of Virginia v. Northland Office Props. Ltd. P'ship, 465 N.W.2d 424, 427 (Minn. App. 1991), review denied (Minn. Apr. 18, 1991). The primary goal of contract interpretation is to determine and enforce the intent of the parties as it was when they entered into the contract. Karim v. Werner, 333 N.W.2d 877, 879 (Minn. 1983). "If a contract is unambiguous, the contract language must be given its plain and ordinary meaning and shall be enforced by courts even if the result is harsh." Denelsbeck v. Wells Fargo & Co., 666 N.W.2d 339, 346-47 (Minn. 2003) (quotation omitted).
I.
Credit Union argues that the lease should be rescinded on the ground that "the undisputed facts reveal that Credit Union and Nicholson both held mistaken beliefs regarding several material aspects of the Lease." "Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake." Winter v. Skoglund, 404 N.W.2d 786, 793 (Minn. 1987). The district court rejected Credit Union's mutual-mistake theory on the grounds that the lease "embraced uses other than that intended by Credit Union"; that under the lease, Credit Union assumed the risk that the property would not be suitable for use as a credit union; and that Credit Union "admitted that it had a full opportunity to determine whether the property was suitable for its intended use." Thus, the district court concluded, Credit Union was the only party mistaken, and absent the fraud or misrepresentation required when a mistake is unilateral, rescission is inappropriate.
Credit Union asserts that (1) both parties mistakenly believed that the property could be used as a credit union, which is clear from the reference in the lease to Credit Union's intent to operate a credit union at the property; (2) both parties mistakenly believed that the property could be improved through renovation, which is demonstrated by the express grant to Credit Union of the "right" to renovate the property; and (3) both parties mistakenly believed that the parking lot could be accessed lawfully because its use was specifically provided for in the lease.
Credit Union argues that the district court also erred by determining "that Credit Union assumed the risk that the Property was not suitable for its intended purpose in part because Credit Union had an opportunity to examine the Property." Credit Union urges this court to imply a covenant in the lease that the parking lot could be accessed lawfully.
Credit Union is correct that courts will imply covenants if the implication results "from the language employed in the instrument or [is] indispensable to carrying the intention of the parties into effect.'" Plaza Assocs. v. Unified Dev., Inc., 524 N.W.2d 725, 728 (Minn. App. 1995) (quoting Closuit v. Mitby, 238 Minn. 274, 282, 56 N.W.2d 428, 432-33 (1953)), review denied (Minn. Jan. 25, 1995). But it is also true that implied covenants are generally disfavored. Id. And when, as here, the implied covenant would contradict express disclaimers in the lease, they are almost certainly disfavored. See Schimmelpfennig v. Gaedke, 223 Minn. 542, 548, 27 N.W.2d 416, 420 (1947) (providing that where an express contract exists, there can be no implied contract on the same subject matter).
Credit Union argues also that accessibility to the parking lot on commercial property is an assumption so fundamental that "[t]here should be no risk to the contrary, period." And Credit Union argues that, even if it did assume the risk that the property could not be used for its intended purpose, it certainly did not assume the risk that the property could not be used for any purpose. But it is undisputed that the city offered to grant Credit Union a building permit after certain requirements were met. Therefore, the property could be used for some purpose, and it could even be used for a credit union.
Nicholson argues that the lease should not be rescinded on the ground of a mutual mistake, both because he was not mistaken as to Credit Union's ability to use, renovate, or access the property and because Credit Union assumed the risk of any such mistake under the terms of the lease. We agree.
The unambiguous language of the lease shows that there was no mutual mistake regarding Credit Union's absolute ability to use the property for a credit union or to make improvements to the property. The acknowledgment in the lease that Credit Union "intended" to use the property as a credit union does not represent a mistaken assumption that Credit Union would be able to operate a credit union on the property. And the lease allows Credit Union to terminate the lease if it is "no longer . . . able to operate its business as a credit union," which anticipates an event or condition of the property that could prevent Credit Union from operating a credit union. And even if both parties were mistaken regarding accessibility of the parking lot, that mistake must have had a "material effect on the agreed exchange of performances," and Credit Union must not have borne the risk of the mistake. See Winter, 404 N.W.2d at 793. We agree with the district court, and it is undisputed by the parties, that there were options for obtaining access to the parking lot that neither party fully exhausted. Therefore, the mistake regarding access need not have had a material effect on performance under the lease. And because the parking lot is included in the definition of "Premises" in the lease and, among other provisions, Credit Union took the "Premises" "WITH ALL FAULTS," Credit Union assumed the risk of any mutual mistake. As a matter of law, Credit Union may not rescind the lease on the ground of mutual mistake.
II.
Credit Union also asserts that rescission of the lease is justified because of its unilateral mistakes regarding its ability to access the parking lot and to improve the property.
Rescission of a contract for mistake . . . is ordinarily founded upon either mutual mistake of the parties or a mistake by one induced or contributed to by the other. It is clear, nevertheless, that the court, under its equitable power, does have the right to rescind a contract for a purely unilateral mistake of one contracting party not induced or contributed to by the other . . . . only when enforcement would impose an oppressive burden on the one seeking rescission, and when rescission would impose no substantial hardship on the one seeking enforcement.
Gethsemane Lutheran Church v. Zacho, 258 Minn. 438, 443-45, 104 N.W.2d 645, 649 (1960) (citations omitted); TNT Props., Ltd v. Tri-Star Developers LLC, 677 N.W.2d 94, 102 (Minn. App. 2004) (determining that there was no basis for rescission "because there is no evidence of ambiguity, fraud, or misrepresentation"). The district court concluded that any unilateral mistake by Credit Union did not justify rescission of the lease because there had been no fraud or misrepresentation by Nicholson.
Credit Union argues that the provisions that Nicholson made in the lease for parking and improvements were representations that "induced or contributed to" Credit Union's mistake and that influenced Credit Union's decision to sign the lease, so the lease should be rescinded on the ground of unilateral mistake. See Gethsemane Lutheran Church, 258 Minn. at 443-44, 104 N.W.2d at 649.
Nicholson asserts that rescission based on unilateral mistake requires ambiguity, fraud, misrepresentation, or the ability to rescind without "prejudice" to the other party. He argues that there was no ambiguity because the lease provided a legal description of the premises, including the parking lot, and because Credit Union had an opportunity to inspect the premises and also assumed the risk of inaccessibility. Also, the lease contains a stipulation that Credit Union "did not rely on anything other than its own judgment when executing the Lease."
Even if Nicholson's representations "induced or contributed to" Credit Union's mistake regarding accessibility of the parking lot, there must also be evidence that Nicholson intended his representations to do so or, at least, that Nicholson knew that Credit Union was mistaken. See Keller v. Wolf, 239 Minn. 397, 401-02, 58 N.W.2d 891, 895 (1953) (stating that "although in Minnesota the mistake need not be mutual' in the sense that both parties are under a similar delusion, there must be concealment or, at least, knowledge on the part of one party that the other party is laboring under a mistake in order to set aside a [contract] for unilateral mistake"); Nadeau v. Md. Cas. Co., 170 Minn. 326, 329, 212 N.W. 595, 596-97 (1927) (noting that a unilateral mistake of which the other party to a contract knowingly takes advantage justifies relief to the mistaken party), cited in Gethsemane Lutheran Church, 258 Minn. at 444, 104 N.W.2d at 649. There is no evidence that Nicholson intended to induce the mistake or that he had knowledge of the mistake. The district court correctly applied the law. Credit Union's unilateral mistake is not a basis for rescinding the lease.
III.
Credit Union further argues that the lease should be rescinded as a matter of law because its purpose in entering into the lease was frustrated. A contract may be rescinded because of frustration of purpose when: (1) the principal purpose in executing the contract is frustrated; (2) the party seeking rescission is without fault; and (3) an event occurs, the nonoccurrence of which was a basic assumption of the agreement. Nat'l Recruiters, Inc. v. Toro Co., 343 N.W.2d 704, 707 (Minn. App. 1984). The district court rejected Credit Union's frustration-of-purpose argument, concluding that even if Credit Union had not assumed the risk that the property would not be suitable for use as a credit union, which the district court concluded that it had, Credit Union's "failure to pursue easement and licensing alternatives forecloses its claim to rescission based on frustration of purpose" because it was not without fault.
Credit Union asserts that when it was prevented from improving the property, operating it as a credit union, and accessing the parking lot, its principal purpose in entering the lease was frustrated. Credit Union iterates that it did not assume the risk that the parking lot would be inaccessible and that it would be prevented from improving the property; that Nicholson, not Credit Union, was obligated to secure access to the property; and that even though Credit Union was not obligated to secure access, it attempted to do so, and Nicholson was uncooperative.
Nicholson argues in response that Credit Union created its own frustration of purpose when it submitted a site plan that failed to comply with city ordinances and then failed to obtain easements, variances, or licenses to correct the problem; Credit Union replies that "[a]ny site plan submitted would have triggered examination by the City as to the Property's zoning compliance"the site plan was not what created the zoning violation. Nicholson argues also that Credit Union is at fault because it failed to determine before signing the lease whether the property was suitable for its intended use.
Even if we agree that Credit Union's principal purpose in entering into the lease was to operate a credit union and agree that the denial of a building permit to complete the renovations necessary to turn the property into a credit union was an event the nonoccurrence of which was a "basic assumption" of the lease, Credit Union must still have been without fault. Nat'l Recruiters, Inc., 343 N.W.2d at 707. And we agree with the district court that Credit Union was not without fault for any frustration of purpose here. Although merely submitting a site plan to the city does not amount to "fault" on the part of Credit Union as Nicholson contends, Credit Union failed to conduct any inspection of the property other than a visual inspection and failed to attempt to secure easements or licenses for the use of the driveways.
And most importantly, Credit Union assumed the risk, under the terms of the lease, that its purpose would be frustrated. As this court explained in City of Savage v. Formanek, "[i]t is not enough that the transaction has become less profitable for the affected party . . . . The frustration must be so severe that it is not fairly to be regarded as within the risks . . . assumed under the contract." 459 N.W.2d 173, 176 (Minn. App. 1990) (omissions in original) (quoting Restatement (Second) of Contracts § 265, cmt. (a) (1981)), review denied (Minn. Oct. 25, 1990). Because Credit Union assumed the risk that it would be unable to operate a credit union on the property and thus that its purpose would be frustrated, any frustration of purpose that occurred cannot properly serve as a basis for rescission of the lease.
IV.
Credit Union argues that the district court erred when it failed to order rescission because Nicholson, rather than Credit Union, materially breached the lease as a matter of law. Termination or rescission of a lease is justified by a material breach or a substantial failure in performance. Cloverdale Foods of Minn., Inc. v. Pioneer Snacks, 580 N.W.2d 46, 49 (Minn. App. 1998). A breach is material when "one of the primary purposes" of the contract is violated. See, e.g., Steller v. Thomas, 232 Minn. 275, 282, 45 N.W.2d 537, 542 (1950) (concluding that a logger committed a material breach when he did not burn brush piles when logging because the primary purpose of the contract was to clear land for farming).
Credit Union asserts that Nicholson breached the lease in three material respects. First, Credit Union contends that Nicholson failed to perform on his representations regarding Credit Union's "right" to make improvements when Credit Union's attempt to exercise that right was "thwarted" by the legal inaccessibility of the parking lot and that Nicholson's failure constituted a material breach because "the right to make improvements constituted a material component of the lease." Second, Credit Union asserts that because the parking lot was a "material attribute of the Property" so that accessibility to it was a "basic component of the Lease," the fact that the parking lot was inaccessible when the lease was signed was also a material breach. And third, Credit Union argues that Nicholson breached the lease's covenant of quiet enjoymentthe covenant that Credit Union could enjoy "the full possession of the Premises"when Credit Union was unable to access the parking lot and improve the property.
Nicholson responds that because he delivered to Credit Union exactly what the lease described, he did not breach the lease; that Credit Union assumed any risk of inaccessibility of the parking lot; and that Credit Union could have used the property as it intended if it had obtained easements or licensesit was not Nicholson's obligation to obtain them on Credit Union's behalf. Credit Union replies that because the parking lot was inaccessible, Nicholson did not deliver the parking lot that was described in the lease.
The district court concluded that Nicholson's failure to secure easements was not a breach because (1) Credit Union assumed the risk that the property would not be suitable for its intended purposes, (2) the lease did not expressly obligate Nicholson to secure easements to allow Credit Union to use the property according to its wishes, and (3) the lease "delegates compliance with present and future laws, ordinances, regulations and orders of all governmental units having jurisdiction over the premises' to Credit Union."
We conclude that the undisputed facts show that Nicholson complied with the express provisions of the lease and that the disclaimers in the lease insulate him from the claim that his failure to deliver property that was suitable for use as a credit union was a material breach. And because Nicholson did not materially breach the lease, Credit Union was not justified in breaching the lease by failing to pay rent. See Anderson v. Kammeier, 262 N.W.2d 366, 374 (Minn. 1978) (Todd, J., dissenting) (noting the principle that a "nonmaterial breach of contract neither justifies rescission nor excuses counter-performance").
Nor was Credit Union's inability to legally access the parking lot as it wished a breach of the covenant of quiet enjoyment by Nicholson. Breach of the covenant requires affirmative action that interferes with a tenant's enjoyment of the property. See Am. Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980). The interference with Credit Union's full use of the property was the result of requirements imposed by the city, not any affirmative action by Nicholson.
V.
Nicholson argues on appeal that although the district court ordered that he be paid a termination fee and attorney fees and costs, it erred when it failed to award damages for unpaid rent. Because Credit Union never properly terminated the lease, Nicholson asserts, the lease was not terminated until the district court's November 2005 order granting summary judgment, so he is entitled to 12 months' unpaid rent for the period November 2004 to November 2005. Credit Union argues that this issue is not properly before this court because it was not presented to the district court. We agree. There is no indication in the record that Nicholson moved for amended findings or a new trial on the ground that the district court failed to award unpaid rent, and we will not consider this issue for the first time on appeal. See Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988).
Nicholson claims also that he is entitled to appellate attorney fees. But under Minn. R. Civ. App. P. 139.06, subd. 1, a request for attorney fees on appeal must be made by separate motion and be adequately supported. Because Nicholson has not made such a motion, we do not consider the request at this time.
Affirmed.
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