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Waffling on Lease Terms
by Ron Davis

Can a commercial-property tenant unilaterally change some of the terms of his rental agreement? He can if the wording of his lease with the property owner allows such changes, as was recently the case in California involving just such a lease arrangement.

The property owner had leased his restaurant building in the northern California town of Oroville to a restaurateur under a two-part agreement. The first part required the tenant to pay rent at a certain rate. The second part required the tenant to operate a “Waffle Shop” restaurant and pay the property owner a management fee of $4,000 a month.

Two years later, the tenant decided to modify the terms of the management agreement. He subsequently changed the name of the restaurant to “Waffle Barn,” then stopped paying the $4,000-a-month management fee to the property owner.

Under the provisions of the lease, the tenant agreed to use the premises for the “sole purpose of operating a Waffle Shop restaurant.” But the lease also stated that consent to change the name or use of the restaurant “shall not be unreasonably withheld” by the property owner.

The tenant continued to operate the restaurant in the same casual-dining “coffee shop” style and to make rent payments to the property owner. The property owner nevertheless sued the tenant for breach of contract, arguing that the lease and the management contract were “both tied together.”

In response, the tenant maintained that the lease does not expressly restrict his use of the premises to a Waffle Shop restaurant. Moreover, he added, California law favors a tenant whenever a restriction on leased property is ambiguous.

A California court, in siding with the tenant, explained, “We do not construe the lease as stating that only a Waffle Shop–and no other restaurant–may be operated on the leased premises. To the contrary, by providing that the property owner shall not unreasonably withhold his consent in the case of a change in name or format by lessee, the lease expressly contemplates the possibility that the tenant may use the premises as a restaurant other than a Waffle Shop.”

Concluded the judges, “Having acknowledged in the lease that it may not unreasonably refuse a request to change the name and/or format of the restaurant, the property owner cannot sustain the argument that the lease must be read as restricting the use of the property to a Waffle Shop only.” (Ramico, Inc. v. Russ Brothers, Inc., 2005 WL 2981970 [Cal. App. 3 Dist.])

Decision: November 2005
Published: December 2005



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