#25770, #25787-rev & rem-GAS

2011 S.D. 38

IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA

* * * * 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- 1 - #25770, #25787 SEVERSON, Justice [¶1.] Arrowhead Ridge I, L.L.C. init iated 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 i ssues of mitigation of damages, interest, and attorneys’ fees pr oceeded to trial. Af ter a court trial, the

trial court concluded that Arrowhead failed to mitigate its damages due solely to an exclusivity provision in a lease with anothe r tenant. The trial court also concluded

that Arrowhead could not recover its attorn eys’ fees under eith er the terms of the

lease or South Dakota law. The trial cour t denied the parties’ motions for a new

trial. We reverse and remand. Background [¶2.] F&K Assam Family, L.L.C. ow ned 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 th e 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 wi th no assets and no liabilities,” as the tenant for the property. The letter prop osed no guarantors. F&K notified Cold#25770, #25787

- 2 - 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. Su bsequent drafts of the proposed lease

identified Cold Stone as the tenant. [¶4.] In June 2004, Cold Stone notifi ed F&K that company policy required a twelve-month limitation of liability in the ev ent 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 fu lly 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 in formed 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 pr emises 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 Rees mans 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 wa s available, circulated a data sheet to#25770, #25787

- 3

- commercia l real estate brokers in Sioux Fa lls, and made calls to advise that the premises was available. A variety of po ssible tenants contacted Arrowhead about the premises, including a cigar lounge, a beauty parlor, a tanning salon, two sandwich restaurants, a pizza buffet rest aurant, 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 b een vacant for nearly two years. [¶7.] In January 2009, the trial co urt 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. Af ter 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 HuHo t. 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 deni ed 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 yogu rt stores and ice cream/yogurt vending units whether freestanding or in kiosks.#25770, #25787

- 4 - 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, admissi on, rejection of evidence, or instructions to the jury or fa ilure 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 [t o] 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 revi ew, 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#25770, #25787

- 5 - (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 cour t 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 a ll 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 pa rties’ 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#25770, #25787

- 6 - instrumen t.” 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 someth ing 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 th e lease contain no limitation of liability. As to the interest rate chargeable on unp aid rent and fees, Arrowhead established that it used a lease for one of its Iowa pr operties as a template for the lease in this case. The lease provision setting the charge able 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 in tended 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 eviden cing its intent at the time it signed the lease into evidence, but the trial co urt placed little weight on the records because they lacked foundation and Cold Stone offered no admissible testimony interpreting them.#25770, #25787

- 7 - [¶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 inju red from another’s breach of contract or tort the active duty of making reasonable exertion to render the injury as light as poss ible. If, by his negligence or willfulness, he allows the damages to be unnecessarily enhanced, the increased loss, th at which was avoidable by the performance of his duty, falls up on 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, In c. v. Palisades Plaza, Inc. , 948 S.W.2d 293, 295 (Tex. 1997) (citation omitte d). At common law, tenants possess an interest in land and have the right to brin g 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)).#25770, #25787

- 8 - Only a handful of states have explicit ly retained the common-law rule that a landlord has no duty to mitigate damages. Id. at 297. [¶18.] The vast majority of modern juri sdictions 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 possesse s 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 “con tractual elements of the modern lease,” many courts have held that a land lord 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 leas e 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 mi tigate 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 ques tion whether the trial court properly

concluded that Arrowhead failed to miti gate its damages due solely to the exclusivity provision in its lease with HuHo t. As the breaching party, Cold Stone bore the burden of proving that Arrowhea d’s damages “would have been lessened by the exercise of reasonable diligence.” See Ducheneaux , 488 N.W.2d at 918 (citing#25770, #25787

- 9 - 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 pi zza 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 anothe r 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-Ohio3648, 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 la ndlord 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.#25770, #25787

- 10 - [¶22.] The exclusivity provision in the lease with HuHot was the sole finding supporting the trial court’s conclusion that Arrowhead faile d to mitigate its damages. But Arrowhead was only requ ired 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 it s lease with HuHot and expose itself to potential liability. Other than the exclusiv ity provision, the undisputed evidence at

trial established that Arrowhead made subs tantial 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 be lieve that a new trial is necessary on the issue of mitigation as the record estab lishes 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 th e 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 pa rticular case is within the trial court’s sound judicial discretion and is therefor e 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 ea ch party bears his attorneys’ fees. Id. ¶ 6#25770, #25787

- 11 - (quoting Crisman v. Determan Chiropractic, Inc. , 2004 S.D. 103, ¶ 26, 687 N.W.2d 507, 513). But an award of attorneys’ fe es 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 aw ard of the attorneys’ fees it incurred

due to Cold Stone’s default is author ized by South Dakota law. Arrowhead commenced a forcible entry and detainer ac tion 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 ac tions 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 land lord may bring an action of forcible entry and detainer if a tenant fails to pay his rent for three days after it is due.#25770, #25787

- 12 - detainer action. 5 Because SDCL 21-16-11 authorizes an award of attorneys’ fees in forcible entry and detainer actions, Arrowhea d 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 cost s 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 co urt 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 therefor e review the trial court’s denial of an award of Arrowhead’s attorneys’ f ees 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 de fault. 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 even t 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.#25770, #25787

- 13 - comply with the terms and condit ions 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 ex pressly mention attorneys’ fees. [¶29.] In examining the plain language of the lease provision, we disagree

with Arrowhead’s contention that it contai ns 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 partie s). 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 bas is that it could recover the attorneys’

fees it incurred due to Cold Stone’s default. [¶30.] Reversed and remanded to en ter judgment consistent with this opinion. [¶31.] GILBERTSON, Chief Justic e, and KONENKAMP and ZINTER, Justices, and MEIERHENRY, Retired Justice, concur.