Opinion ID: 1154530
Heading Depth: 3
Heading Rank: 1

Heading: Enforceability of Paragraph 10 of the Lease.

Text: The superior court concluded that paragraph 10 is enforceable as a matter of law and that a fair rental value should be implied as the rental for the five-year periods for which the parties are unable to negotiate an agreement. The validity of the superior court's summary judgment decision turns on this conclusion of law. [2] We sustain the superior court's holding that paragraph 10 is enforceable. Good faith is a term implied in every contract. [3] In this context, good faith requires the parties to attempt to reach agreement as to rent for the property for the five-year period in question. Forcing Ferguson to quit the property after his substantial reliance on the fifty-five-year length of the lease would be inequitable, as would be allowing Ferguson to continue using the property without reasonably compensating the City. The City had notice that Ferguson intended to use the property to build a filling station. Ferguson constructed a filling station on the property and subleased the station for an original term of ten years with renewal options for two successive five-year terms. Under the terms of the lease Ferguson could neither sublet the premises nor construct a filling station without the City's prior consent. He expended substantial sums in constructing the filling station. On the other hand, Ferguson should not benefit from a lease provision which he asserts is unenforceable, in order to obtain a better bargain than the parties intended when they entered into this long-term lease. Courts are no longer reluctant to supply lease terms when parties who, at the time of contracting agreed to set or renegotiate particular terms in the future, are unable to reach agreement. This is particularly true when the amount of rental is the term left to future agreement. Chaney v. Schneider, 92 Cal. App.2d 88, 206 P.2d 669, 669 (1949). In concluding that paragraph 10 of the lease is enforceable in the factual circumstances just outlined, we find the reasoning of Chaney persuasive. Therein the court wrote in part: [I]ntent is to be determined from a view of the instrument as a whole, and a consideration of all of the facts in the case. If the agreement to renew was the essence of the contract, and the terms of the lease or the rental to be paid thereunder were to be fixed by agreement, or in some other way, at the time of the extension of the lease, then failure of the parties to so agree, or to fix particular terms does not avoid the lease. In such a case the courts will declare the terms upon which the parties fail to agree. [4] 206 P.2d at 671. Based on this reasoning the court was willing to declare a missing rental term in order to effect the reasonable expectations of the parties, where the renewal option was the essence of the contract. There is even greater reason to declare a rental term when, as here, parties under a long term lease are unable to reach agreement, since there are correspondingly greater reliance expectations created in the continuing use of the property. [5] Our opinion in Altman v. Alaska Truss & Mfg. Co., 677 P.2d 1215 (Alaska 1983), indicates our willingness under the proper circumstances to supply a fair market rental term and is in accord with the approach of the Chaney court. [6] In Altman, this court suggested that where a lessor had done everything possible to have the rental rate established by arbitration or appraisal, then the lessee would be obligated to pay the fair market rental value of the premises. Id. at 1224. In this case, the essence of the contract is the fifty-five-year term of the lease. This is evidenced by the substantial long term investment made by the lessee in constructing the service station. It is clear that the parties contemplated that the rent over this fifty-five-year term would be adjusted to fluctuations in market conditions. Paragraph 10 provided in part that rents shall be subject to renegotiation for increase or decrease every five years. We therefore find no error in the superior court's decision to find paragraph 10 enforceable and to imply a reasonable fair market rent if necessary to give effect to the reasonable expectations of the parties.