This case involves a commercial lease and presents the following questions: (1) Under a lease agreement providing that the tenant "shall not assign, sell, mortgage, pledge or in any manner transfer the Lease or interest herein whether voluntary or involuntary or by operation of law * * * without the prior written consent of the Landlord," was the tenant required to obtain the landlord's consent when the tenant merged into its wholly owned subsidiary? (2) If the tenant was required to obtain the landlord's consent, was the landlord entitled to withhold its consent at its sole discretion, or was it permitted to do so only reasonably, because of a duty of good faith?
We answer those questions as follows: (1) The tenant's merger into its wholly owned subsidiary effected a transfer of the lease "by operation of law," requiring the landlord's consent. (2) A duty of good faith applies to lease agreements; here, however, the landlord's refusal to consent did not contravene that duty, because the landlord's refusal did not contravene the "reasonable expectations" of the parties as manifested in the express terms of the lease agreement at issue.
Pacific First Federal Savings Bank (Tenant) was a tenant in a building owned by The New Morgan Park Corporation (Landlord). Article 18 of the lease agreement between the parties
"Section 18.1 Definitions. The cumulative (i.e., in one or more sales or transfers by operation of law or otherwise) transfer of an aggregate of 50% or more of
On July 30, 1990, Tenant notified Landlord that it intended to merge on the following day into Tenant's wholly owned subsidiary, Pacific First Bank (Bank). Tenant asked that Landlord consent to transfer of the lease.
Landlord notified Bank, the post-merger corporate entity, that the merger was an "assignment" without consent constituting a breach of the lease agreement. Bank filed this action seeking a declaration that it became the tenant of the property in compliance with the lease. Landlord counterclaimed to recover possession of the property.
The trial court concluded that "the merger in this case did not require consent of the Landlord." As pertinent here, the trial court reasoned that, like an "upstream" merger,
The Court of Appeals held that the merger was an "assignment" requiring the consent of
The Court of Appeals also referred to this court's statement in Abrahamson v. Brett, 143 Or. 14, 22, 21 P.2d 229 (1933), that,
The Court of Appeals concluded that, consistent with this court's quoted statement in Abrahamson, Landlord's right to consent to the assignment of the lease was not constrained by a duty of good faith. 122 Or. App. at 406-07, 857 P.2d 895. The court reversed and remanded the case to the circuit court. Id. at 408, 857 P.2d 895.
Bank sought review in this court, arguing that the merger did not require Landlord's consent, because the quoted statement in Abrahamson v. Brett, supra, was merely dictum; because, under other decisions of this and other courts, every contract contains a duty of good faith; and because lease provisions relating to consent to assignments carry an implied obligation of reasonableness.
In answering the questions presented, we employ general principles of contract construction. Unambiguous contracts must be enforced according to their terms; whether the terms of a contract are ambiguous is, in the first instance, a question of law. OSEA v. Rainier School Dist. No. 13, 311 Or. 188, 194, 808 P.2d 83 (1991). If a contract is ambiguous, the trier of fact will ascertain the intent of the parties and construe the contract consistent with the intent of the parties. Ibid.; see also ORS 42.240 (in the construction of a written instrument the intention of the parties is to be pursued if possible). Words or terms of a contract are ambiguous when they reasonably can, in context, be given more than one meaning. Shadbolt v. Farmers Insur. Exch., 275 Or. 407, 411, 551 P.2d 478 (1976).
We first consider whether the lease agreement was ambiguous as to whether, by merging with its wholly owned subsidiary, Tenant "transfer[red]" the lease "in any manner," within the meaning of Section 18.2 of the lease agreement, so as to require Tenant to obtain the consent of Landlord. Section 18.2 does not expressly state whether a merger of Tenant with another corporation effects a "transfer" of the lease for which Tenant must obtain the consent of Landlord. It does, however, expressly provide that a "transfer" of the lease "in any manner," "whether voluntary or involuntary or by operation of law," is an event requiring the consent of Landlord.
We conclude that there is no ambiguity on that point in Section 18.2.
Bank argues that the nonassignment clause of the lease agreement (Section 18.2) does not apply, because it does not refer expressly to mergers. More pertinently, however, Section 18.2, which is worded in a broad and all-encompassing manner, does not exclude mergers. A downstream merger is one way in which the rights and obligations under a lease pass—that is, transfer—from one corporate entity to another.
Bank also argues that the nonassignment clause should not apply, because its purpose would not be furthered. Specifically, Bank asserts that it is stronger financially than Tenant, its predecessor. That may be so, but Section 18.2 contains no hint whatever that it applies only to situations involving financially equal or weaker transferees. The plain words of Section 18.2 make the provisions therein applicable to every "transfer" of the lease "in any manner," "whether voluntary or involuntary or by operation of law." Only in the situation of a sublease covered by Section 18.3 is the financial condition of an entity made relevant under the terms of the agreement; by implication, in the situations covered by Section 18.2, financial condition is not relevant. In addition, the exception provided in Section 18.1 relates to the continued existence of the original tenant as the leasing entity—not the financial condition of that entity. Although there is "meager authority" addressing the effect on a nonassignment clause of mergers by corporate tenants, where such clauses prohibit transfers "by operation of law," such mergers are a breach of the nonassignment clause "if the effect is to transfer the lease to an entity other than that of the original tenant" even though no interest in property is impaired by the merger. Milton R. Friedman, 1 Friedman on Leases § 7.303e2 (3d ed 1990). See also R. Schoshinski, American Law of Landlord and Tenant § 8.16 (1980 & March 1994 Supp) (if a covenant not to assign a lease expressly prohibits transfers by operation of law, then transfers by operation of law breach the covenant not to assign).
As a result of the merger that occurred in this case, Tenant ceased to exist as a corporate entity, and Bank—a legally separate corporate entity—succeeded to all the rights and liabilities of Tenant with respect to the lease. For federal savings banks, see 12 CFR § 552.13(b)(6) (providing that a federal savings bank whose corporate existence does not continue after a merger is a "disappearing" association); 12 CFR § 552.13(k) (providing that a charter of a "disappearing" association is deemed to be canceled on the effective date of a merger); 12 CFR § 546.3 (providing in part that, on the effective date of a merger in which the resulting entity is a federal savings bank, the resulting association "succeeds to" all the rights and obligations of the merging association (emphasis added)). For state banks, see ORS 711.040 (when a bank merger becomes effective, the separate existence of every bank, except the resulting bank, ends; "[a]ll property, all debts, all choses in action and every other interest of each merging * * * bank is transferred to and vested in the resulting bank without any further act or deed of any party to the merger" (emphasis added)); see also
Bank next argues that, even if the merger of Tenant into its wholly owned subsidiary effected a transfer of the lease requiring the consent of Landlord, Landlord could not withhold that consent unreasonably. Bank contends that, in cases of this court decided after Abrahamson v. Brett, supra, this court recognized the principle that every contract contains a duty of good faith. See Best v. U.S. National Bank, 303 Or. 557, 561, 739 P.2d 554 (1987) (stating that principle); Perkins v. Standard Oil Co., 235 Or. 7, 16, 383 P.2d 107, 383 P.2d 1002 (1963) (same); see also Restatement (Second) of Contracts § 205 (1981) (stating principle).
In Best v. U.S. National Bank, supra, this court considered whether a bank's fees for processing certain types of checks were excessive, in violation of the bank's duty of good faith in the performance of its account agreements with depositors. This court noted that that duty
This court proceeded to consider the meaning of the term "good faith" in that context. The court discussed the purpose of the good faith doctrine and the definitions of "good faith" proposed in the Restatement (Second) of Contracts § 205. Id. at 562-63, 739 P.2d 554. The Court explained that, in its previous decisions, it
The court discussed its previous decisions illustrating the operation of the principle. Id. at 563-64, 739 P.2d 554. The court noted that, in Comini v. Union Oil Co., 277 Or. 753, 756, 562 P.2d 175 (1977), it had concluded that, where an oil company had the contractual right to disapprove its distributor's transfer of its distributorship, the company could disapprove a transfer to an inexperienced party. Best v. U.S. National Bank, supra, 303 Or. at 564, 739 P.2d 554. The Best court stated, however, that, consistent with the principle, the company could not have disapproved a transfer "in order to retaliate against the distributor for some reason." Ibid.
Applying those principles to the case before us, this court concluded in Best v. U.S. National Bank, supra, that the bank was obligated to exercise its discretion as to the amount of the fees "within the confines of the expectations of the depositors." Id. at 564, 739 P.2d 554. When depositors entered into account agreements, they reasonably could have expected that the challenged fees would be similar in amount to other service fees and would reflect the bank's actual costs in providing the relevant services. Id. at 565-66, 739 P.2d 554. There was evidence that the bank set the challenged fees at amounts greatly in excess of such reasonably expected amounts, partly in order to "reap the large profits" obtainable from such fees. Id. at 566, 739 P.2d 554. Thus, a trier of fact
This court later applied those principles to a similar claim by bank depositors in Tolbert v. First National Bank, 312 Or. 485, 823 P.2d 965 (1991). In that case, however, there was undisputed evidence that the depositors agreed to the specific fees charged by the bank and agreed to the right of the bank to change the amount of the fees at its discretion. Id. at 490-91, 823 P.2d 965. This court concluded:
We conclude that the principles enunciated in this state's common-law good faith cases are applicable here. That is, we conclude that, as a general proposition, a duty of good faith applies to lease agreements as it does to other contracts. In so holding, we join the jurisdictions referred to by one commentator as a "rapidly growing minority" that recognize this principle. See Friedman, supra, at § 7.304a (noting that "there is a rapidly growing minority to the effect that if [a] lease states `tenant may assign only with landlord's consent' or `tenant may not assign without landlord's consent' there is engrafted on this language by implication the phrase `which consent shall not be unreasonably withheld' ").
We emphasize, however, that the doctrine of good faith is to be applied in a manner that will "effectuate the reasonable contractual expectations of the parties." See Best v. U.S. National Bank, supra, 303 Or. at 563, 739 P.2d 554 (stating that as the purpose of the good faith doctrine); see also Tolbert v. First National Bank, supra, 312 Or. at 493-94, 823 P.2d 965 (where parties' contract provides for unilateral exercise of discretion, reasonable expectations are met when that discretion is exercised after notice); Restatement (Second) of Property § 15.2(2) (1977 & 1993 Supp) ("A restraint on alienation without the consent of the landlord of the tenant's interest in the leased property is valid, but the landlord's consent * * * cannot be withheld unreasonably, unless a freely negotiated provision in the lease gives the landlord an absolute right to withhold consent" (emphasis added)).
In the present case, the reasonable contractual expectations of the parties are shown, by the unambiguous terms of Article 18 of the lease to which the parties agreed, to encompass Landlord's right to withhold consent, at its discretion, to a "transfer" of the lease.
Bank asserts that its reasonable expectations also included the law that was applicable at the time the lease agreement was made and that that law itself imposed a duty of good faith. There are two flaws in that reasoning. First, with respect to leases, the applicable law at the time the lease agreement was signed (1982) was stated in Abrahamson v. Brett, supra, 143 Or. at 22, 21 P.2d 229: when a lease prohibits assignment without the landlord's consent, the landlord "may arbitrarily withhold [its consent] without giving any reasons, and in granting [its consent] may impose such conditions as [it] sees fit." As stated above, we are announcing a different principle today: that a duty of good faith applies to lease agreements as it does to other contracts. Second, also as discussed above, the duty of good faith operates to effectuate the reasonable expectations of the parties as determined under the terms of their contract. Here, those terms demonstrate that the parties agreed to—that is, reasonably expected—a unilateral, unrestricted exercise of discretion by Landlord under Section 18.2 of the lease agreement.
In summary, Tenant's merger with its wholly owned subsidiary effected a transfer "by operation of law" of the lease, requiring Landlord's consent. Landlord's refusal to consent did not contravene the "reasonable expectations" of the parties as to Landlord's right to withhold that consent, as those expectations were manifested in the express terms of Article 18 of the lease agreement. Bank is not entitled, therefore, to a declaration that it became the tenant of the property in compliance with the lease agreement.
The decision of the Court of Appeals is affirmed on different grounds. The judgment of the circuit court is reversed, and the case is remanded to the circuit court for further proceedings.
FADELEY, Justice, dissenting.
In a decision reminiscent of the actions of the landlord in an 1890's melodrama, twirling his moustache while exclaiming "but you must pay the rent, the majority cancels a tenant's rights and forfeits the remaining decades of the term of a 50-year lease. No default has occurred, either under the literal terms of the lease or the implied-by-law promise to deal fairly and in good faith. All rent is paid. No diminution of the tenant's assets or financial responsibility has occurred.
The majority seizes on a technicality
Merger is not a ground for declaring default in the lease. The majority, however, say it is because they believe that the parties expected a "transfer by operation of law," such as would be governmental condemnation of the assets involved, to include mergers even where, as here, the merger enhances the ability of the tenant to pay the promised rent. I cannot agree and dissent for that reason as well as for the reasons demonstrated in the dissent of Unis, J., which I join.
UNIS, Justice, dissenting.
The majority holds that the "downstream" merger
I do not agree that the merger was an event as defined in Section 18.2 that required the consent of Landlord. However, even if the merger was an event as defined in Section 18.2 that required the consent of Landlord, as the majority holds, I conclude that Landlord unreasonably withheld its consent. Consequently, I would hold that the lease continues in full force and effect and that Bank is entitled to a declaration that it is the tenant of the property. Accordingly, I would reverse the decision of the Court of Appeals and affirm the judgment of the trial court.
For its thesis that Tenant's merger into its wholly owned subsidiary (i.e., a "downstream" merger) was an event as defined in Section 18.2 that requires the consent of Landlord, the majority essentially relies on the following. First, Section 18.2, which does not expressly refer to mergers, "does * * * expressly provide that a `transfer' of the lease `in any manner,' `whether voluntary or involuntary or by operation of law,' is an event requiring the consent of Landlord." 319 Or. at 348, 876 P.2d at 764. Second, the word "transfer" "covers all forms of passing of rights and obligations." Id. Third, "[a] downstream merger is one way in which the rights and obligations under a lease pass— that is, transfer—from one corporate entity to another." 319 Or. at 349, 876 P.2d at 765. Fourth, "whichever law relating to the effect of mergers—federal, state, or both—applied here, that law `operated' to give the rights and liabilities of Tenant (one entity) to Bank (another entity), with respect to the lease." 319 Or. at 350, 876 P.2d at 766.
On the surface, the majority's reasoning and holding appear to be logical and persuasive. On close scrutiny, however, serious flaws are disclosed. The majority's conception of the effect of the downstream merger and its resulting holding that the merger was an event as defined in Section 18.2 that required the consent of Landlord are not in accordance with statutory law that governs and controls bank mergers. The majority's conception of the effect of the downstream merger also is not in harmony with the objectives of banking laws.
12 CFR § 546.3, which deals with the transfer of assets on merger in which the
Similarly, 12 CFR § 552.13(1) states the effect of a merger on each of the constituent federal savings association's property rights and interests:
The majority states that statutory law, on the effective date of the merger, operated to
If Landlord could withhold consent, as the majority holds, then Bank would not receive unimpaired all the rights, interests, and obligations that Tenant had enjoyed at the time of the merger, as required by law. Moreover, requiring Tenant to obtain Landlord's consent before Bank succeeds to all of Tenant's rights, interests, and obligations with respect to the lease would be to require "further action," contrary to federal law. The majority's holding that the merger was an event as defined in Section 18.2 that required the consent of Landlord is, therefore, incompatible with federal banking law relating to the merger.
There is another reason why the majority's holding misses the mark. Generally, this court will not enforce a contract that conflicts with a statute where the purpose of the statute is to protect the public. Mountain Fir Lbr. Co. v. EBI Co., 296 Or. 639, 643-44, 679 P.2d 296 (1984). Banking laws are intended to "promote the safety" and "well-being" of banks. Schramm v. Bank of California, 143 Or. 546, 574, 20 P.2d 1093, 23 P.2d 327 (1933). In achieving that objective, the paramount consideration is the protection of the interests of depositors and stockholders. 1 Michie on Banks and Banking 15, § 3 (1993). See also Schramm v. Bank of California, supra, 143 Or. at 574, 20 P.2d 1093 (objective of promoting safety of banks cannot be achieved unless safety of depositors is the paramount consideration). Here, the legislative objectives of protecting depositors and shareholders that underlie banking laws relating to merger would be frustrated if Landlord could withhold its consent.
For the foregoing reasons, the majority's holding that the "downstream" merger was an event as defined in Section 18.2, requiring the consent of Landlord, is wrong.
Even if the merger was an event as defined in Section 18.2 of the lease that required the consent of Landlord, as the majority holds, the majority misapplies the principles enunciated by this court concerning the implied duty of good faith and fair dealing. I agree with the majority that an implied duty of good faith and fair dealing applies to lease agreements as it does to other contracts. 319 Or. at 353, 876 P.2d at 767. I also agree with the majority that even "if [a] lease states that `tenant may assign only with the landlord's consent' or `tenant may not assign without landlord's consent,' there is engrafted on that language by implication the phrase `which consent shall not be unreasonably withheld.' " 319 Or. at 353, 876 P.2d at 767 (quoting 1 Friedman on Leases § 7.304a (3d ed 1990)). I also agree with the majority that the implied duty of good faith and fair dealing "is to be applied in a manner that will effectuate the reasonable contractual expectations of the parties" and that an objective standard is to be used for determining whether the implied duty of good faith and fair dealing has been met. 319 Or. at 353, 876 P.2d at 767 (internal quotation marks omitted).
Whether Landlord's consent was unreasonably withheld in this case is determined by the objectively reasonable contractual expectations of the parties. See Tolbert v.
My disagreement with the majority is with its method of determining the objectively reasonable expectations of Tenant and Landlord with respect to Section 18.2 of the lease, the assignment-consent clause, and the majority's astounding conclusion that although Section 18.2, by implication, requires that Landlord's "consent shall not be unreasonably withheld," 319 Or. at 353, 876 P.2d at 767, the objectively reasonable contractual expectations of the parties in this case are met even if Landlord arbitrarily withheld its consent.
To support its conclusion, the majority explains:
"To illustrate, in Comini the defendant oil company had a contractual right to disapprove the plaintiff distributorship's transfer of the distributorship. This court concluded that the right was intended by the parties to protect the oil company's legitimate business interests in its distribution system. Comini, 277 Or at 756 [562 P.2d 175]. Thus, the oil company could, consistent with its obligation to perform in good faith, reject a transfer to someone inexperienced in the oil business and even reject a transfer to an experienced distributor when it had decided to consolidate the distributorship with another distributorship. Id. at 756-57 [562 P.2d 175]. But the oil company would have performed in bad faith if, for example, it had rejected a transfer in order to retaliate against the distributor for some reason. Similarly, the parties to an employment contract generally contemplate that an employer may use its discretion to fire an at-will employee if the employer is dissatisfied with the employee's performance or if the employee's
Good faith and fair dealing in the performance and enforcement of a contract thus emphasize faithfulness to an agreed common purpose and consistency with the objectively justified expectations of the parties. Restatement (Second) Contracts § 205, comment a at 100 (1981). According to Best, the "reasonable contemplation" standard of good-faith performance focuses the inquiry on (1) the discretion-exercising party's purpose in exercising that discretion, and (2) whether that purpose was within the objectively reasonable expectations of the parties.
Instead of following that method of inquiry, the majority focuses its inquiry entirely on the express terms of Article 18 of the lease agreement. 319 Or. at 353-355, 876 P.2d at 767-768. As a result, the majority holds that the implied duty of good faith and fair dealing requires that a landlord's "consent shall not be unreasonably withheld," and at the same time, paradoxically, also holds that Landlord could arbitrarily withhold its consent.
Applying the method of inquiry stated in Best to the facts of this case, whether the discretion exercised by Landlord here in withholding its consent is consistent with the implied duty of good faith and fair dealing depends on the particular purposes reasonably contemplated by the parties in giving Landlord discretion to withhold its consent.
One of those purposes is to protect Landlord from a significant adverse change in the use of the premises or in the ability of Tenant to pay rent. In the words of the Restatement, "[t]he landlord may have an understandable concern about certain personal qualities of a tenant, particularly [its] reputation for meeting [its] obligations. The preservation of the values that go into the personal selection of the tenant justifies upholding a provision in the lease that curtails the right of the tenant to put anyone else in [its] place by transferring [its] interest[.]" Restatement (Second) Property (Landlord and Tenant) § 15.2, comment a at 100-01 (1977).
A fact-specific analysis is necessary to determine whether, in refusing to consent, Landlord has complied with the implied duty of good faith and fair dealing. Several factors are involved in that analysis, including, but not limited to, (1) the overall financial responsibility of the new tenant, (2) whether the use of the premises would lead to waste of the landlord's interests in the property, (3) the legality of the proposed use, (4) the nature and extent of alterations needed by the proposed new tenant, (5) the proposed new tenant's suitability to use the property, and (6) the expected economic feasibility of the proposed new tenant to meet rent obligations based on the intended use.
Here, the evidence clearly establishes that Bank, the resulting tenant, was, for all practical
The record in this case, therefore, demonstrates that Landlord arbitrarily refused to consent. That refusal was in bad faith.
For the foregoing reasons, I respectfully dissent.
FADELEY, J., joins in this dissenting opinion.
ORS 711.040(2), which deals with the effect of mergers of certain banks, similarly provides:
See also ORS 60.497(b) (when a merger of private corporations takes effect, "[t]he title to all real estate and other property owned by each corporation party to the merger is vested in the surviving corporation without reversion or impairment").