Opinion
Case No. 03-13878-RGM
October 10, 2003
MEMORANDUM OPINION
This case was before the court on October 9, 2003, on the motion of Oshinsky Family Limited Partnership for relief from the automatic stay. The motion was denied after a hearing. This Memorandum Opinion briefly restates the reasons stated on the record.
The landlord sought relief from the stay so it could return to state court to prosecute an unlawful detainer suit in the general district court and obtain possession of the premises that the debtor leased from the landlord. The landlord entered into a lease with the debtor's predecessor in interest. The predecessor filed a voluntary petition in bankruptcy under chapter 11 of the United States Bankruptcy Code in this court and assumed and assigned the lease to the debtor. The landlord objected, unsuccessfully, and the assignment was effective about September 1, 2002. At that time, all parties, including this court, thought that all defaults had been cured. The debtor made substantial improvements to the premises and is now operating a restaurant at the premises. Until the difficulties arose in late April 2003, all rent had been paid in full and on time.
At the end of April 2003 the landlord's property manager discovered that he had failed to bill the full rend due from May 2002. The lease contains an automatic 2.5% escalation clause. The increase per month was about $135. The total that the debtor should have paid from September 2002 through April 2003 was about $1085. Rather than notify the debtor of the error and request payment, the landlord treated it as a default in the payment of rent and issued a five-day letter. The debtor paid the amount demanded within the five-day period. Unfortunately, the check was returned by the debtor's bank for insufficient funds. A week after the date on the landlord's bank's notification to the landlord of the returned check, the landlord issued a termination letter. The debtor immediately tendered a cashier's check for the full amount due but the landlord rejected the tender and all future tenders of monthly rent.
The lender also asserted in a separate 30-day default letter that the debtor's use of two video games in the restaurant violated the lease and demanded that they be removed. The debtor never removed the video games. This was also asserted as a reason to terminate the lease.
The parties agree that if the lease was properly terminated before the debtor filed its petition in bankruptcy, the defaults may not be cured and the lease may not be reinstated. In those circumstances, relief from the automatic stay would be appropriate.
The debtor, however, asserts that the termination was improper. It asserts that the default in the payment of the $1,085 within the five-day period was not a material breach of the lease and that the use prohibition in the lease prohibits the use of the premises as a video arcade, but not the use of two video games.
As more fully stated on the record, the court finds that the lease is not ambiguous with respect to the use restriction. The debtor is correct that the lease prohibits the use of the premises as a video arcade but does not prohibit video games themselves. The evidence is that the premises are used as a bar and restaurant and that the two video games are merely ancillary to the principal use of the premises. The paragraph involved in this issue limits the use of the premises. There is a list of uses that are prohibited. These uses are intended to protect other current or future tenants in their businesses and lead to a more well-rounded shopping center. They do not prohibit all competition or duplication of sales, but only, in some cases, when the sales are more than 5% of the sales of the store. For example, while coffee shops are prohibited, the tenant may sell coffee as a part of its use of the premises as a restaurant. More importantly, the clause in question refers to arcades, which is the subject of the clause. A video arcade is merely one of three types of arcades described. Only the pinball arcade and the video arcade are specified. The third adjective is a general description of any other entertainment arcade. The words used in their ordinary sense refer to arcades, not an incidental use of an arcade game. This is clear from the context. This is a shopping center with multiple stores. Shopping center landlords want to keep a good mix of tenants to encourage overall traffic through the shopping center and avoid tenants that attract the "wrong" type of clientele. An entertainment arcade — such as a pinball arcade or a video game arcade — can attract groups of younger consumers who have been known to become somewhat involved in their gaming, sometimes to the extent to be considered boisterous, rude and obnoxious to other potential consumers, something that can decrease overall traffic in a shopping center. This is not a likely fear where the principal use is as a restaurant and there are only two video games that are physically separated from each other. Consequently, the landlord improperly relied on this lease provision to issue its 30-day default letter and to terminate the lease.
The court also more fully addressed the payment of the $1,085 increased rent on the record. The lease does not address how mutual mistakes of fact are to be treated. It is clear that everyone was under the impression in August 2002 that all defaults had been cured at the time of the court-approved assumption of the lease. Everyone was mistaken. The May 2002 rental increase had not been identified. In this, the debtor was least at fault. He was the assignee of the lease and reasonably relied upon the landlord's statement of the amount of the monthly rental payment. The debtor paid this amount, without objection, from September 2002 through April 2003.
The amount not paid was not a material amount. It represented only 2.5% of the total rent that the debtor in fact paid. This means that the debtor paid abut $43,400 during this period. The landlord did not consider it material as evidenced by its failure to identify it as unpaid for almost eight months. It did not go to the core relationship. Although payment of rent is central to a lease, here the known rent was timely paid and the unknown amount was but a small portion of it. As more fully developed on the record, the debtor would suffer a significant forfeiture if this were to be considered material and the lease were to be terminated while the landlord had much less at stake. In fact, the landlord's damages are almost, if not in fact, non-existent. The debtor promptly paid the full amount when he learned of the mistake and offered to pay the full amount in cleared funds upon learning that his first check had bounced. The debtor acted in good faith at all times. No argument was made that the debtor was not acting in good faith, such as kiting checks, repeatedly bounced checks and the like. In fact, the evidence was that all prior rental payments were made on time and that none was returned for insufficient funds.
In these circumstances where both parties were under a mutual mistake of fact as to the proper amount of rent to be paid, the amount unpaid was insignificant compared to what was in fact paid and the lease is silent on the process to correct such unintentional errors, equity requires that the landlord first give the tenant notice of the mistake and a reasonable time to rectify it. Only if the tenant fails to correct the error within a reasonable time may the landlord resort to the default remedies under the lease. In this case, five days was not a reasonable time. The amount was relatively small and had accrued over an eight-month period. Additional time should have been given. Had a reasonable time been given, it is likely that the check would not have been returned. The debtor would not have been required to act in such a hurried manner. Had the check been returned, the default provisions could have been invoked. But, the court is satisfied that in those circumstances, the debtor would have made a more thorough investigation of why the check was returned and would have paid the amount within the requisite period. In any event, without having given the debtor a reasonable time within which to correct the mutual mistake, the landlord could not properly invoke the default procedures and thereafter terminate the lease
Since the only two premises for the lease termination were not proper, the lease termination was itself not proper. The lease remains in full force and effect and may be assumed and, if appropriate, assigned.