Dick Broadcasting Co., Inc. of Tennessee v. Oak Ridge FM, Inc. ( 2011 )

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
May 3, 2011 Session
DICK BROADCASTING CO., INC. OF TENNESSEE v. OAK RIDGE FM,
INC., ET AL.
Appeal from the Chancery Court for Knox County
No. 150482-3 Michael W. Moyers, Chancellor
No. E2010-01685-COA-R3-CV-FILED-OCTOBER 19, 2011
The plaintiff filed suit against the defendants for causes of action sounding in contract after
the defendants refused to consent to the assignment of certain agreements relating to the
programming of a radio station. The parties filed competing summary judgment motions.
The trial court dismissed the case, finding as a matter of law that the defendants did not
breach one of the contracts at issue. The plaintiff appealed. We reverse the judgment of the
trial court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Reversed; Case Remanded
J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which H ERSCHEL P. F RANKS,
P.J., and CHARLES D. SUSANO, JR., J., joined.
John A. Day, Brandon E. Bass, and Burke Keaty, Brentwood, Tennessee, for the appellant,
Dick Broadcasting Co., Inc. of Tennessee.
Robert S. Stone, Knoxville, Tennessee, for the appellees, Oak Ridge FM, Inc. and ComCon
Consultants.
John A. Lucas, Alcoa, Tennessee, for the appellee, John W. Pirkle.
OPINION
I. BACKGROUND
In 1997, the plaintiff, Dick Broadcasting Company, Inc. (“DBC”) entered into three
contracts with the defendants, Oak Ridge FM, Inc., ComCon Consultants (“ComCon”), and
John W. Pirkle (collectively “the Pirkle Entities”), to program WOKI-FM, a radio station in
Oak Ridge, Tennessee. The first contract, the Time Brokerage Agreement (“the TBA”),
granted DBC the right to program WOKI-FM for seven years and to purchase substantially
all of the broadcast time on the station. The TBA contained the following language:
15:10. Binding Agreements; Successors and Assigns. This Agreement shall
be binding upon and inure to the benefit of the parties and their respective
Successors and assigns, including, without limitation, any assignee of the FCC
licenses for the Stations.
The second contract, the Right-of-First-Refusal Agreement (“the ROFR”), granted DBC a
right of first refusal to purchase substantially all of the assets used in the operation of WOKI-
FM. The ROFR’s provision regarding assignment states:
7. Assignment. This First Refusal Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns . . . . No party may assign its rights, interests or obligations hereunder
without the prior written consent of the other party, and any purported
assignment without such consent shall be null and void and of no legal force
or effect; provided, however, that DBC shall be permitted to assign its rights
and obligations under this First Refusal Agreement (1) to an entity controlled
by James Allen Dick Jr., or by any one or more of the Dick family shareholders
of DBC, or (2) to another entity provided that DBC shall be prevented from
performing this First Refusal Agreement and provided that DBC shall
guarantee the obligations of such other entity as DBC’s assignee hereunder. .
..
The third contract, the Consulting Agreement (“the CA”), contracted for ComCon
(comprised of Mr. Pirkle and his son) to provide part-time consulting service regarding
WOKI-FM during the term of the TBA. The CA noted:
9. Amendment. No amendment, change or variance from this Agreement
shall be binding on either party hereto unless executed in writing and signed
by both parties hereto.
In its “Governing Law” section, the CA provided “[t]his Agreement shall be binding on the
parties hereto and their successors and assigns.” These three agreements will be collectively
called “the WOKI Agreements.”
-2-
In early 2000, DBC and its related companies decided to sell most of their interests
in radio stations. After soliciting bids, DBC decided to sell its assets to Citadel Broadcasting
Company (“Citadel”). In March 2000, Citadel agreed to pay DBC a total purchase price of
$300,000,000, and set a closing date approximately five months later for the parties to
complete their due diligence and meet the conditions and requirements of the agreement.
DBC entered into a written Asset Purchase Agreement with Citadel effective April 30, 2000.
The sale was to include the assignment of the WOKI Agreements.
DBC observes that the Pirkle Entities knew on March 8, 2000, of the possible sale of
DBC’s assets. On that date, an Inside Radio article provided first notice that DBC was for
sale and that Citadel was bidding for it. Twenty days later, a Knoxville News Sentinel article
ran in the business section entitled, “Dick Broadcasting is FOR SALE,” specifically setting
forth the radio properties “on the block,” including WOKI-FM. On May 10th, 2000, the
Knoxville News Sentinel reported “Dick Broadcasting sells 11 Stations,” and that
Citadel will add to its portfolio . . . one AM and four FM Stations (one of
which is operated under a long-term local market agreement) in Knoxville, the
69th largest market. Other local stations are WNOX-AM and FM and WSJM-
FM and WOKI-FM.
However, despite this notice, DBC notes that at no time after March 8, 2000, did Mr. Pirkle
contact any representative of DBC regarding the asset sale or the reported inclusion of
WOKI-FM in the sale.
According to Mr. Pirkle, when the Pirkle Entities learned about the proposed
assignment of the WOKI Agreements to Citadel, he opined to DBC that none of the contracts
were assignable without consent. In an affidavit, Mr. Pirkle related as follows:
7. . . . In these communications [to DBC], I stated that I would not agree to
assign the Time Brokerage Agreement and Right-of-First- Refusal Agreement
to Citadel without additional consideration. I do not recall DBC making a
specific request to assign the Consulting Agreement to Citadel.
8. I refused to consent to the assignment based on the legal opinion from
counsel and my belief that ORFM and ComCon had contract rights in the
assignment of WOKI Agreements for which they should be paid. It was my
intent in my negotiations with DBC to obtain the greatest economic benefit for
ORFM and ComCon as consideration for their consent to assign the WOKI
Agreements.
-3-
9. At some point during my negotiations with DBC, I made the decision to
refuse to agree that the WOKI Agreements were assignable in order to
negotiate a separate and more profitable agreement with Citadel.
***
Mr. Pirkle stated in his deposition:
They never contacted me to discuss what I would like to -- if I -- to discuss
whether or not I even wanted to discuss what happens with the LMA. They
tried to force me to do something that they knew I wouldn’t want to do, and in
their -- their -- in their arrogance and their egotism they attempted to roll right
over me, and I wouldn’t stand for it. . . .
When DBC formally notified the Pirkle Entities of its intent to assign the WOKI
Agreements to Citadel and requested written consent for the assignment, Mr. Pirkle refused
to sign. He sent a letter to Allen Dick stating “none of the Oak Ridge Contracts were
assignable without permission.” After this action was filed by DBC, the Pirkle Entities
claimed in an answer as follows:
None of Defendants had ever heard of Citadel Broadcasting Company and/or
Citadel Communications Corporation (“Citadel”) until after Defendants
learned that DBC had put its company up for sale in March 2000. Defendants
subsequently learned that Citadel is a company headquartered in Las Vegas,
Nevada which had been engaged in a rapid acquisition of radio stations in the
United States since the mid 1990’s, but had never engaged in the broadcasting
business in Tennessee prior to year 2000 when it entered into agreements to
acquire radio stations in eastern Tennessee, including Knoxville.
According to the Pirkle Entities, when they first entered into the WOKI Agreements, they
entered into the contractual relationship with DBC because it was a local, closely held
company with a proven track record as a successful broadcaster in the Knoxville market and
a company that had demonstrated longevity as well as the ability to consistently develop, over
time, its own radio properties. They contend their trust and confidence was understandably
placed in DBC to protect the image and value of WOKI without any real need for ComCon’s
advice. They note that Citadel, on the other hand, had no prior connection with the Knoxville
market. The company was quickly acquiring radio stations -- perhaps a risky financial
business model. The Pirkle Entities contend that substituting Citadel for DBC as a party to
the CA had the potential of materially increasing the burden imposed on ComCon under the
-4-
CA by requiring ComCon to provide Citadel extensive training on the workings of the
Knoxville broadcast market.
DBC contends that the Pirkle Entities objected to assignment of the WOKI
Agreements with the sole objective to negotiate more money for themselves. DBC argues,
however, that the Pirkle Entities did not have the right under the WOKI Agreements to
oppose a proposed assignment of the agreements as a leverage point to obtain more money.
DBC asserts that two of the three WOKI Agreements (the TBA and the CA) contained no
anti-assignment provision or requirement that DBC affirmatively obtain the Pirkle Entities’
consent to a proposed assignment. Only the ROFR required the written consent of the Pirkle
Entities for assignment.
In order to close the Citadel deal, DBC repeatedly requested that the Pirkle Entities
consent to the assignment of the WOKI Agreements. To alleviate any purported concerns
about Citadel’s ability to perform under the agreements, DBC advised the Pirkle Entities that
it would guarantee the obligations under the WOKI Agreements.1 Thus, according to DBC,
if the Pirkle Entities would have agreed to the assignments, their financial position would not
have been subjected to any risk because DBC would have retained liability in the event of
a default by Citadel. However, instead of cooperating, DBC relates that the Pirkle Entities
injected themselves into the sale process by trying to negotiate directly with Citadel.
According to DBC, the actions of the Pirkle Entities ultimately cost it millions of
dollars. Because of the controversy surrounding the WOKI Agreements,2 Citadel would only
close on the asset sale if $10,000,000 was deducted from the price. DBC further claims other
expenses have been incurred amounting to well over a million dollars.
DBC filed suit asking the trial court to find that the TBA and the CA were at all times
assignable by DBC to Citadel without the consent of the Pirkle Entities; that DBC rightfully
requested the Pirkle Entities to consent to the assignment of the ROFR, but that the Pirkle
Entities unreasonably withheld it; that the Pirkle Entities intentionally and falsely asserted
that the TBA and CA gave them a right to consent to their assignment and then unreasonably
withheld that consent, all in a ploy to work a new deal with Citadel; that, assuming the duty
of good faith and fair dealing applies to the ROFR, the Pirkle Entities breached the duty as
1
The Pirkle Entities dispute that DBC offered to guarantee the entire performance of all three of the
WOKI Agreements. According to the Pirkle Entities, DBC only offered to guarantee the monthly payments
due under the TBA.
2
DBC asserted in the trial court that the assignment of all three of the contracts was required for the
WOKI-FM portion of the asset transfer agreement between DBC and Citadel to be effective.
-5-
a matter of law; and that ComCon had breached the CA as a matter of law by objecting to the
assignment when it had no right to consent or withhold consent to the assignment.
On July 7, 2010, the trial court ruled on competing motions for summary judgment
filed by the parties. The court first addressed the ROFR, noting that DBC characterizes the
assignment provision as a “silent consent” provision, “by which is meant that the provisions
of the clause provide no language setting forth the circumstances under which consent may
be withheld.” The trial court held:
. . . Because the language in the contract at issue is silent with regard to the
circumstances under which consent to assignment of the ROFR may be
withheld, the Plaintiff urges upon the Court the imposition of the “implied
covenant of good faith and fair dealing” contained within the Restatement
(Second) of Contracts at § 205 as adopted and applied by the Courts of the
State [of] Tennessee.
The Defendants for their part argue that the terms of the contract with regard
to assignment are complete, unambiguous and should be enforced according
to their literal terms. The Defendants point out, and it is conceded by the
Plaintiff, that no Tennessee decision has imposed the “implied covenant of
good faith and fair dealing” to an assignment clause, and that to do so here
would result in the addition of new terms to an otherwise unambiguous
contract. . . .
While it is undoubtedly true that Tennessee has adopted § 205 of the
Restatement (Second) of Contracts, and implies a covenant of good faith and
fair dealing in all contractual relationships, that implied covenant should not
be used to vary the terms of an otherwise clear and unambiguous agreement.
...
. . . In this particular case, the Court finds nothing ambiguous about the “silent
consent” language in question. These parties, sophisticated business entities,
were free to negotiate for and include within the language of the consent
clause language to the effect that “consent shall not be unreasonably withheld”
but chose not to do so. To imply a “reasonableness” standard to the decision
of either party . . . to withhold consent to an assignment of the ROFR would
be in effect to add a new provision to the contract which the parties were free
to add themselves. To do so would, in the Court’s opinion, run contra to the
universally accepted [tenets] of contract interpretation . . . .
-6-
Additionally, it seems clear that Tennessee generally observes the principle
that interests in property are to be freely useable and alienable. Thus, for
example, in Tennessee leasehold interests are freely assignable by the lessee
without consent of the lessor in the absence of contrary language within the
lease, and covenants which restrict the right of assignment or subletting are
strictly construed against the lessor. Generally speaking, Tennessee Courts
strictly construe restrictions on the free use of property against the restrictions
and such restrictions will not be extended by implication to anything not
clearly and expressly prohibited by their plain terms. In the main, the cases
relied upon by the Plaintiff involve “silent consent” clauses in real estate lease
contracts. Implying a covenant of good faith and fair dealing in such contracts,
in the Court’s view, advances the underlying principle of the right of free use
and alienation of property in that, in imposing a requirement of reasonableness
upon a lessor’s ability to deny the subletting or assignment of a lease, the
lessor’s ability to interfere with the lessee’s free use or alienability of the
leasehold estate is diminished.
A Right of First Refusal agreement, however, is itself a restraint on the free use
and alienability of property, because in its absence a property owner would of
course be empowered to sell his property to whomever he wished at whatever
price he negotiated. Also, and unlike leasehold interests, ROFR agreements
are considered to be personal in nature and not generally transferable or
assignable unless such is specifically provided for in the ROFR contract. Thus
in keeping with the general preference for the free use and alienability of
property, a ROFR contract, as a restriction on the free alienability of property,
should be strictly construed against restrictions on free alienability. Imposing
a covenant of good faith and fair dealing upon a “silent consent” provision in
an ROFR contract would have the effect of increasing the restrictions on free
use and alienability of property, in that it would further limit the property
owner’s options in transferring his property as he sees fit. Again the Court
would point out that these parties were free to include within the contract
restrictions on the Defendants’ right to withhold consent to the assignment of
the ROFR but chose not to include such restrictions. To ask the Court now to
impose such a restriction not only would result in the reformation of the
contract by judicial fiat, but would also be contrary to the general rule that
property owners ought [to] be free to dispose of their property as they wish,
and that restrictions against that right should be strictly construed.
For the foregoing reasons, this Court will decline to superimpose a
“reasonableness” requirement upon the assignment provision of the ROFR
-7-
contract. The clear language of the provision in question gives the parties the
unrestricted right to refuse assignment of the contract, and the Court will
enforce those provisions as written.
(Internal citations omitted).
The trial court further addressed whether, assuming a covenant of good faith and fair
dealing could be implied under the circumstances, DBC had established a violation of the
covenant:
Although the conclusion above essentially pretermits this issue, the Court will
briefly address the Plaintiff’s contention that the undisputed material facts of
the case demonstrate that Plaintiff is entitled to a judgment as a matter of law.
Plaintiff’s argument in essence is that Defendant Pirkle has testified by
affidavit and deposition that he was at least in part motivated to deny consent
to assign the ROFR contract to Citadel because of his interest in making a
more lucrative arrangement with Citadel. The Court need not pass on the
question of whether such conduct would violate the covenant of good faith and
fair dealing (even if it were to apply in this case) because in their response to
the Plaintiff’s Rule 56.03 Statement of Undisputed Material Facts the
Defendants have disputed the allegation that the only reason they objected to
the assignment of the contracts at issue was a desire for monetary gain; citing
further testimony of Mr. Pirkle and that of Mr. Lewis [Cosby] the Defendants
argue that they had valid business concerns regarding the financial status of
Citadel and [its] ability to perform under the contracts. This, the Court finds,
creates a material issue of fact rendering Summary Judgment for the Plaintiff[]
on this issue unavailable.
The trial court held as follows regarding the CA:
The Defendants argue in their Motion for Partial Summary Judgment that even
if a covenant of good faith is to be implied in the silent consent language of the
ROFR and even if they violated the covenant by their behavior, the Consulting
Agreement was a personal services contract that could not be assigned as a
matter of law, and that therefore the WOKI-FM portion of the asset sale by
DBC to Citadel could not be validly accomplished.
The Court is persuaded by the Plaintiff’s argument that, assuming this contract
is a personal services contract, “it is not the benefits of the contract that are
-8-
non-assignable, but the duties that are non-delegable.” Even if the Court
assumes that the CA was a personal services contract, DBC’s only
responsibility under the agreement was to pay for those services provided by
the Defendants under the CA. The Court finds that DBC’s interests in the CA
were freely assignable without the consent of the Pirkle entities.
Plaintiff on the other hand argues that the covenant of good faith also applies
to the CA, and that the Defendants’ objection to the assignment of the CA to
Citadel violates the covenant, citing § 205 of the Restatement (Second) of
Contracts:
e. Good faith in enforcement. The obligation of good faith and
fair dealing extends to the assertion, settlement and litigation of
contract claims and defenses. See, e.g., §§ 73, 89. The
obligation is violated by dishonest conduct such as conjuring up
a pretended dispute, asserting an interpretation contrary to one’s
own understanding, or falsification of facts.
REST 2d CONTR § 205. Plaintiff argues that when the Defendants objected
to the assignment of the CA they were in violation of the covenant inasmuch
as the Defendants had no right to so object.
The Court will begin by observing that Tennessee does generally recognize the
implied covenant of good faith and fair dealing in most contractual
enforcement, and the peculiar aspects of the ROFR consent language that the
Court believes exempts those provisions from the general rule do not apply
with regard to the CA. Therefore, the Court finds that the implied covenant
of good faith does apply to the CA, which will be interpreted with the
covenant’s reasonableness requirements in mind. However, Plaintiff
essentially urges a “strict liability” standard upon the Court with regard to the
Defendants’ conduct; if the Defendants insisted on a contractual right which
they did not have, the argument goes, then they have violated the covenant of
good faith, regardless of whether they had a good faith belief that they actually
had the contract right upon which they were insisting or even if they were
relying upon the advice of counsel in asserting the contract right. The Court
does not believe that the restrictions of the covenant are that broad. The plain
language of the Restatement provision relied upon by the Plaintiff speaks in
terms of “dishonest conduct,” “pretended disputes” and assertions “contrary
to the understanding” of the asserter. All of these terms require the Court to
make judgments about the state of mind of the Defendants at the time they
-9-
asserted their objections to the assignment of the CA. The Court is unwilling
to find that a party may be held liable for a breach of contract for holding out
a good faith but mistaken interpretation of a contract provision. A contrary
holding would open a veritable Pandora’s Box of litigation, rendering every
losing party in a contract dispute potentially liable for a breach of contract
based solely on the fact that the Court did not hold with that party’s
interpretation of a contract provision. The Court finds that this is a box best
left closed. Because the Court finds that there is a material issue of fact
presented regarding whether the Defendants’ actions regarding the CA were
undertaken in good faith, it follows that the Plaintiff would not be entitled to
summary judgment on this issue.
(Internal citations omitted). Accordingly, the trial court found that “[t]he ROFR should be
strictly construed against the restriction on sale, and the language of the ROFR contract is
not vague or ambiguous and should be enforced on [its] terms”; that “[t]here is a material
issue of fact regarding the intentions and motivations of the Defendants in refusing the
assignment”; “[e]ven if [the CA] was a personal services contract, DBC had the right freely
to assign its benefits under the contract to Citadel”; “[l]ike most contracts in Tennessee, the
implied covenant would apply to the CA”; and “[a] material issue of fact [exists] regarding
the state of mind and motivations of the Defendants in objecting to the assignment of the
CA.” The trial court noted that “if the Defendants had the right to refuse consent to
assignment of any of the three contracts that constituted the relationship between DBC and
WOKI-FM, the entirety of the Plaintiff’s case must fail.” The trial court found “that the
Defendants had the right to refuse their consent to the assignment of the ROFR for any
reason” and “that they can have no liability to DBC for the ensuing and resulting
arrangements between DBC and Citadel.” The court held “that summary judgment should
be granted to Defendants and that this action must be dismissed.” DBC subsequently filed
this timely appeal.
II. ISSUES
The issues raised by DBC are restated as follows:
A. Did the trial court err in ruling that the implied covenant of good faith and
fair dealing does not apply to a “silent consent” provision regarding the
assignability of a right of first refusal agreement?
B. Did the trial court err in ruling that, if the implied covenant of good faith
and fair dealing applies to a “silent consent” provision regarding the
-10-
assignability of a right of first refusal, the Pirkle Entities proffered evidence
sufficient to create a material issue of fact as to the intentions and motivations
of the Pirkle Entities in refusing the assignment?
C. Did the trial court err in ruling that a contracting party’s state of mind
and/or motivations are relevant in determining whether the party breached a
contract by objecting to its assignment when the party had no contractual right
to object?
D. Did the trial court err in ruling that the Pirkle Entities proffered evidence
sufficient to create a material issue of fact as to the state of mind and
motivations of ComCon in objecting to the assignment of the Consulting
Agreement?
III. STANDARD OF REVIEW
Our review is de novo upon the record of the trial court. Tenn. R. App. P. 13(d). The
trial court’s findings of fact are conclusive on appeal unless the evidence in the record
preponderates against those findings. State v. Burns, 6 S.W.3d 453 (Tenn. 1999). The
interpretation of a written agreement is a matter of law and not of fact. Therefore, as to
matters of law, our scope of review is de novo on the record with no presumption of
correctness of the trial court’s conclusion of law. NSA DBA Benefit Plan, Inc. v. Connecticut
Gen. Life Ins. Co. 968 S.W.2d 791, 795-96 (Tenn. Ct. App. 1997); Park Place Ctr. Enter.
v. Park Place Mall Assoc., 836 S.W.2d 113, 116 (Tenn. Ct. App. 1992).
IV. DISCUSSION
DBC asserts that the ROFR in this case should be construed consistent with the
covenant of good faith and fair dealing. The Pirkle Entities argue that Tennessee law does
not require them to have been reasonable when declining consent to the assignment of the
ROFR.
It appears that the primary matter before us, the construction of a silent consent clause
in an anti-assignment provision, is an issue of first impression in this state. We have
exhaustively reviewed this record, considered the positions of the parties, and analyzed
countless cases from other jurisdictions. We conclude that a silent consent clause should be
interpreted consistent with the duty of good faith and fair dealing, requiring the parties to act
in a commercially reasonable manner when deciding whether consent to a proposed
-11-
assignment should be granted.
It is well settled in Tennessee that “[e]very contract imposes upon each party a duty
of good faith and fair dealing in its performance and enforcement.” Covington v. Robinson,
723 S.W.2d 643, 645 (Tenn. Ct. App. 1986) (citing Restatement (Second) of Contracts § 205
(1979); Winfree v. Educators Credit Union, 900 S.W.2d 285, 289 (Tenn. Ct. App. 1995)
(quoting 17 Am. Jur. 2d Contracts, § 256 (1964)).
Our Supreme Court discussed the nature of the duty of good faith in Wallace v.
National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1996):
In Tennessee, the common law imposes a duty of good faith in the
performance of contracts. . . . The law regarding the good faith performance
of contracts was well stated by the Court of Appeals in TSC Industries, Inc. v.
Tomlin, 743 S.W.2d 169, 173 (Tenn. App. 1987):
It is true that there is implied in every contract a duty of good
faith and fair dealing in its performance and enforcement, and
a person is presumed to know the law. See Restatement (2d)
Contracts, § 205 (1979). What this duty consists of, however,
depends upon the individual contract in each case. In construing
contracts, courts look to the language of the instrument and to
the intention of the parties, and impose a construction which is
fair and reasonable.
In Covington v. Robinson, 723 S.W.2d 643, 645-46 (Tenn. App. 1986), which
was relied upon by the Court of Appeals in TSC Industries, Inc. v. Tomlin, the
Court of Appeals held that in determining whether the parties acted in good
faith in the performance of a contract, the court must judge the performance
against the intent of the parties as determined by a reasonable and fair
construction of the language of the instrument. In a later decision, the Court
of Appeals held that good faith in performance is measured by the terms of the
contract. “They [the parties] may by agreement, however, determine the
standards by which the performance of obligations are to be measured.” Bank
of Crockett v. Cullipher, 752 S.W.2d 84, 91 (Tenn. App. 1988).
Wallace, 938 S.W.2d at 686.
A federal court applying Tennessee law has ruled that the duty of good faith and fair
dealing imposes a reasonableness requirement in a silent consent clause generally. In Town
-12-
& Country Equip., Inc. v. Deere & Co., Inc., 133 F. Supp. 2d 665, 668-69 (W.D. Tenn. 2000),
the plaintiff sued the defendant for breach of an agreement allowing sale of the defendant’s
products at the plaintiff’s store. Id. at 667-68. The agreement contained a silent consent
clause requiring the defendant’s prior written approval before the plaintiff could relocate its
store. Id. at 668. The court rejected the defendant’s argument that the silent consent clause
meant the defendant had “an absolute contractual right to withhold its approval of any
relocation, for any reason.” Id. at 669. Based on the duty of good faith and fair dealing, the
district court found “[n]othing in the agreement suggests that [the defendant] may withhold
that approval unreasonably,” and denied summary judgment for the defendant on the
plaintiff’s claim that the defendant breached the contract by unreasonably withholding
consent. Id. at 668-69, 673.
An increasing number of jurisdictions now hold that where a contract provides for
assignment only with the prior consent of the grantor, such consent may be withheld only
where the grantor has a commercially reasonably objection to the assignment. In Homa-Goff
Interiors, Inc. v. Cowden, 350 So. 2d 1035 (Ala. 1977), the Supreme Court of Alabama noted:
The general rule throughout the country has been that, when a lease contains
an approval clause, the landlord may arbitrarily and capriciously reject
proposed subtenants. This rule, however, has been under steady attack . . . .
***
[W]e hold that, even where the lease provides an approval clause, a landlord
may not unreasonably and capriciously withhold his consent to a sublease
agreement. The landlord’s rejection should be judged under a test applying a
reasonable commercial standard. This question, of course, becomes a question
of fact to be determined by the jury. . . .
Id. at 1037-1038 (internal citations omitted). Similarly, in Julian v. Christopher, 575 A.2d
735 (Md. 1990), the Maryland appellate court “recognized that in a lease, as well as in other
contracts, “there exists an implied covenant that each of the parties thereto will act in good
faith and deal fairly with the others.” . . . [I]f the lease does not spell out any standard for
withholding consent, then the implied covenant of good faith and fair dealing should imply
a reasonableness standard.” Id. at 739 (internal citations omitted).
Likewise, in Warner v. Konover, 553 A.2d 1138, 1140-1141 (Conn. 1989), the
Connecticut Supreme Court held that a landlord who has discretion to withhold consent to
lease assignments must exercise its discretion in such a way that is consistent with the duty
of good faith and fair dealing. In Warner, the tenant sought to sell its business and assign
-13-
its lease during the fourth year of a five-year lease. The lease provided that the tenant could
not assign the lease “without the prior written consent of Landlord.” Id. at 1140 n. 1. The
landlord refused to grant consent unless the parties renegotiated the rental. Connecticut’s
highest court held that a landlord may not unreasonably withhold its consent to the proposed
lease assignment and that the landlord’s refusal in this case was unreasonable. Id. at 1140-
1141. Earlier, in 1010 Potomac Assocs. v. Grocery Manuf. of Am., Inc., 485 A.2d 199 (D.C.
1984), the District of Columbia Court of Appeals observed:
[A] landlord may not for economic motives reasonably refuse consent to a
sublease that fully protects the landlord’s bargain under the prime lease. . . .
[I]t is unreasonable for a landlord to withhold consent to a sublease solely to
extract an economic concession or to improve its economic position. The
purpose of the consent clause is protection of the landlord in its ownership and
operation of the particular property, not protection of the landlord’s general
economic condition. The landlord has no reasonable basis for withholding
consent if the landlord remains assured of all the benefits bargained for in the
prime lease.
Id. at 209-10 (internal citations omitted).
In Boss Barbara, Inc. v. Newbill, 638 P.2d 1084 (N.M. 1982), the Supreme Court of
New Mexico considered whether a landlord could unreasonably and arbitrarily withhold
consent to a sublease. That court recognized that “the trend of the jurisdictions is to require
the landlord to act reasonably when withholding consent . . . .” Id. at 1085 (citing Homa-
Goff Interiors, Inc. v. Cowden, 350 So. 2d 1035 (Ala. 1977). The court noted as follows:
[A] lease, being a contract, should be governed by general contract principles
of good faith and commercial reasonableness. . . .
New Mexico law has consistently required fairness, justice and right dealing
in all commercial practices and transactions. . . .
. . . In this case, the tenant could not sublease the property without the written
consent of the landlord. The lease provision neither restricts the landlord’s
power to withhold consent unless he has reasonable cause, nor does the
provision permit the landlord to unreasonably and arbitrarily withhold consent
to a sublease agreement. However, in the absence of more specific language,
and because of new Mexico’s requirement that commercial transactions be
guided by right dealing and fairness, we construe Paragraph IX to require that
the landlord act reasonably when withholding his consent to a sublease
-14-
agreement.
Id. at 1086 (internal citations omitted).
In Funk v. Funk, 633 P.2d 586 (Idaho 1981), the Idaho Supreme Court noted that “no
desirable public policy is served by upholding a landlord’s arbitrary refusal of consent merely
because of whim or caprice or where, as here, it is apparent that the refusal to consent was
withheld for purely financial reasons and that the landlord wanted the lessees to enter into
an entirely new lease agreement with substantial increased financial benefits to the landlord.
. . . Id. at 589 (internal citations omitted).
A sampling of cases supporting the position we take today include the following:
Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994); Carma Developers
(California) Inc. v. Marathon Dev. California, Inc. 826 P.2d 710 (Cal. 1992); Newman v.
Hinky Dinky Omaha-Lincoln, Inc., 427 N.W.2d 50 (Neb. 1988); Kendall v. Pestana, Inc.,
709 P.2d 837 (Cal. 1985); Prince v. Elm Inv. Co., 649 P.2d 820 (Utah 1982); Warmack v.
Merchants Nat’l Bank of Fort Smith, 612 S.W.2d 733 (Ark. 1981); Hendrickson v. Freericks,
620 P.2d 205 (Alaska 1980); Brown v. First Fed. Sav. & Loan Ass’n, 460 P.2d 97, 100
(Mont. 1969); Campbell v. Westdahl, 715 P.2d 288 (Ariz. Ct. App. 1985); Jack Frost Sales,
Inc. v. Harris Trust & Sav. Bank 433 N.E.2d 941, 949 (Ill. Ct. App. 1982); Fernandez v.
Vazquez, 397 So. 2d 1171 (Fla. Ct. App. 1981); Arrington v. Walter E. Heller Int’l Corp., 333
N.E.2d 50 (Ill. Ct. App. 1975); Shaker Bldg. Co. v. Federal Lime & Stone Co., 277 N.E.2d
584 (Ohio Misc.1971).
Admittedly, there are cases that hold otherwise. Some jurisdictions still hold onto the
older view that consent may be withheld without justification and do not recognize a general
duty of good faith implied in all contracts. See, e.g., First Fed. Sav. Bank of Indiana v. Key
Mkts, Inc., 559 N.E.2d 600 (Ind. 1990).
We hold that under a silent consent clause in an anti-assignment provision, a party
may not withhold consent without a good faith and commercially reasonable basis for
objecting to the assignment. This obligation arises from the duty of good faith and fair
dealing, and a breach of the obligation is a breach of contract. Accordingly, we hold that the
Pirkle Entities had a duty to consent to DBC’s proposed assignment of the ROFR unless they
had a good faith and commercially reasonable basis for objecting to the assignment.
V. CONCLUSION
In view of our holding on the first issue, the trial court erred in granting summary
-15-
judgment to the Pirkle Entities. We reverse the judgment of the trial court and remand for
further proceedings in accordance with this opinion. We pretermit consideration of the
remaining issues, as in our view, they can be resolved upon remand of the case. Costs on
appeal are taxed to appellees, Oak Ridge FM, Inc., ComCon Consultants, and John W. Pirkle.
_________________________________
JOHN W. McCLARTY, JUDGE
-16-