Appeals Court Reinstates Failed Restaurant’s Elusive Breach of Implied Covenant of Good Faith and Fair Dealing Claim Against Commercial Landlord

By: David Viens

Introduction

A recent Massachusetts Appeals Court case involving a dispute arising from a failed restaurant demonstrates the often-elusive nature of what is known as the “implied covenant of good faith and fair dealing.”  The case, Classic Restaurant Concepts, LLC v. President and Fellows of Harvard College (“Classic Restaurant”), involved a commercial lease dispute between Classic Restaurant Concepts, LLC (“Classic”), the tenant-operator of the Harvard Square, Cambridge high-end restaurant En Boca—and its landlord, President and Fellows of Harvard College (“Harvard”), which operates Harvard University and owns extensive real estate in Cambridge.  The trial court dismissed the case before trial.  On appeal, however, the Appeals Court reinstated the case, including Classic’s implied covenant of good faith and fair dealing claim, concluding that the trial court judge misconstrued the scope and extent of the implied covenant and other claims under the parties’ operative lease.

Snapshot of Classic Restaurant’s Key Takeaways

• The implied covenant of good faith and fair dealing exists in every contract;
• Parties to a contract may not act to injure the other party’s rights to receive its reasonably expected benefits of the contract;
• A breach of the implied covenant of good faith and fair dealing may also violate the Consumer Protection Statute, General Laws Chapter 93A, under which punitive damages and attorney’s fees may be sought;
• Commercial property owners/landlords should be transparent with prospective tenants (and existing tenants) concerning known, planned construction activities that may affect the tenant’s ability to enjoy the full and expected benefits of a proposed lease; and
• Commercial property owners/landlords that own multiple units or nearby properties that are likely to necessitate known construction activities that may affect other tenants should clearly and explicitly spell out the parties’ understandings, expectations, rights and obligations in their leases.

The “Implied” Covenant of Good Faith and Fair Dealing

Every contract entered into in Massachusetts, be it a lease, construction or employment contract, is deemed under our law to contain the “implied covenant of good faith and fair dealing,” even though it is not expressly included as a written contractual provision.  Under this implied term or condition, the parties to a contract are deemed to owe each other a duty to act in good faith in the performance of their obligations and to refrain from conduct that would have the effect of destroying or injuring the right of the other party to receive the “fruits of the contract.”  The implied covenant exists so that the objectives of the contract and the parties’ reasonable expectations may be realized.  Importantly, though, a party may not invoke the implied covenant to create rights and duties not otherwise provided for under the existing contractual relationship, as the purpose of the covenant is to guarantee that the parties remain faithful to the intended and agreed expectations of the parties in their performance.

A proven breach of the implied covenant will entitle a party to recover the resulting economic damages that it can prove.  Notably, a breach of the implied covenant of good faith and fair dealing may also be, and often is, deemed a violation of the Massachusetts Consumer Protection Statute, General Laws Chapter 93A.  Chapter 93A, which generally prohibits unfair methods of competition and unfair or deceptive acts or practices in business transactions, applies to both consumer-to-business transactions and interactions, as well as to solely commercial transactions between businesses, despite the statute’s name.  While prevailing parties in litigation generally cannot recover their attorney’s fees unless specifically allowed under a contract or an applicable statute, Chapter 93A is one of the limited number of statutes that entitles a prevailing party to recover attorney’s fees.

Similarly significant, while prevailing litigants generally are only entitled to “be made whole” for their provable losses and can only recover, under very limited statutory circumstances, “punitive” damages that are solely designed to punish a wrongdoer, Chapter 93A also allows the prevailing party to recover multiple (doubled or trebled) damages where a knowing or wilful violation is proven.  This is to deter the unfair and deceptive practices and conduct proscribed under Chapter 93A.  Therefore, Chapter 93A, and the implied covenant by extension, can be very powerful tools in litigation when the circumstances implicate their application and potential violation.  Because of the elusive nature of this implied covenant, litigants often over plead alleged violations—and even trial court judges sometimes misconstrue this concept.

Classic Restaurant Case

This is precisely what occurred in the Classic Restaurant Concepts, LLC case, a perfect example of one of the myriad contexts that may implicate a breach of the implied covenant of good faith and fair dealing, as well as violation of Chapter 93A.  That is, the commercial landlord and tenant relationship, and in particular, where a tenant’s business operations are interrupted or damaged by construction activities controlled by the landlord.

In Classic Restaurant Concepts, property owner Harvard had a previous restaurant-operator tenant in commercial space located on Holyoke Street and approached Classic to potentially take over the space when that tenant expressed the desire to opt out of the lease.  Classic was indeed interested, later acquired the prior tenant’s existing lease and signed an amendment to the original lease (the “Lease”) in September 2015.  Classic thereafter undertook extensive renovations to the space to transform it into a fine dining concept serving lunch and dinner, and ultimately opened the restaurant in the fall of 2016.  Prior to Classic’s acquisition of the Lease, Harvard had informed Classic that, beginning in April 2016, a Harvard student building directly across the street from the restaurant and which occupied an entire city block, would undergo substantial renovations, continuing through 2018, and would become Harvard’s new Smith Campus Center (“SCC”).

In March 2016, Harvard’s general contractor (“GC”) for the SCC project received permission from the City to close Holyoke Street to vehicular through-traffic during construction work hours, to aid the construction, beginning in April 2016.  The sidewalk in front of the restaurant remained open, but the GC informed Harvard that the street closure could continue until the end of the SCC project in August 2018.  Although the GC was performing the actual work, Harvard had the ultimate decision on the construction’s “means and methods,” which included any decisions to seek street closures.

When Classic opened the restaurant in the fall of 2016, Classic described Holyoke Street as “a war zone” because of the construction.  The street was unpassable, the sidewalk in front of the restaurant was substantially narrowed by fencing just a few feet wide, and it was difficult for patrons to get to the restaurant.  Due to lack of business, Classic was forced to close the restaurant in June 2017.  As anticipated, Holyoke Street remained closed due to the construction through the summer of 2018.

Classic subsequently filed a lawsuit against Harvard alleging that the closure of Holyoke Street, for Harvard’s benefit, interfered with the restaurant’s operations and caused its ultimate failure.  Classic asserted various claims against Harvard, including for fraud (i.e., intentionally concealing information about the SCC project), breach of the implied covenant of good faith and fair dealing, breach of the covenant of quiet enjoyment (which protects a tenant’s right to freedom from serious interference with its tenancy by the landlord), and violation of Chapter 93A.

Before Classic had the opportunity to present its case at trial, however, the trial court judge granted Harvard’s motion for summary judgment, dismissing all of Classic’s claims.  Summary judgment can only be granted by a court when the material facts (those necessary to decide the dispute) are not in genuine dispute by the parties (trials and jurors are only needed when material facts are genuinely disputed) and one of the parties is entitled to win based on the court’s mere application of the applicable law to the undisputed facts.

Classic appealed the trial court’s entry of summary judgment.  On appeal, Classic was successful in reinstating various claims, including its implied covenant and Chapter 93A claims, among others, as the Appeals Court found that the trial court judge misapplied the law governing the implied covenant and also misconstrued various purported undisputed facts.

As to the fraud claim, which alleged Harvard fraudulently induced Classic to enter the Lease in September 2015 by failing to disclose information about the anticipated street closure, the Appeals Court affirmed (upheld) the dismissal of this particular claim, because there was no actual evidence that Harvard knew, before executing the Lease, that Holyoke Street would be closed due to the SCC project.

Classic’s implied covenant of good faith and fair dealing claim asserted that Harvard  breached the implied covenant by causing the closure of Holyoke Street to aid Harvard’s construction project and interests, but consequently, harming Classic’s ability to reap the benefits of its Lease.  Classic argued that the street closure interfered with its efforts to “continuously operate a distinctive, high-quality destination restaurant” at the site, in a manner that “maximized revenue,” as the Lease required.  Classic presented evidence to the trial court that the customer base targeted by Classic’s high-end concept would not be attracted to a restaurant in a construction zone such as what transpired, that the inability of cars (including rideshares) to drop patrons off at the door during the road closure negatively impacted business, and that the road closure substantially diminished the restaurant’s visibility and accessibility and thus diminished its business.  Classic also presented evidence to the trial court, through the GC, that the street closing was “good” for the GC, allowed it to build faster, and that the project would have been more difficult and slower (and thus more expensive to Harvard and unavailable to students until later) without the street closure.

Despite the evidence of the street closure’s benefit to Harvard, at the expense of Classic, the trial court judge, in granting summary judgment on the implied covenant claim, found that “Classic impermissibly sought to read into the lease a provision that ‘Harvard would prevent the closure of Holyoke Street.’”  The judge viewed this as contravening the oft-cited principle that the implied covenant “may not be invoked to create rights and duties not otherwise provided for in the existing contractual relationship.”  The trial court judge also reasoned that Classic was aware of the SCC project from the start and “was specifically aware of road closures before it entered into the [Lease] and did not address them in it.”  Thus, the judge found, there was no “intended and agreed expectation regarding road closures that could have been implied . . . and Classic never negotiated for an express term on this point.”

The Appeals Court, however, rejected the trial judge’s conclusion and related analysis, and reversed the dismissal of the implied covenant claim.  First, the Appeals Court noted, Classic never claimed that Harvard was required to prevent the closure of Holyoke Street.  Rather, Classic asserted that Harvard was required to refrain from itself causing the closure of Holyoke Street, an important distinction, to an extent that would harm Classic’s right under the implied covenant “to reap the benefits prescribed by the terms of the [Lease].”  Whether the street closure did so, the Appeals Court concluded, was a question of fact, as to which there was a genuine dispute, that would need to be determined at a trial.

The Appeals Court noted that Classic’s knowledge of the impending SCC project (but not necessarily the street closure or its planned extent) when it entered the Lease is a circumstance that may be considered at trial in evaluating whether, and to what extent, the street closure injured Classic’s rights under the Lease.  “This is because duties under the implied covenant depend on each party’s ‘reasonable expectations of the other.’”  But Classic’s general knowledge of the planned SCC project or possible street closures, according to the Appeals Court, did not equal specific knowledge or acceptance of the Holyoke Street closure in the manner and for the length of time that it was ultimately closed.  The court noted that “Harvard has not established that Classic, in signing the lease, should reasonably have expected the closure to occur” and that “a factfinder could find that Classic reasonably expected that Harvard would not itself cause a street closure that would significantly impair Classic’s ability to perform the obligations and reap the benefits of the lease.”

The Appeals Court also criticized the trial court judge’s overly broad construction and application of the well-established notion that “[t]he purpose of the covenant of good faith and fair dealing is not to supply contractual terms that the parties are free to negotiate.”  The Appeals Court aptly noted that “[t]his statement, taken out of context and applied literally, could entirely negate the implied covenant, by confining it to the enforcement of a contract’s express terms.”  Theoretically, the Appeals Court went on, “parties to a contract could always, in retrospect, have negotiated express terms to deal with any possible future action by one party that might injure the other party’s ability to benefit from the contract. This is true whether the future action is an employer’s termination of a salesperson in order to prevent the salesperson from collecting bonus commissions on sales already made [which is a long-established violation of the implied covenant], or a lessor’s limiting access to the leased premises in order to facilitate the lessor’s separate construction project.”  The Appeals Court continued “[i]f the failure to negotiate an express term preventing the employer or the lessor from taking such action rendered the implied covenant inapplicable, the implied covenant would be a nullity” and that “[t]he very phrase ‘implied covenant,’ however, contemplates an obligation that is not express in the contract.”

The Appeals Court also reversed the trial court’s dismissal of Classic’s claim for breach of the covenant of quiet enjoyment on largely the same grounds, that is, because Classic presented sufficient evidence that Harvard, by itself causing the closure of Holyoke Street, interfered with Classic’s ability to operate a restaurant at the leased space, and the trial court judge improperly imputed Classic to have full knowledge of the street closure and its extent and duration by virtue of its general knowledge of the planned SCC project or potential street closures in general.  Thus, the Appeals Court also revived this claim and ordered that it be reinstated to proceed to a trial in the Superior Court.

The Appeals Court further reversed the trial court’s summary judgment/dismissal of Classic’s Chapter 93A claim to the extent it was based on the same facts supporting the implied covenant claim, thus permitting Classic to proceed to a trial on this claim and allowing it to pursue the attorney’s fees and multiple damages allowed under the statute.  The Appeals Court explained that Harvard’s alleged conduct in causing the closure of Holyoke Street which benefitted Harvard’s construction project could be viewed as unfair or deceptive under Chapter 93A for the same reason that its conduct, by harming Classic’s right to receive the fruits of the Lease, constituted a breach of the implied covenant.  The Appeals Court also noted that a breach of the covenant of quiet enjoyment could also be viewed as unfair or deceptive conduct under Chapter 93A.  Specifically, the Appeals Court highlighted various evidence supporting Classic’s claim that Harvard did not timely or accurately disclose its full knowledge of the planned or likely street closure and that Classic suffered harm as a result.  For instance, in February 2016, Harvard’s GC told it that the street closure would be essentially every day for two and a half years, but this was not shared with Classic. Also, in early 2016, when Classic asked Harvard for an explanation after the street was initially closed, Harvard advised that the closure would end before school began in the fall of 2016, and repeated this assurance in July 2016.  Classic expressed to Harvard its dismay when it later learned the closure would extend to at least November 2016.  The court noted that a factfinder at trial could find that Harvard both did not timely disclose what it knew or expected about the street closure, and that this withheld information harmed Classic, as Classic expended substantial resources in anticipating a much earlier opening.  Whether Harvard’s nondisclosures were unfair or deceptive would ultimately depend on resolution of these actually disputed questions of fact, warranting reinstatement of the Chapter 93A claim and a trial to resolve this and Classic’s other revived claims.

Key Takeaways

The Classic Restaurant case illustrates the importance of the implied covenant of good faith and fair dealing and that contractual disputes will not always be “open and shut” cases where there is not a clear breach of a specific contractual term.  The case reinforces that this implied covenant exists in every contract to ensure that neither party acts to injure the other’s rights to receive its reasonably expected benefits of the contract, and may also implicate a further violation of Chapter 93A, bringing with it the additional punitive damages and attorney’s fees allowed under the statute.  In the commercial landlord-tenant context, landlords routinely undertake construction activities relative to other units in multi-unit properties, as well as involving other nearby owned property, which may adversely affect other existing tenants.  As highlighted by this case, such property owners should take caution to be fully transparent with prospective tenants (and existing tenants at renewal time) concerning known, planned construction activities that may affect the tenant’s ability to reap the full benefits of a proposed lease.

Additionally, the Classic Restaurant case also illustrates that litigants and even trial court judges may have difficulty grasping and adjudicating implied covenant claims given their unusual (albeit often over pled) nature.  Landlords that own multiple units or properties that are likely to necessitate known construction activities that may affect other tenants should clearly and explicitly spell out the parties’ understandings, expectations, rights and obligations in their leases.  Doing so may avoid a later and costly dispute involving an alleged violation of the powerful, if elusive, implied covenant of good faith and fair dealing.

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