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Thursday, July 17, 2008

Bogart on Good Faith in Commercial Leasing

Daniel B. Bogart (Chapman) has posted Good Faith and Fair Dealing in Commercial Leasing: The Right Doctrine in the Wrong Transaction on SSRN.  Here's the abstract:

Professor Bogart was keynote lecturer for the 2007 Kratovil Conference Real Estate Law and Practice sponsored by the John Marshall Law School Center for Real Estate Law. This article was solicited in connection with that lecture. In this article, Professor Daniel Bogart criticizes the unfortunate habit of many courts to import the doctrine of good faith and fair dealing, as it has been developed in residential real estate law, into commercial leasing. Commercial leasing practice is hugely important to real property lawyers and generates a significant portion of their legal fees. More importantly, commercial leasing is the driving force behind much of commercial real property development. In the first Part of his article, Professor Bogart examines the doctrine of good faith and fair dealing and questions its applicability to commercial lease transactions. He draws upon the thoughtful scholarship of Professor Emily M. S. Houh and other scholars. Two approaches to good faith have dominated scholarly discussion: the Restatement Second of Contracts Section 205 and an economic analysis of lost opportunities. Section 205 of the Restatement essentially defines as "good faith" everything that is not "bad faith." Courts adopting this approach create an open-ended laundry list of bad landlord behavior, and aim to "do justice" among the parties to a dispute. This is the dominant view and has been used successfully in residential leasing scenarios to prevent unscrupulous landlords from preying on tenants. This approach is also a basis for the Implied Warranty of Habitability. A second approach to good faith and fair dealing is grounded in economics and seeks only to prevent one party from opportunistically extracting after the fact some right that could have been negotiated into the initial contract document. Professor Bogart argues that this second approach more closely fits the commercial leasing context, in which parties are or could be represented by counsel and are typically more business savvy than their residential counterparts. Indeed, as Professor Bogart notes in the article, this is behavior that real estate lawyers see routinely, and call "taking a second bite at the apple." Professor Bogart also argues that a casual application of the doctrine of good faith releases parties to the commercial lease from the bitter fruits of their negotiated agreements and lessens the value of good lawyering. One primary goal of courts, especially in the commercial context, should be to encourage parties to transactions to find good attorneys and then heed their attorneys' advice. In the second Part of his article, Professor Bogart tests three increasingly complex hypothetical commercial lease disputes and asks whether, in any of them, the landlord or tenant violated the doctrine of good faith and fair dealing. Each hypothetical is based on an actual, litigated lease dispute that rose to the state appellate level. In one case, the court found a party to have violated the doctrine. Professor Bogart argues that none of the fact patterns should be deemed to be the basis for a breach of the doctrine of good faith.

I heard Danny present this paper at a workshop, and it is outstanding.  It captures a lot of what used to frustrate me as a litigator about the approach many courts take to fairness in commercial cases.  The courts' well-meaning injection of fairness considerations ends up undercutting the ability of parties to allocate risk by contract.  Highly recommended!

Ben Barros

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