Allan J. Norville and Kenai Plaza/Carr's-Safeway, LLC v. Carr-Gottstein Foods Co.

The question presented is whether a landlord's refusal to consent to a
sublease was unreasonable. The superior court granted summary judgment in favor of

the tenant on this issue. We conclude that this was error because there were genuine
issues of material fact and the tenant was not entitled to judgment as a matter of law.

FACTS AND PROCEEDINGS

Allan Norville owns a shopping center in Kenai. Beginning in 1991, Carr-
Gottstein Foods Co. (Carrs), leased space in the center under a twenty-five year lease.
In 1995 Carrs asked Norville to consent to a sublease for a Bank of America branch.

Article 13 of the lease required Carrs to seek Norville's consent prior to subletting and
provided that consent was not to be withheld unreasonably. Norville initially did not
consent to the sublease. He explained:

I have not granted permission to proceed for currently I am
discussing the possibility of locating a bank branch on one of
the pads at the center. I have agreed with the prospective
tenant that if a bank is located on the pad, the balance of the
center would be restricted and no other bank will be located
in the shopping center. The covenant would be similar to the
covenant in our lease, wherein I am not allowed to place
another food store on the site.

But a week later, after receiving a call from John Cairns, Carrs president, N orville
consented. He stated that he did so for two reasons: "[F]irst because [Cairns] is a
personal friend . . . and, second, the fact that Carrs had a large amount of long-term debt
and the added cash flow would help the company." In his letter granting consent
Norville wrote that "the consent to allow the Bank of America branch shall in no way be
construed as a waiver of our rights under the lease."

Bank of America operated a branch bank in the center as a subtenant of
Carrs until April of 1999. In early 1999 Safeway, Inc., purchased all the shares of Carrs
and Carrs became a subsidiary of Safeway. Since all post-acquisition dealings between
the parties involved Safeway employees, we refer to Carrs after the acquisition as
"Safeway."

In July 1999 Safeway wrote Norville requesting that he consent to a
sublease to Alaska USA Federal Credit Union. The proposed area was the same space
that had been previously occupied by Bank of America. Safeway's property manager,
Jeanese Riggs, contacted Norville to follow up on the request. According to Riggs,
Norville "advised me that he would not consent to the sublease unless he was given a
percentage of the sublease rent. H e claimed he was entitled to this because his ability to
negotiate with another bank to locate in his shopping plaza would be adversely
impacted."

In subsequent communications, Norville indicated that he would approve
the sublease for seventy-five percent of the rent paid by Alaska USA, an amount just
under $3,000 per month. According to Norville, he conditioned his consent upon
receiving a portion of Alaska USA's rent because he "was still planning to develop a
bank on the bank pad of the center," and he had "continued concerns that any other bank
would be put off by an Alaska USA in-store bank . . . competing with it in the same
shopping center." He stated that he "feared that the prior existence of the BofA branch
office was one of the reasons why [he] still had no bank tenant, and that if [he] could find
such a tenant the market rate [he] could charge would be diminished by the Alaska USA
branch within Carrs." He also stated that he was motivated in part by concerns that this
was the first step in a series of subleases to which Safeway would "demand consent" in
order to reduce its own operations in the center.

In September 1999 Safeway accepted Norville's terms under protest.
Safeway made it clear that it believed that Norville did not have reasonable grounds for
conditioning his approval of the sublease and stated, "we . . . intend to pursue this matter

. . . ." Alaska USA began operating in the subleased space in August of 1999 and
continues to do so.

In June 2001 Safeway sued Norville, alleging that his withholding of
consent for the Alaska USA sublease was unreasonable and in violation of the lease.

Safeway sought a declaration that Norville was required to consent to the sublease
unconditionally and asked for judgment for the amount of the sublease rental paid to
Norville.

After Norville answered and some discovery was conducted, Safeway
moved for summary judgment. Safeway's theory was that Norville had withheld consent
to the sublease solely on the basis of the intended use of the space for banking. Safeway
argued that under the lease it had the right to use its store for any services offered in
similar stores, and that banking is one such service. Since that use was permitted under
the lease, Safeway argued that it was unreasonable for Norville to withhold consent to
the sublease.

In response, Norville argued that the reasonableness of his conditional
consent was a question of fact. Norville also took issue with the contention that the lease
permitted banking as a use. Finally, Norville argued that use was not the sole basis for
his refusal.

After oral argument, the superior court granted summary judgment for
Safeway. The final judgment entered required Norville to refund thirty-one monthly
payments from the Alaska USA sublease, amounting to $91,930.50, plus interest, costs,
and attorney's fees.

Relevant lease provisions

As already indicated, the term of the Norville-Carrs lease was twenty-five
years. Approximately 70,992 square feet were leased. A minimum annual rent of

$851,904 was specified, and a percentage rent was to be charged to the extent that it
exceeded the minimum. The percentage rate was two percent for gross sales exceeding
$40,000,000 to be reduced to one-and-a-half percent on gross sales exceeding
$50,000,000. "Gross sales" do not encompass "minimum and base rents from
subtenants." The tenant is required to "use, occupy, operate and conduct its business in
the entire Demised Premises in such manner as to produce the maximum volume of
Gross Sales . . . ."

The two most important clauses to the resolution of this dispute are the
"Tenant's Use Clause" and the "Assignment or Subletting Clause."

The Tenant's Use Clause, section 1.1(i) provides:

Tenant shall use the Demised Premises for the
principal purpose of conducting thereon a general food
supermarket including sales of deli-type foods for onpremises
consumption, with the privilege of including in the
Demised Premises a drugs and toiletries department, a
notions department, a variety and soft goods department, a
housewares and hardware department, a ready-to-wear
clothing and accessory department, a prescription pharmacy,
an automotive accessory and supply department, a floral
department, a photo/sound/video department and a
department or departments selling other items or offering
such services compatible with the items or services offered
by Tenant for sale in the foregoing enumerated departments
and items sold and services offered from time to time in other
general food supermarkets operated by Tenant or others.

Tenant may also use the Demised Premises to the extent
incidental to the uses described above, for the installation and
use of one or more machines and/or devices which effect or
facilitate the transfer, crediting and /or debiting of funds, the
determination of account balances, the cashing of checks
and/or any and all functions relating to such type of activities
as may now or in the future be performed or facilitated by
machines and/or devices. Tenant shall not use the Demised

Premises for any other principal use or purpose without the
prior written consent of Landlord.

The Assignment or Subletting Clause provides in relevant part:
13.1 Tenant expressly covenants that it will not
assign this Lease or any interest therein, nor sublease or
suffer or permit the Demised Premises or any part thereof to
be used by others, without the prior written consent of
Landlord in each instance, which consent will not be
withheld unreasonably. . . .

. . . .

13.4 . . . . If Landlord shall consent to any particular
assignment or subletting, such consent shall be deemed
consent to that particular transaction only and not to any
other or future transaction.

Contentions

On appeal both parties treat Norville's consent to the Alaska USA sublease
conditioned on receiving seventy-five percent of the rent paid by Alaska USA as
equivalent to a refusal to consent to the sublease. We accept this characterization.

Norville argues that whether his refusal to consent to the Alaska USA
sublease was unreasonable is a question of fact that should not have been resolved by
summary judgment. He contends that he withheld consent for two reasons. The first was
because of "his long-standing desire to find a full-service bank to lease a ‘bank pad' in
another part of the shopping center." The second was related to rent receipts on
Safeway's premises. He points out that by subleasing to a bank the space used by the
bank no longer contributes to gross sales and thus to rent calculated on a percentage
basis. He contends that these reasons, considered either individually or collectively,
justified his withholding of consent.

In response to N orville's first reason for withholding consent, Safeway
argues that the motive to lease other space in the center to a bank is unreasonable as a
matter of law because under the Tenant's Use Clause it was entitled to use its premises
for banking. Safeway stresses that Norville's "objection was use. He did not want a
bank in the supermarket. Since the use clause gives [Safeway] the right to put an in-store
branch bank in the premises, Norville's objection to Alaska USA was unreasonable as
a matter of law ." According to Safeway, its allegation that Safeway is permitted under
the use clause to install a branch bank also answers Norville's argument that he withheld
consent to the sublease because it would not contribute to gross sales: "Where the terms
of the governing lease give [Safeway] the right to the activity, any disadvantage imposed
on Norville is irrelevant. As just shown, in-store banks are included in [Safeway's] right
to offer ‘items sold and services offered from time to time in other general food
supermarkets operated by tenant or others.' "

Norville, in turn, contests the claim that branch banking is a permitted use.
He contends that specific language in the use clause permits only machine based banking
activities and that this language controls the permission to engage in branch banking that
might otherwise be found in the general language of the use clause.

DISCUSSION

One premise of Safeway's argument is that under the lease Norville must
consent to any sublease that is for a use that would be permitted under the Tenant's Use
Clause if conducted by Safeway. A second premise is that banking is a permitted use
under the Tenant's Use Clause. We believe, for the reasons that follow, that the first
premise is incorrect as a matter of law, and the correctness of the second premise
depends on unresolved extrinsic evidence.1
Can the landlord object to a sublease for uses that would be permitted to the
tenant?
We turn first to Safeway's argument that Norville cannot object on the basis
of use to a sublease for a use that would be permitted to Safeway. The language of the
lease does not support Safeway's contention. The subletting clause does not specify any
limitation on the right of the landlord to withhold consent other than reasonableness.

Further, the Tenant's Use Clause limits permitted uses to those by "a department," a term
that in normal usage would not encompass a subtenant. The applicable language of the
use clause, elided for ease of understanding, is as follows: "Tenant shall use the
Demised Premises for the principal purpose of conducting thereon a general food
supermarket . . . with the privilege of including in the Demised Premises . . . a
department . . . selling other items or offering . . . items sold and services offered from
time to time in other general food supermarkets . . . ." The normal meaning of
"department" used in this context is "a division of a store handling a distinct class of
merchandise < the furniture ~> ."2 This would not seem to encompass a
3 In interpreting contracts, as well as statutes, "unless otherwise defined,
words will be interpreted as taking their ordinary, contemporary, common meaning."
State v. Niedemeyer, 14 P.3d 264, 272 n.38 (Alaska 2000) (citation omitted); Day v. A
& G Constr. Co., 528 P.2d 440, 447 (Alaska 1974). See also RESTATEMENT (SECOND)
OF CONTRACTS § 201 cmt. a: "Unless a different intention is shown, language is
interpreted in accordance with its generally prevailing meaning. See § 202(3)." Section
202(3) provides "[u]nless a different intention is manifested, (a) where language has a
generally prevailing meaning, it is interpreted in accordance with that meaning."
space leased to a separate entity.3 The prohibition of subletting without consent, together
with the Tenant's Use Clause's definition of permitted uses as those by "a department,"
suggest that the lease does not erect a categorical rule barring the landlord from
withholding consent on the basis of use to a proposed sublease that entails uses that
would be permitted to the tenant.

Further, there are practical reasons why withholding consent in such
circumstances might be reasonable. The scale of a tenant-operated department under the
use clause might be expected to be smaller than the operations of a separate store. For
example, the quantity of the hardware offerings found in a typical supermarket is much
less than in a hardware store.

Why would scale make a difference to a landlord? One reason may be that
the particular use in question is less remunerative in rent per square feet to the landlord
than core supermarket uses. This would have an impact on percentage rents. The
landlord, to use the hardware example, might be willing to tolerate the relatively small
commitment in square feet to hardware sales that would be expected in a supermarket
hardware department, but could reasonably object to the larger commitment of space
necessary for a full-scale hardware store.4 Another reason might be that the landlord is
seeking to attract a store as a primary tenant in the same complex that would be in
competition with the proposed subleasee. While the scale of the competition offered by
sales from a department of the supermarket might not deter the prospective new tenant
from taking space in the shopping center, the greater competition offered by a subleasee
could well be a deterrent.

These examples parallel the reasons offered by Norville in opposition to
summary judgment. Norville's reasons - concerns about competition with a primary
tenant and about the fact that the subleased space would not be contributing to gross
sales for purposes of percentage rent calculations - seem plausible. They are consistent
with reasons found to be acceptable in a number of cases involving shopping centers.

In general, the standard is that a sublease may be refused if doing so is
commercially reasonable.5 It is not reasonable for a landlord to deny consent in order
to charge a higher rent than he originally contracted for.6 A landlord's
desire for a better bargain than contracted for has nothing to
do with the permissible purposes of the restraint on alienation
- to protect the lessor's interest in the preservation of the
property and the performance of the lease covenants.
" ‘[T]he clause is for the protection of the landlord in its
ownership and operation of the particular property - not for
its general economic protection.' "[7]

Refusing to consent to a sublease because a proposed subtenant would
compete with other businesses in the center and thereby potentially prejudice the
landlord's relationship with other tenants has been recognized as a permissible basis for
withholding consent.8 Refusing to consent to a sublease because gross sales, and thus
percentage rents, will be impaired is likewise a legitimate reason.9 Under the current
lease, Norville's interest in maximizing gross sales is recognized by an explicit covenant.

Thus, Norville's reasons for withholding consent are not impermissible under the lease's
explicit terms. Whether they are genuine and reasonable under the circumstances of this
case are questions of fact that remain to be litigated.

Is general branch banking a permitted use?

Safeway argues that because many supermarkets contain banks, banking
is a service "offered from time to time in other general food supermarkets" and thus is
a permitted use under the first sentence of the Tenant's Use Clause. Neither party
contests that currently, as well as in 1990, many supermarkets contain branch banks. But
Norville argues that the second sentence of the use clause specifically addresses the only
type of banking permitted under the lease. The second sentence provides:

Tenant may also use the Demised Premises to the extent
incidental to the uses described above, for the installation and
use of one or more machines and/or devices which effect or
facilitate the transfer, crediting and/or debiting of funds, the
determination of account balances, the cashing of checks
and/or any and all functions relating to such type of activities
as may now or in the future be performed or facilitated by
machines and/or devices.

Norville argues that the language "the transfer, crediting and/or debiting of
funds, the determination of account balances, the cashing of checks and/or any and all
functions relating to such type of activities" refers to banking functions. He contends
that because the only banking functions permitted under the lease are those that are
performed by machines, the second sentence operates as a limitation on the type of
banking permitted under the lease. Safeway counters that the second sentence is
permissive rather than restrictive because it begins "[t]enant may also use." Norville
responds that the first sentence does not expressly mention banking and that, in context,
the second sentence must be read as a limitation that excludes, by implication, banking
functions not conducted by machines, otherw ise it would have no meaning.
Norville also argues that relevant extrinsic evidence clarifies the meaning
of the use clause. In opposition to Safeway's motion for summary judgment, Norville
filed a lengthy affidavit. The affidavit discusses the conversations leading to the
execution of the lease in late 1990 between Norville and Michael Moxness, Carrs'
attorney. The affidavit states in relevant part:
One of the issues discussed with Mr. Moxness was the right
to install in-store banking ATMs in the store.

In the development plan for the shopping center,
various building pads were located on the periphery of the
center. One of the pads was designated to be used for a
future bank location, and accordingly in the negotiations I
never consented to a bank being located in the Carrs Grocery
Store.

During the course of negotiations various issues were
discussed with Mr. Moxness concerning the uses that would
be allowed in the center. The negotiations resulted in
reaching the agreement as set forth in Paragraph 1.1(i). Carrs
was permitted to use the premises as a general food
supermarket, and Carrs could install automatic teller
machines (ATMs). The intent of the restriction was to allow
me, as the developer, to place a full service bank on the bank
pad designated for that development, and to allow Carrs to
install only ATMs.
Norville's affidavit may merely be referring to a subjective intent that was
never expressed in discussions with Moxness. If so, it would not serve as relevant
extrinsic evidence. Testimony of a party as to his subjective intentions concerning the
meaning of a particular clause in a contract is not probative unless the party in some way
expressed or manifested his understanding at the time of contract formation.10 But in
reviewing grants of summary judgment we are required to view the evidence submitted
in opposition to a motion for summary judgment in a light most favorable to the
opponent, resolving all reasonable implications that can be drawn from such evidence
in favor of the opponent.11 Viewed using this standard, Norville's affidavit implies that
the question whether Carrs would be allowed to place a full-service bank on its premises
was discussed at the time the lease was entered into and the negotiating parties agreed
that only ATMs and similar machines w ould be permitted. As so construed, the affidavit
presents probative extrinsic evidence.

In response to Norville's affidavit, Safeway filed an affidavit of Moxness.
Moxness stated that he had no recollection of Norville requesting an exclusion for
general banking and that he would not have granted such an exclusion. With reference
to the Tenant's Use Clause language relating to bank machines, Moxness stated:

I do not recall this language as being a compromise for
excluding banks or financial institutions from the Tenant's
Use Clause. I believe the same ATM language was typically
included in other Carrs lease agreements. Had such language
been a compromise for the use of banks, it would have been
highly unusual not to expressly include in the Retail Lease
Agreement that banks were excluded from the Tenant's Use
Clause.

As independent supporting extrinsic evidence and in contradiction to
Moxness's affidavit, Norville offered evidence that identical use clauses were used in
other 1990 leases between Carrs as tenant and Labar Co., a partnership in which the
principal owners of Carrs were general partners, as landlord.12 Norville cited evidence
that after Carrs was sold to Safeway, Safeway requested the Labar Co. partnership to
give its consent to a sublease to a bank, and this consent was denied. Norville argues that
this is evidence that the principals of Carrs in 1990 intended the language of the use
clause to permit only ATMs and similar machines, not general banking.

The objective of contract interpretation is to determine and enforce the
reasonable expectations of the parties.
In determining the intent of the parties the court looks to the
written contract as well as extrinsic evidence regarding the
parties' intent at the time the contract was made. The parties'
expectations are assessed by examining the language used in
the contract, case law interpreting similar language, and
relevant extrinsic evidence, including the subsequent conduct
of the parties.[13]

Interpretation of a contract is ordinarily a question of law. But interpretation "becomes
a task for the trier of fact when the parties present extrinsic evidence to clarify a
contract's meaning, when this evidence points towards conflicting interpretations of the
contract, and when the contract itself is reasonably susceptible of either meaning."14

In this case the Tenant's Use Clause can reasonably be interpreted to allow
only banking by machine. Norville's affidavit concerning negotiations leading up to the
lease is extrinsic evidence that supports this interpretation. The fact that this extrinsic
evidence is refuted by Moxness's affidavit does not mean that summary judgment was
justified. Instead, the refutation merely means that there was a genuine issue of material
fact as to what the extrinsic evidence meant.

The evidence regarding Carrs' former principals' refusal to allow Safeway
to place a bank in another shopping center under identical lease language is not very
detailed. It is possible that the landlords refused to consent to the proposed sublease on
grounds different than those involved here. Thus, while the transaction may prove to be
a source of relevant extrinsic evidence on remand, we are unable to say at this point that
it has probative effect.

As noted, Norville argues that the specific language concerning banking
functions in the second sentence of the Tenant's Use Clause modifies the permission that
might otherwise be inferred from the general language of the first sentence.

This is a
position with at least surface appeal. Since many supermarkets contained banks in 1990,
the second sentence would seem to have little or no meaning unless it were intended to
be a limitation. In contracts, as in statutes, "where one section deals with a subject in
general terms and another deals with a part of the same subject in a more detailed way,
the two should be harmonized if possible; but if there is a conflict, the specific section
will control over the general."15 Here the two sentences can be harmonized if the first
is understood not to cover banking. Or, if the first sentence is understood to include
banking, the sentences can still be harmonized if the limitations of the second sentence
are construed to apply to the permission to provide banking services granted in the first.
But we have no occasion to rule on this argument at this time, for Norville did not move
for partial summary judgment. If he had, it is possible Safeway would have been able
to offer extrinsic evidence or arguments as to the meaning of the use clause that would
contradict Norville's interpretation.

Other arguments raised by Safeway

Safeway argues that the parol evidence rule precludes consideration of the
extrinsic evidence offered by Norville. "The parol evidence rule is a rule of substantive
law which holds that an integrated written contract may not be varied or contradicted by
prior negotiations or agreements."16 Three determinations have to be made before the
parol evidence rule can be applied: "(1) whether the contract is integrated, (2) what the
contract means, and (3) whether the prior agreement conflicts with the integrated
agreement."17 Here we can assume that the contract is integrated. The critical question
is what the contract means. On this question extrinsic evidence is relevant. "Extrinsic
evidence may always be received on the question of meaning."18 Thus Safeway's
argument on this point lacks merit.
Safeway also argues that two other grounds preclude Norville from taking
the position that he does concerning the meaning of the use clause. Safeway argues that
the statute of frauds, AS 09.25.010(a)(1), and a lease estoppel certificate signed by
Norville act as bars to Norville's position. These arguments both lack merit for they
assume that the lease clearly permits branch banking under the use clause, whereas the
actual language, even without consideration of extrinsic evidence, leaves this question
in substantial doubt.