July 24, 2013 – The Wisconsin Supreme Court, in Tufail v. Midwest Hospitality, 2013 WI 62 (July 10, 2013), reversed the Wisconsin Court of Appeals in a case involving a contract dispute between a landlord, Amjad T. Tufail, and tenant, Midwest Hospitality LLC (Midwest).

Tufail and Midwest entered into a commercial lease agreement for property in Milwaukee’s north side, where Midwest had intended to open a Church’s Chicken fast food restaurant. However, the City of Milwaukee required a special use permit for a fast-food restaurant with a drive-through, and limited the hours of operation under that permit. As a result, Midwest found it was not economically feasible to operate the restaurant at that location, and stopped paying rent under the lease, claiming Tufail misrepresented certain terms of the lease.

The supreme court found that Tufail did not make false representations regarding the use of the property, and that as a result, Tufail did not breach the contract, thus overturning the court of appeals and affirming the judgment of the circuit court in Tufail’s favor.

Background

In 2000, Tufail purchased property on W. North Avenue in Milwaukee, where he had operated a fast-food restaurant called “New York Chicken.” He had obtained, on an appeal to the Board of Zoning Appeals, a permit to operate a fast-food restaurant on the property for 10 years. Around 2007, when New York Chicken ceased operations, Midwest approached Tufail and inquired about opening a Church’s Chicken on the property. Midwest prepared a written lease and the parties executed the five-year lease in March 2008. Midwest agreed to pay $35,000 in rent for the first year.

Paragraph 5 of the lease specified the intended use of the property:

“Tenant may use and occupy the Premise for any lawful purposes, including, but not limited to, the retail sales, consumption, and delivery of food and beverages which shall include, but not be limited to, Chicken products, Fish products, bread products, salads, sandwiches, dessert items, promotional items, and any other items sold by any Church’s Chicken store.”

Tufail also made representations and warranties to the effect that “no existing restrictions, building and zoning ordinances, or other laws … of any governmental authority prevent the use of the Premises for the purposes set forth in Paragraph 5.”

Midwest began renovation work, which ended in May 2008 when Midwest was informed it needed to obtain a special use permit to operate a fast-food restaurant with a drive-through at the property. Midwest applied for the permit and was initially met with opposition by community groups opposed to adding a Church’s Chicken restaurant to the neighborhood. However, the City of Milwaukee Board of Zoning Appeals ultimately approved the application, with certain conditions, namely, that the restaurant close by 9 p.m. and that the permit was only granted for one year.

Midwest determined that the conditions of the special use permit changed the business’s profitability forecast and determined that the operation of a Church’s Chicken on the property was not worth the investment. It then notified Tufail that it would stop paying rent, arguing that Tufail made a false representation and that it was entitled to terminate the lease early.

At trial, the circuit court found that not all Church’s Chicken restaurants have drive-through operations, although a vast majority of them do, and that since Midwest’s special use permit application was granted, it was not prevented from opening a Church’s Chicken on the property with a drive-through. Upon review of the lease, the circuit court found that it failed to set forth any use as a fast-food restaurant with a drive-through, but that even if it could be interpreted to include that as an intended use, that use was ultimately allowed by the City of Milwaukee.

As a result, the circuit court did not find Tufail made false representations, did not breach the lease, and that instead, Midwest’s early termination was itself a breach of contract and awarded judgment to Tufail of $90,033 in damages.

On appeal, the court of appeals instead concluded that the reference to “Church’s Chicken” in Paragraph 5 of the lease allowed the operation as a Church’s Chicken and that it was not necessary for the use provision to include additional words allowing operation of a fast-food restaurant, because a Church’s Chicken is a fast-food restaurant. The court of appeals reversed the circuit court and found instead for Midwest.

Did Tufail Make a False Representation?

The sole question presented on review by the supreme court is whether Tufail breached the lease by making a false representation. The lease is covered by the law governing contract interpretation, the goal of which is to give effect to the parties’ intentions.

Justice Anne Walsh Bradley, in the majority opinion, notes, “Where the terms of a contract are clear and unambiguous, we construe the contract according to its literal terms.” Contract language is construed according it its plain or ordinary meaning, consistent with what a “reasonable person” would understand the words to mean under the circumstances.

The court’s analysis centered on determining first the meaning of Tufail’s representation as it is written in the lease, and second, on whether the representation is false under the facts of the case.

Tufail argued that a fast-food restaurant with a drive-through is not among the uses of the property set forth in Paragraph 5, and furthermore, all of the uses identified in Paragraph 5 are permitted uses under the City of Milwaukee zoning code. Midwest argued that the reference to “Church’s Chicken” in Paragraph 5 requires that a Church’s Chicken fast-food restaurant with a drive-through may be operated on the property. The court rejected that argument and concluded that Tufail’s representation requires simply that Midwest may not be prevented from using the property for the purposes specifically identified in Paragraph 5.

The supreme court then went on to review whether Tufail’s representation is false under the facts. It determined that there was no indication that the circuit court’s findings were clearly erroneous, and that the supreme court was bound to accept those findings, including that Midwest was not in fact prevented from opening a Church’s Chicken restaurant on the property.

“Given the lack of any reference in the lease to a fast-food restaurant with a drive-through, there is no indication in the facts that the uses of the property, as they are stated in Paragraph 5 of the lease, were prevented,” Justice Bradley stated. The court went further, noting that, “even if we accepted Midwest Hospitality’s argument that there is an ‘undisputed understanding of Church’s Chicken’ as a fast-food restaurant with a drive-through … the representation is still not false under these facts,” because the special use permit was granted by the City of Milwaukee.

The supreme court concluded that the representation by Tufail was not false, because the circuit court found that Midwest was not prevented from using the property for the uses specified in the lease, and its finding is not clearly erroneous.

Justice David T. Prosser issued the lone dissent in the case, noting that “the only reasonable meaning of ‘Church’s Chicken’ is a fast-food restaurant,” and therefore Tufail breached the lease.

“The plain language of the lease unambiguously demonstrates that the parties intended for Midwest to operate a Church’s Chicken fast-food restaurant on the property,” Justice Prosser noted, and “since the zoning code did not permit a fast-food restaurant on the property, and Church’s Chicken is a fast-food restaurant, Tufail’s warranty that no ordinances prevented the operation of a Church’s Chicken on the property was false.”

Finally, Justice Prosser commented that although, “the majority opinion leans upon the fact that Midwest ultimately attained a special use permit to operate a fast food restaurant with a drive-through,” that that does not remedy Tufail’s false warranty.