Lease Interpretation: 'Clear And Unambiguous' Is In The Eye Of The Beholder?

Woodhollow Loft, Inc. v. Sisters of St. Francis Health Services Inc., 472 B.R. 494 (N.D. Ind. 2010) –

The results can be unpredictable if a lease does not precisely document the parties' intent, leaving matters up to a court's imagination.

The Sisters of St. Francis Health Services bought a fitness center with a sports bar through a subsidiary (SMMHC) in January 1998. As a matter of policy, they decided against direct ownership of the liquor license. Instead SMMHC entered into a three-year Consulting and Non-Competition Agreement with the seller (Et Al) to continue to operate the sports bar and maintain the liquor license.

SMMHC then decided to convert the sports bar into an upscale restaurant and bar to be operated by a new group. The new group formed The Sunshine Boys, Inc. (TSB), which leased the bar under a five year lease, and Woodhollow Lofts, Inc. (Woodhollow), which operated the bar. The two entities had the same three shareholders.

The lease provided that "Landlord shall transfer a liquor license to Tenant [TSB] upon execution of this Lease Agreement. Upon expiration or termination of this Lease Agreement Tenant shall work with Landlord to transfer the liquor license back to Landlord." In fact, the liquor license was transferred by Et Al (SMMHC's seller) to Woodhollow. Woodhollow did not pay any consideration for the transfer of the license.

Woodhollow occupied and operated the bar from October 1999 through July 31, 2007. It was never a formal party to the lease. In 2001 SMMHC sought to evict Woodhollow. The parties entered into a stipulated order that required TSB and Woodhollow to make certain rent payments, and provided for the return of the leased premises and the liquor license if TSB and Woodhollow defaulted.

Woodhollow filed a Chapter 11 petition in February 2007. (TSB was administratively dissolved by the State of Indiana in August 2002.) The landlord sought relief from the automatic stay to recover the leased premises, and Woodhollow sought to assume its tenancy. This was resolved by an agreement that Woodhollow would vacate the premises at the end of July 2007.

The landlord also commenced a proceeding to determine ownership of the liquor license. After initially determining that Woodhollow was entitled to transfer the liquor license, the bankruptcy court ultimately determined that (i) Woodhollow had no right to continue to use the liquor license after it vacated the leased premises, and (ii) the landlord did not have an...