Foreseeability of Tenant's Denied License Put Risk on Landlord

Facts: In order to open and operate a daycare under state law, Florida daycare tenants must first sign a lease for space before applying for a license to operate the business. A daycare executed a five-year commercial lease for two store spaces in a shopping center while it applied for and waited for its license. The daycare owners executed personal guarantees of the lease. The lease stated that the tenant could use the premises “solely for the purpose of the operation of a child day care center” for up to 35 children between the ages of 6 weeks and 5 years. The tenant was required to comply “with all applicable government codes and licensing requirements.”

The government agency in charge of licensing daycare businesses noted that there was no outdoor play space, which was required for daycares. The exception was if the daycare was in an “urban” area. The daycare argued that it was urban, and it received a six-month provisional license. Ultimately, it was denied a permanent license because the licensing agency didn’t believe it was in an urban location, and it wasn’t able to use any outdoor space at the shopping center for the required play space.

The tenant abandoned the premises one year into the lease, when its provisional license expired and no further renewals were permitted by law. The owner sued the tenant, asking for a judgment in its favor without a trial. A trial court ruled in its favor. The daycare appealed.

Decision: A Florida appeals court reversed the lower court’s decision.

Reasoning: According to the tenant, at the outset of the lease, it had notified the landlord that it would vacate the premises if it couldn’t obtain a permanent license. It had discussed with the landlord that being granted a license wasn’t a certainty but state law required it to sign a lease prior to a final determination about a license. The tenant argued that it was foreseeable at the inception of the lease that the daycare might not be able to operate and, therefore, wouldn’t need the space.

The appeals court noted that in cases where a risk was foreseeable at the inception of the lease, then there exists an inference that the risk was either allocated by the contract—that is, the lease specified what would happen in that instance and who would take on the expense—or was assumed by the party—that is, one of the parties agreed up front that it would be responsible.

Here, the landlord argued that the risk the tenant wouldn’t obtain a license was foreseen and allocated by the lease to the tenant. However, the provisions of the lease don’t explicitly allocate the risk that the government agency would deny the tenant the urban designation and, consequently, a permanent license without outdoor play space, said the appeals court. Additionally, there seemed to be no intent of the parties to the lease as to the allocation of the risk, it added.

The tenant also asserted that it was granted the temporary urban designation by the government agency before signing the lease, and the landlord was aware that the tenant was wary of signing the lease due to the lack of outdoor play space without assurances that it would receive the urban designation from the department.

The appeals court determined that there was enough of an issue as to whether it was foreseeable at the inception of the lease that the government agency would deny the tenant the urban designation and require outdoor play space for licensure to require a trial to be held. Accordingly, it reversed and sent the case back to the trial court for further proceedings to determine the extent that the tenant would be liable for past back rent and future rent.

• Genuinely Loving Childcare, LLC v. Bre Mariner Conway Crossings, LLC, January 2017