Berg v. Hudesman

115 Wash.2d 657, 801 P.2d 222 (1990)

Parties:

Berg (landlord)- , Hudesman (tenant)-

Facts:

In 1959, the parties executed a 99-year ground lease which would terminate in the year 2058. The tenant constructed commercial buildings on the property and was allowed to sublease the property. The tenant originally leased the building to Safeway for the first 15 years of the lease and then converted the property to a shopping center. The lease called for the tenant to pay $5,000 a year in rent plus 10 percent of the net rentals. Beginning in the sixteenth year the tenant was to pay rent either as originally calculated or he was to pay 50% of net rentals, whichever was greater. In August 1987, the landlord sued the tenant claiming that the tenant had incorrectly calculated the rent due under the formula that had been created. Specifically at issue was the interpretation of the term "gross rentals".

Issue:

Is external evidence of the surrounding circumstances admissible to determine the parties' intent and meaning of the written instrument?

Holding:

Yes. The court adopts the "context rule" (p408).

Reasoning:

The court rejects the plain meaning rule. The plain meaning rule states that if a term is plain and unambiguous on its face, then you use the text of the instrument to determine its meaning (p407). The plain meaning rule is only used in cases of ambiguity.

The court adopts the context rule (p408) as embodied in Restatement (Second) of Contracts §§ 212 & 214(c).

R2K § 212:

(1) The interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances, in accordance with the rules stated in this chapter.

(2) A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.

R2K §214(c):

Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish....

(c) the meaning of the writing, whether or not integrated.

The context rule takes into consideration previous, contemporaneous and subsequent negotiations. The court rules that the fact that the landlord accepted the rent for four years. This acceptance coupled with the fact that the landlord was able to audit the tenant's books (p405), and other factors, were indicative of the parties intent to calculate the net rentals in that manner. Under the context rule, extrinsic evidence may be introduced to determine meaning of an integrated agreement.