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SW Mall imbroglio: appeals decision could set precedent for writing contingencies into contracts.

SW Mall Imbroglio

Getting a judge to enforce all the terms of a real estate contract may be more difficult now that an Arkansas Court of Appeals has ruled that the agreement can be thrown out if it doesn't cover all possible contingencies.

That's the reaction of lawyers for Rector Phillips Morse to losing an appeals court decision concerning a 25-year management contract RPM had at Southwest Mall.

In December 1988, RPM unsuccessfully sued for $380,000 in revenues it claims it lost when its contract to manage the Southwest Mall was broken by the new owners. RPM claimed the previous owners should have paid off the remaining years on its management contract or found new owners who would continue to use RPM Management Co.

But the courts didn't agree with RPM and the firm's attorneys say the law may be precedent setting. "Lawyers have thought since the time of English Common Law that when you put a period for duration of a contract into an agreement, that's what it meant," says John Gill, a Little Rock lawyer who represents RPM. "Now, the court has said if you don't cover all contingencies that come up, the duration provision is meaningless."

Specifically, RPM's quarter century management agreement failed to cover in writing the possibility that the property might be sold one day to new owners who would want to break the contract. When it was sold, the new owners gave RPM the boot.

Hearing The Case

The genesis of the controversy began in 1972 when RPM entered into a management agreement with its wholly-owned management subsidiary, RPM Management Co., to operate what was then known as Southwest City Mall. The agreement was written to be binding on successors and assigns of the owner, but lacked a written clause for continuation or termination, if the owners should dispose of the property before the 25-year agreement expired.

Shortly after the management agreement was executed, RPM sold portions of its interest in the mall to Robert Chowning and the late Lawrence B. Burrow.

All three of the parties later entered into a joint venture which owned part of the mall and subsequent interests in the joint venture were later transferred to the Eleanor Rector Trust and Wilbur P. Gulley, Mary E. Gulley, and Janet Gulley Wade. Still other parties entered the picture when Herschel H. Friday and the Hawthorne Land Co. acquired separate interests in the mall, without becoming members of the joint venture.

Then in 1984, RPM and the other owners put the mall up for sale. After the property was listed, Chowning and the other investors say they first became aware RPM's contract intended for it to manage the property after it was sold.

Several prospective purchasers lost interest after they were told about the RPM management contract. To resolve the situation, RPM and the investors entered into an escrow agreement under which the mall would be sold without the management contract in place.

The investors then brought an action in chancery court to determine their obligations under the contract and RPM countersued for breach of the contract.

"We were not saying that the new owners were responsible for the management contract," says Beverly A. Roachell, an attorney and SVP for RPM. "The sellers were responsible to find someone [a buyer] to continue the contract or buy the contract out themselves, as part of the cost of selling the property."

The Appeals Panel Rules

This June, a three-judge appeals panel reviewed the ruling by Pulaski County Chancery Judge Judith Rogers with Judge Goerge K. Cracraft writing the opinion. The panel partially reversed and partially affirmed aspects of Rogers' decision, but the overall effect was to affirm Chowning, Burrow, the Gulleys, Wade, Friday and Hawthorne Land Co.'s ability to disregard the management contract.

Joel Ledbetter, president of Hawthorne Land Co., says, "It's been a real learning situation for all of us. If you're going to have a long-term agreement, you're going to have to have clauses in the agreement to provide for a way it could be terminated. It must spell out how to terminate [the agreement] in the event of a sale."

Common Practice

It is a common practice for a management company to own all or part of the building it is managing, Roachell says. But she says the Southest Mall lawsuit is unusual on two points:

* RPM initially owned all of the mall when the management contract was signed with its subsidiary.

* Although Chowning had been general in-house legal counsel for RPM, he testified he did not know about the management agreement.

Judge Rogers decided that because members of the joint venture had never accepted the management contract, they weren't liable for it.

RPM Appeal

Regarding the potentially binding management contract on successors of the original mall owners, the appeals' ruling notes that just because it's binding on the successors and assigns of the owners, it doesn't affect new owners. Subsequent mall owners must agree to the management contract before they become bound by it. Attempting to enforce the management agreement beyond the date of termination constitutes "unfair surprise," the appeals ruling says.

In general, RPM and its management company erred by failing to put things in writing about what would take place beyond a sale of the mall, the appeals judges note.

PHOTO : SPRAWLING MALL: Southwest Mall, formerly named Southwest City Mall, lies adjacent to the south side of Interstate 30 at Little Rock.
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Title Annotation:Southwest Mall near Little Rock
Author:Kern, David F.
Publication:Arkansas Business
Date:Jul 16, 1990
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