Can trust land lessees challenge dramatic rental increases under long-term leases? Cook Associates v. Utah SITLA Explained

In Cook Associates v. Utah SITLA, the Utah Court of Appeals addressed whether a state agency’s dramatic rental increase under a long-term ground lease violated the covenant of good faith and fair dealing. The case provides important guidance on how discretionary lease provisions must be exercised reasonably, even when the contract language appears to grant broad authority.

Background and Facts

Cook Associates entered into a 49-year ground lease with SITLA in 1978 to operate an explosives manufacturing plant on trust land near Lehi. The lease permitted SITLA to adjust rental rates every five years “as [SITLA] shall deem to be reasonably necessary in the best interest of the State.” The initial rent was $3,000 annually, which SITLA modestly increased over the years to $4,560 by 1998. However, in 2008, SITLA attempted to raise the rent to $1,288,690 annually—a 282-fold increase—based on the property’s potential for residential development.

Key Legal Issues

The primary issue was whether SITLA’s exercise of its discretionary authority to adjust rental rates breached the covenant of good faith and fair dealing. Cook argued that while the lease granted SITLA broad discretion, the dramatic increase exceeded the reasonable expectations created by the parties’ 30-year course of dealing. SITLA contended that constitutional and statutory mandates required it to obtain fair market value based on the property’s highest and best use.

Court’s Analysis and Holding

The court of appeals reversed the trial court’s summary judgment on the good faith and fair dealing claim, finding that factual questions remained about SITLA’s motivations. The court emphasized that even express contractual rights must be exercised reasonably and in good faith. While acknowledging SITLA’s broad discretion, the court noted that the covenant protects against exercising discretion “for a reason outside the contemplated range—a reason beyond the risks assumed by the party claiming the breach.”

Importantly, the court rejected SITLA’s argument that constitutional or statutory mandates required fair market value adjustments based on highest and best use. The court distinguished between prospective legislative requirements for new agreements and the rights of existing contractual parties.

Practice Implications

This decision demonstrates that even broadly drafted discretionary clauses are subject to good faith limitations. Practitioners should examine the parties’ course of dealing and reasonable expectations when challenging or defending discretionary actions under contracts. The case also illustrates that summary judgment is rarely appropriate for good faith and fair dealing claims, which typically involve factual determinations about motivations and reasonableness.