April 23, 2018

Colorado Court of Appeals: Entire Lease Void Where District Exceeded Leasing Authority

The Colorado Court of Appeals issued its opinion in Rocky Mountain Natural Gas, LLC v. The Colorado Mountain Junior College District on Thursday, September 11, 2014.

Lease—Municipality—Void—Reformation—Equitable Estoppel—Compensation.

Rocky Mountain Natural Gas, LLC (RMNG) and Colorado Mountain Junior College District(CMC) entered into a lease allowing RMNG to construct and operate a natural gas compressor station on CMC property. Despite the statutory three-year term limit on CMC’s authority to lease district property, the lease included an initial term of twenty years, with an option for RMNG to extend the lease for an additional twenty-year term. RMNG spent approximately $2.5 million in reliance on the lease, and CMC thereafter took action to set aside the lease as unenforceable, because the term of the lease exceeded CMC’s statutory authority. The court granted summary judgment in favor of CMC.

On appeal, RMNG contended that the district court erred by determining that the lease was entirely void and unenforceable. Because the evidence did not clearly show that CMC desired to lease the property for less than the twenty-year term stated in the agreement with RMNG, it was within the discretion of the district court to reject reformation of the contract as an appropriate equitable remedy. Further, because the entire contract was void, the court could not use the “savings clause” to reform the contract to the maximum three years. Accordingly, the district court did not err in determining that the term of years could not be reformed and that the entire lease was void and unenforceable.

RMNG also contended that the district court erred by refusing to apply equitable estoppel against CMC to prevent manifest injustice. Where a contract is void because it is not within a municipality’s power to make, the municipality cannot be estopped to deny the validity of the contract. Here, because CMC had no power to lease district property for any term exceeding three years, principles of estoppel do not apply against CMC. Accordingly, the district court did not err when it allowed CMC to deny the validity of the lease.

RMNG further argued that the district court erred because it refused to hold a hearing or make factual findings that would permit it to craft a remedy that fully compensated RMNG for CMC’s breach. CMC refunded the lease payments it received from RMNG. Accordingly, RMNG was fully compensated for the benefit it conferred on CMC and the district did not err when it denied further relief and granted summary judgment in favor of CMC. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

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