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What is a breach of the implied covenant?

The law recognizes that contracts do not contain only the expressed terms that are written in them but there are also some implied terms, and specifically every contract carries with it an implied covenant of good faith. That means where the contract gives one party discretion to do something or not to do something, the law implies that the party is going to exercise good faith in doing that.

For example, if a lease has a renewal provision, the landlord has the discretion of whether or not to renew it. The law implies that the landlord is going to exercise that discretion in good faith and within the commercially reasonable expectations of the parties. The landlord cannot act arbitrarily or capriciously. If the lease is not renewed, there has to be a legitimate good faith business reason for that.

Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please click here to contact one of our attorneys.

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