LEEDS v. ALPHA BETA COMPANY (1998)

OPINION

Gary Leeds, an individual, and Matthew and Iris Strauss, doing business as Leeds & Strauss Enterprises (Leeds & Strauss), appeal the trial court's entry of judgment in favor of Alpha Beta Company, Inc. (Alpha Beta).

I

The facts are relatively straightforward.   In June 1964, Alpha Beta executed a build-to-suit 20-year lease with Leeds & Strauss's predecessor, Progressive Investor's Inc. Rent was the greater of either a base amount or a percentage of gross sales.¹  The base rent reduced by half during the last of six five-year option periods.

Matters continued as contemplated until Alpha Beta closed its grocery business at that location, opening another store two miles away.   Although Alpha Beta continued to pay the base rent, Leeds & Strauss was not satisfied.   It filed the underlying unlawful detainer and damage action alleging, “Based on [Alpha Beta's] conduct, and the express language of the lease, there is an implied covenant in the lease which obligates [Alpha Beta] to operate a grocery store, supermarket or other similar business on The Premises.”

The litigation was short lived.   Before discovery was completed and without permitting Leeds & Strauss the opportunity to amend its complaint, the court granted Alpha Beta's summary judgment motion.

II

Article 4 of the lease is controlling.   It provides:  “It is the Tenant's intention to use the demised premises for the purpose of conducting and carrying on the business of a supermarket or such other lawful business as Tenant may from time to time deem advisable, provided, however, if the demised premises are a part of a shopping center and the exclusive right to operate a particular type of business within the shopping center has been granted to another tenant or owner, and Tenant has been notified in writing of the granting of such ‘exclusive,’ Tenant will not during the initial ten (10) years of the term of this Lease conduct a business upon the demised premises in violation of such ‘exclusive.’   As long as the premises are being used for the operation of a supermarket, nothing herein contained shall be construed as a limitation upon Tenant's right to sell all those products customarily sold by Tenant's other supermarkets.”  (Italics added.)

express Covenant

 Leeds & Strauss reminds us in interpreting the above quoted language we are to look at the lease as a whole (Civ.Code, § 1641) and give effect to the parties' mutual intentions as they existed at the time of contracting (Civ.Code, § 1636).   It contends if we do this, we will conclude Alpha Beta was required, pursuant to an express covenant to continue to operate a business at the subject premises.   This argument fails because the controlling language in Article 4 of the lease is void of any such specific mandate.²

implied Covenant

“[U]nder California law a covenant to continue operations may be implied in a commercial lease.”  (Cordonier v. Central Shopping Plaza Associates (1978) 82 Cal.App.3d 991, 999, 147 Cal.Rptr. 558, italics added.)  College Block v. Atlantic Richfield Co. (1988) 206 Cal.App.3d 1376, 254 Cal.Rptr. 179 is instructive.   There, the landlord leased its premises to ARCO for a gas station pursuant to a minimum against a percentage rent.   Thirty-nine months prior to the lease's expiration, ARCO ceased operations at that location but continued to pay the minimum rent.   The landlord sued.  “[T]he trial court held as a matter of law that in the parties' lease there was an implied covenant of continued operation.”  (Id. at p. 1378, 254 Cal.Rptr. 179.)   The Court of Appeal agreed. “To make a commercial lease mutually profitable when the rent is a minimum plus a percentage,․a covenant to operate in good faith will be implied into the contract if the minimum rent is not substantial.” (Id. at p. 1380, 254 Cal.Rptr. 179 italics added.)

Carter v. Adler (1955) 138 Cal.App.2d 63, 291 P.2d 111 is also relevant.  “It is the law that when a tenant occupies a store under a lease which fixes the rental at a minimum rental or a definite percentage of the gross receipts from sales, he [or she] cannot avoid liability by diverting his [or her] business to another store he [or she] operates in the same vicinity, when such diversion is effected for the sole purpose of reducing the amount of the gross sales below a specified sum whereby to lay the basis for a cancellation of the lease.  ‘Such conduct would be a direct violation of the covenant of good faith and fair dealing which exists in every contract.’ ”  (Id. at pp. 72-73, 291 P.2d 111;  see also Edmond's of Fresno v. MacDonald Group, Ltd. (1985) 171 Cal.App.3d 598, 605-606, 217 Cal.Rptr. 375.)

 Alpha Beta maintains the lease, as a matter of law, does not contain an implied covenant to continue a business and the decision whether to do so is solely Alpha Beta's.   It is wrong.

The lease required the property owner to build a supermarket pursuant to Alpha Beta's design.   The parties agreed to a long-term lease during which the rent was primarily based on a percentage of sales.   Moreover, as the anchor tenant, Alpha Beta's continued business operation was important in ways other than its increased rental payments.   Abandonment of the premises could certainly be found to deny the landlord the benefits of its bargain.   This is particularly true in the last years of the lease when the base rent reduces by half.

The authority upon which Alpha Beta relies is not helpful to its position.   In Lippman v. Sears, Roebuck & Co. (1955) 44 Cal.2d 136, 142, 280 P.2d 775, the court noted as a general rule, “[A] statement as to the purpose for which premises are leased does not imply a covenant by the lessee that he [or she] will engage in that use, but he [or she] may cease to use the premises for any purpose.”   This was not the court's holding however.³  As the court explained, “Where the rental for use of a building is based upon a percentage of sales, the lessee reasonably may be said to covenant impliedly that he [or she] will use good faith to insure a continuation of them.”  (Id. at p. 143, 280 P.2d 775.) ⁴

An Implied Covenant May Underlie An unlawful Detainer Action

 Alpha Beta argues a breach of an implied covenant cannot serve as the basis for an unlawful detainer action because that would permit a forfeiture without express notice of the obligation to be performed.   Again, it misreads the authority upon which it relies.  “A lease may be terminated ․ for ․ breach of expressed or implied covenants contained in the instrument.”  (Keating v. Preston (1940) 42 Cal.App.2d 110, 117, 108 P.2d 479, original italics.)

In Keating, the landlord sought termination of the lease for alleged breach of an implied covenant not to violate a Penal Code section prohibiting restaurants from accepting horse-betting wagers.   The court concluded the cause of action could not lie.  “Unless the lease specifically limits the use of the property to a particular purpose, or that restriction is necessarily inferred from the language which is employed, the lease may not be forfeited on account of the mere use of the property for another purpose even though that be an illegal use prohibited by statute, for the reason that forfeitures of leases are not favored by the law.”  (Keating v. Preston, supra, 42 Cal.App.2d at p. 115, 108 P.2d 479, italics added.)   The restriction we consider is necessarily inferred.

the Trial Court Erred In Granting Summary Judgment

 The trial court may grant a summary judgment motion only “if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”   (Code Civ. Proc., § 437c, subd. (c).)  As we explained, such is not the case here.

On remand, the court is to consider the following:  “[A] covenant of continued operation will be implied ․ [if] the guaranteed minimum[ ][is] not substantial” or adequate.  (College Block v. Atlantic Richfield Co., supra, 206 Cal.App.3d at p. 1383, 254 Cal.Rptr. 179.)  “ ‘A substantial minimum’ cannot be precisely defined [citation] and factual information on this issue must be examined before a covenant will be implied․  [¶] ․ The parties should be given an opportunity to submit evidence as to the facts and circumstances surrounding the contract to determine if, at the time the contract was entered into, the guaranteed rent was ‘substantial.’ ”  (Ibid.)

The judgment is reversed and the matter remanded with directions to proceed in accordance with the views expressed herein.   Appellants shall recover their costs on appeal.

FOOTNOTES

1.   Article 2 of the lease defines the percentage rate as “[a] sum equal to the amount by which 1-1/414 [percent] of Tenant's gross sales ․ made during each Lease year exceeds the fixed minimum rent paid for such year and the amount expended by Tenant for fire insurance premiums and real property taxes and assessments relating to said lease year.”

2.   Leeds & Strauss cite an out-of-state authority for the proposition Article 4 establishes an express covenant.   In Olympus Hills Shopping Center, Ltd.v. Smith's Food & Drug Centers (Utah App.1994) 889 P.2d 445, 457, the percentage based lease provided, “Smith's has the right to use the premises as ‘a supermarket, drug store and pharmacy or any other lawful retail selling business not directly in conflict or competition with another major tenant in the shopping center.’ ”   After several years of operation, the tenant opened a competing store a few miles away converting the leased space to a discount outlet.   The landlord sued for, inter alia, breach of the covenant of good faith and fair dealing.   After a jury verdict found in favor of the landlord, the tenant appealed arguing it had the right to use the premises for any lawful business not in competition with another tenant.   Not so, said the court.  “[A] party must exercise express rights awarded under a contract reasonably and in good faith․  [¶] ․ [C]ontracting parties, hard as they may try, cannot reduce every understanding to a stated term․  Instances inevitably arise in which one party exercises discretion retained in a way that denies the other a reasonably expected benefit of the bargain.”  (Id. at p. 450.)   “The trial court correctly determined [the landlord] justifiably expected that Smith's would select a reasonable economic use for the property in good faith.”  (Id. at p. 451, fn. omitted, italics added.)

3.   In Lippman, our Supreme Court considered “the amount of rent a lessor is entitled to receive under a ‘percentage,’ lease from a tenant who discontinues the use of demised property for retail sales and occupies it for other purposes.”  (Lippmanv. Sears, Roebuck & Co.,supra, 44 Cal.2d at p. 139, 280 P.2d 775, italics added.)   It concluded the amount is ordinarily that “which the lessor would have received from his [or her] share of the proceeds of the business had the lessee operated it in its usual and customary manner.  [Citation.]  In the present lease, however, the parties have made specific provision for the payment of damages ․ [which] [i]n effect ․ liquidated the damages․”  (Id. at pp. 146-147, 280 P.2d 775.)

4.   Alpha Beta also cites Charles C. Chapman Building Co. v. California Mart (1969) 2 Cal.App.3d 846, 82 Cal.Rptr. 830.   Again, its reliance is misplaced because there the court considered a non-percentage rent lease.   Despite the landlord making substantial renovations to accommodate its tenants, they moved to a newer building.   The landlord sued that owner seeking declaratory relief damages based upon contract interference.   The Court of Appeal upheld the trial court's granting of the defendants' Code of Civil Procedure section 631.8 motion.

SONENSHINE, Associate Justice.

WALLIN, Acting P.J., and CROSBY, J., concur.