College Block v. Atlantic Richfield

California Court of Appeal · Property

Propertyleasespercentage rent leasesimplied covenant of continued operationpercentage leaseimplied covenantcontinued operationcommercial lease

Facts

In 1965, College Block leased undeveloped property to ARCO for 20 years under a lease under which ARCO agreed to build and operate a gasoline service station. The lease tied rent to gasoline delivered, subject to a minimum of $1,000 per month, and also limited ARCO's use of the property to a service station, prohibited College Block from operating a competing gasoline station on other property it owned or controlled, and gave ARCO rights to build, maintain, replace, and remove improvements. ARCO built and operated a station for about 17 years, then closed it with 39 months left on the lease while continuing to pay only the $1,000 monthly minimum. At trial, no evidence was presented on whether the $1,000 minimum was substantial at the time the lease was made, but the court nevertheless implied a covenant of continued operation as a matter of law.

Issue

May a court imply a covenant of continued operation in this percentage gasoline-station lease as a matter of law based solely on the lease terms? More specifically, must the court first determine whether the guaranteed $1,000 minimum rent was substantial or adequate at the time the contract was made before implying such a covenant?

Rule

In a commercial lease containing a specified minimum rent plus a percentage rent provision, a covenant of continued operation may be implied to give the lessor the benefit of the bargain when the lease as a whole shows the parties contemplated continued operation and the guaranteed minimum rent is not substantial or adequate. Whether the minimum is "substantial" is a factual question that requires evidence of the facts and circumstances surrounding the contract at the time it was entered into.

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In Sacramento, Nora Vega leased a vacant corner parcel to Sierra Crest Fuel, LLC for 15 years. The lease required Sierra Crest to construct and run a car wash, limited use of the land to a car wash, barred Nora from leasing her adjacent parcel to another car wash, and set rent at 5% of gross receipts with a guaranteed minimum of $700 per month. After four years, Sierra Crest shut down but continued paying $700 monthly.

If Nora sues for lost percentage rent, what is the strongest argument against a court implying a covenant of continued operation at the outset?

Explanation. A continued-operation covenant may be implied in a commercial percentage lease when the lease as a whole shows the parties contemplated continued operation and the guaranteed minimum is not substantial or adequate. Whether the minimum is substantial is a factual question determined from the circumstances at the time of contracting, so the court should not imply the covenant without that evidence.