College Block v. Atlantic Richfield

California Court of Appeal · 1988 · Property

206 Cal. App. 3d 1376 (1988)

Updated July 8, 2026

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.