Stop & Shop, Inc. v. Ganem

Supreme Judicial Court of Massachusetts · Contracts

Contractspercentage leaseimplied covenantcontinuous operationminimum rentgross sales rentdeclaratory reliefreformation

Facts

The parties entered a percentage lease of a lot and building in Haverhill for a term of thirteen years and six months, requiring minimum annual rent of $22,000 plus additional percentage rent based on gross sales above a stated threshold, subject to an additional sales condition tied to another store in Lawrence. The lease did not state any required use, did not require the lessee to keep the premises open, and did not bar the lessee from opening competing stores, though it did contain bookkeeping and sales-reporting provisions tied to percentage rent. The lessee operated a supermarket on the premises through 1962, paid percentage rent only in 1956 and 1957, and then intended to cease supermarket operations while continuing to pay minimum rent, excess taxes, and otherwise comply with the lease. The lessors threatened suit, and their counterclaim alleged that the lessee had opened two nearby competing stores in Haverhill and sought reformation and additional rent based on sales from those other stores.

Issue

Whether the percentage lease, though silent on required use and continuous operation, contained an implied covenant obligating the lessee to keep operating a supermarket on the premises. Also, whether the lessors' counterclaim stated a basis for relief based on the lessee's opening of competing nearby stores and alleged lack of good faith.

Rule

Covenants in a written lease will not be extended by implication unless the implication is clear and undoubted. In a percentage lease, the absence of an express operating requirement, together with a substantial minimum rent and no showing that the fixed rent is significantly below fair rental value, does not justify implying a covenant of continuous operation; the burden of showing facts such as disparity between fixed rent and fair rental value rests on the lessor. Allegations of prior representations or of acting "not in good faith" do not support reformation or damages unless they show that the writing erroneously failed to embody an agreement actually made or otherwise state a legally sufficient wrongful invasion of the lessor's rights.

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Maya Ortiz leased a freestanding retail building in Toledo, Ohio, to Riverbend Home Goods, LLC for 12 years. The lease requires $180,000 annual base rent plus 2% of gross sales above a stated threshold, but it does not require any particular use, does not require the store to remain open, and does not restrict Riverbend from opening other stores; after four years, Riverbend plans to close the store while continuing to pay base rent and taxes.

If Ortiz sues to compel Riverbend to keep operating, which result is most consistent with the majority rule?

Explanation. The majority rejected any automatic rule that a percentage lease carries a continuous-operation covenant. Implied covenants arise only when the implication is clear and undoubted. Where the lease is otherwise complete, contains substantial minimum rent, and has no express operating or use clause, those facts support the inference that fixed rent and the tenant's self-interest were the only assurances the landlord required. (Derived from Stop & Shop, Inc. v. Ganem (n.d.).)