The rental agreed to be paid by Sears, Roebuck and Company for a building leased to it by Lazard
Under the lease executed by Lippman and Sears the premises were "to be occupied for the sale and storage of general merchandise and for servicing automobiles, automobile tires, batteries and accessories." Sears promised to pay "as rent for said demised premises the sum of ... ($285.00) in advance, upon the first day of each month during the term hereof, said monthly installments of rental being hereinafter for convenience respectively referred to as `minimum monthly payments'.... In the event the net sales ... made by Tenant upon the demised premises during any lease year of the term hereof, are in excess of ... ($146,800.00), then Tenant will pay as `additional rent' hereunder for said lease year, a sum equivalent to 2 1/2% of the first ... ($163,200.) of such excess and 2% of the remainder thereof, within fifteen (15) days after the end of said lease year."
If the lessee assigned or sublet the premises, it agreed to pay as rent "the average monthly rental paid by Tenant to Landlord during the twelve months' period last preceding such assignment or subletting, but in no event shall such monthly rental be less than" $285. In the event of an abandonment of the premises, the lessor is to re-let them at "the best rent obtainable." Sears agreed to pay "as damages" "the difference between such rent and the unpaid balance of "the rent herein reserved."
The term of the lease was 10 years. After operating a retail sales business in the building for several years and paying both "minimum monthly payments" and "additional rent," Sears transferred its sales business to another location and used the Lippman premises solely for the storage of merchandise. Only "minimum monthly payments" were made during 1950, the final year of the term, and the lessor is suing to recover "additional rent" for that year.
In his complaint, filed after the expiration of the lease, Lippman alleged that the lessee had agreed to conduct a retail sales business on the premises and, if it ceased to do so, to pay "a monthly rental equal to the average monthly rental it had paid for the twelve months immediately preceding
The answer denied generally these allegations. As an affirmative defense, Sears pleaded that an agreement executed by the company and Lippman amounted to a settlement of his claims.
During the trial, extensive testimony regarding preliminary negotiations and circumstances surrounding the execution of the lease was admitted over objection by counsel for Sears that it was incompetent, irrelevant and immaterial and tended to vary the terms of the written lease. That testimony showed the following facts:
For several years prior to the execution of the lease from Lippman, Sears had occupied the building as tenant of one Russell under a written lease calling for the payment of a rental of $285 per month. In 1940, a large part of the premises was destroyed by fire. Sam Jones, manager of Sears' property department, suggested to Lippman, who was lessor of other property occupied by the company, that he purchase and reconstruct the building for investment. According to Jones, the building, reconstructed after use as a garage, had not been completely satisfactory to the company's purposes, and he made specific suggestions for rebuilding it. Lippman was promised "a good lease."
After inspecting the premises, Lippman presented to Jones his estimate as to the costs of purchase and reconstruction and stated he would require a lease with a rental of "at least $800 a month." Jones made a counterproposal of a percentage of profits, to enable Lippman to "gamble" with Sears on the volume of sales, with a guarantee of a minimum of $285 per month. According to Lippman's testimony, he was told that it was necessary to fix the guarantee at the latter figure because the Russell lease was still in effect and the "main office" would not approve a new lease unless the minimum rental was the same amount. Jones testified that "the sum arrived at ... was a nominal sum to take care of fixed expenses, and ... the profit on [Lippman's] investment would be arrived at through a percentage of sales."
Lippman purchased the building and began making the contemplated improvements, which totaled in cost more than $75,000, exclusive of overhead, interest, taxes and the value
Some time later, Lippman acquired vacant property adjacent to the building and offered it to Sears for use as a parking lot. It was accepted but an increase of rent was declined by Sears' representative who suggested that Lippman would be compensated by an increase in sales. Lippman agreed to this proposition.
After the expiration of the lease, a new one was negotiated, calling for a month-to-month tenancy with a rental of $300 per month. Sears continued to occupy the building under the new lease for some four months, until served with notice to remove.
In arguing the objection to this evidence, counsel for Sears stated that it might be received for the purpose of reforming the lease but that the writing itself is unambiguous. Later trial judge invited an amendment to the complaint to state a cause of action for reformation or other equitable relief, but the offer was declined. He then overruled the objection, stating that it might be received to establish an implied covenant to pay a reasonable rental upon an abandonment of the lease or to show that the guaranteed minimum rental was not substantial or adequate.
The findings of fact declare that the lease provided a minimum monthly rental, which "was intended to be and was, in fact, a nominal rental and was not a substantial or adequate minimum rental." The lease further provided, it was found, that "[i]n the event the defendant did not occupy said premises for the sale of general merchandise but used said premises for the storage of merchandise, it was to pay plaintiff a monthly rental equal to the average monthly rental it had paid for the twelve months immediately preceding the month in which it ceased to use said premises for the sale of merchandise." According to another finding, Sears ceased to occupy the premises for the sale of merchandise on November 1, 1949, and thereafter used the premises solely for the storage of merchandise. As a conclusion of law from these findings, the court decided that Lippman is entitled to recover from Sears $17,004.82, the difference between the minimum
Sears contends that the lease does not expressly require it to continue its retail sales business for the full term of the lease or, in lieu of its doing so, to pay any amount in excess of the guaranteed minimum rental. And, the argument continues, because the lease is complete in stating the obligations of the parties with regard to the payment of rent, there is no basis for implication. It urges that the admission of extrinsic evidence to establish such a covenant violates the parol evidence rule. Sears also disputes the materiality of the finding that the guaranteed minimum rental was not substantial or adequate, and if that finding is material to any issue, it asserts, there is no substantial evidence to support it.
The clause which states the uses to which the property could be put cannot reasonably be construed as an express covenant on the part of Sears to continue in all of the enumerated activities. It is included in the portion of the lease which describes the nature and location of the property, and there is no language of undertaking by either party in connection with it.
The author of the annotation in 170 American Law Reports states: "greater leeway is allowed to the lessee of a percentage lease with respect to the use and occupancy of the premises and the conduct of the business contemplated where there is a substantial guaranteed minimum rental, upon which the lessor mainly relies, with a percentage of the income made an additional obligation, than where the sole rental is made payable from a percentage of the income." (P. 1117.) The intention of Lippman and Sears in regard to the monthly payments of $285 is of decisive importance in determining the rights of the parties.
In Cousins Inv. Co. v. Hastings Clothing Co., 45 Cal.App.2d 141 [113 P.2d 878], the lessee had occupied the premises for several years under a written lease calling for the payment of a monthly rental of $2,750. The lease was renewed but with the rental increased to $5,500 per month plus taxes. After the lessee had found it difficult to pay that amount of rent, the parties agreed to a revision of the lease to provide for a "reserved rental" of $4,000 per month plus 5 1/2 per cent of the gross income to be paid in such a manner as to limit the total rent during a six-month period to an average of $5,500 per month. With a little more than a month remaining under the revised lease, the lessee removed to a different location and, for the final month, paid only the
This conclusion was followed in Masciotra v. Harlow, 105 Cal.App.2d 376, 381 [233 P.2d 586]. In that case the defendant leased property for the purpose of operating a restaurant, promising to pay a monthly rental of 7 per cent of the gross receipts with a minimum of $250. After several years of successful operation under the name "Pump Room," the defendant opened a new restaurant at a different location, transferring the name "Pump Room" and two-thirds of the personnel to the new location. Defendant continued to operate a restaurant on the old premises, but business fell off and the rentals remained at the minimum. The lessor sued contending that "there is an implied covenant that lessee would, during the term of the lease, so conduct his business on plaintiff's premises as to make it mutually profitable to both parties." (P. 379.) The court refused to imply a covenant, concluding that "the parties considered the stipulated minimum rent to be in itself fair and adequate and any additional sum was in the nature of a bonus which the lessee was willing to pay if his business exceeded his expectations." (P. 380.)
In both the Cousins and Masciotra cases the minimum rental provision was held to be adequate and substantial. Neither decision, therefore, is squarely authority for the proposition that a covenant to remain in business may be implied from an inadequate or insubstantial minimum, and no case has been found which so holds. However, that legal principle follows logically from the rule which permits the implication
The lease was made only after Lippman had repaired and remodeled the building at a substantial cost and with the understanding that he would "gamble" with Sears upon the amount of its retail sales. Later improvements were made pated increase in the amount of sales resulting from Sears' and furnished to Sears free of any charge except the anticiuse of them.
The judgment is affirmed.
Gibson, C.J., Shenk, J., Carter, J., Traynor, J., Schauer, J., and Spence, J., concurred.