IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 94-30257

 

JOHN J. GRISAFFI, JR.,

Plaintiff-Appellee/CrossAppellant,

versus

DILLARD DEPARTMENT STORES, INC.,

Defendant-Appellant/CrossAppellee.

 

Appeal from the United States District Court

for the Eastern District of Louisiana

 

(January 23, 1995)

Before POLITZ, Chief Judge, and HIGGINBOTHAM and DeMOSS, Circuit

Judges.

HIGGINBOTHAM, Circuit Judge:

In this diversity case, we consider the obligations of

landlord and tenant under Louisiana law. We conclude that the

Louisiana Supreme Court would not imply a duty to continue

operation of a retail store in a percentage-of-sales rental lease

where the tenant has the right to sublease. We reverse the

district court's contrary conclusion. We affirm an award to the

tenant of base rentals paid after a leaky roof made the premises

unusable.
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I.

Holmes Co. leased 23,400 square feet in the Tammany Mall in

Slidell, Louisiana from Commercial Properties Development

Corporation in 1983. The ten-year lease, which Commercial wrote,

set rent at $2 per square foot per year, plus 2% of gross sales

between $2,340,000 and $3,735,000, plus 1% of gross sales above

$3,735,000. The lease did not address subletting or any obligation

of Holmes to operate a retail store throughout the lease term.

Until May 1989, Holmes operated The Budget Store on the leased

premises, clearing merchandise from other stores at bargain prices.

In May 1989, Dillard bought all of Holmes's stock. Dillard

immediately closed The Budget Store because it considered it

unprofitable and because the roof leaked. Dillard continued to pay

base rentals and retained the keys but did not use the premises.

It did not complain about the leaky roof until February or March

1990.

Grisaffi, as Commercial's successor in interest, filed this

diversity suit against Dillard for payment of percentage rentals

that Grisaffi would have received if Dillard had continued to use

the premises as a store. Dillard counterclaimed for cancellation

of the lease and reimbursement for rentals paid since May 1989--

when, Dillard says, the leaky roof made the premises unusable.

After a bench trial, the judge (i) ruled that Dillard had breached

an implied duty of continuous operation, (ii) awarded damages based

on estimated percentage rentals that Grisaffi would have received

if Dillard had continued to run the store, (iii) held that Grisaffi
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breached his obligation to keep the premises fit for retail use in

May 1993, and (iv) awarded Dillard base rentals it had paid after

that date. Both parties appeal.

II.

Good faith performance is an implied requirement of every

contract under Louisiana law. La. Civ. Code Ann. art. 1983.

Grisaffi argues, and the district court held, that this good faith

obligation includes an implied duty of continuous operation unless

continued operation would be unprofitable. This argument relies

heavily on two Louisiana cases. The first case, Selber Bros., Inc.

v. Newstadt's Shoe Stores, 14 So. 2d 10, 12 (La. 1943), held that

a lessee under a percentage-rental lease violated its duty of good

faith by holding an unusual clearance sale, opening a new store one

block away, and closing the old store two months before the lease

ended. The second case, Slidell Inv. Co. v. City Prods. Corp., 202

So. 2d 323, 325 (La. Ct. App.), writ denied, 204 So. 2d 572 (La.

1967), held a lessee under a percentage-rental lease liable for

closing its business on the leased premises and reopening across

the street.

These cases do not hold that the duty of good faith under a

percentage-rental lease implies a duty of continuous operation.

Both Slidell and Selber suggest that a lessee may, in good faith,

close an unprofitable store. More to the point, the lessons of

Slidell and Selber are in their facts--facts that support a finding

of bad faith. In each case, the lessee shut down a store at one
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location to open an identical store at a nearby location to take

advantage of more favorable lease terms. In Slidell, the lessor

had built the shopping center specifically for the lessee. Given

these special circumstances, we are not persuaded that these two

cases collapse good faith into an implied duty of continuous

operation. See Wilson v. Cost+ Plus of Vivian, Inc., 375 So. 2d

683, 686-87 (La. Ct. App. 1979) (interpreting Slidell and Selber,

and holding that absent express continuous occupancy clause, lessee

may close business unless it then moves to another location);

Riverside Realty Co. v. National Food Stores of Louisiana, Inc.,

174 So. 2d 229, 233 (La. Ct. App.) (interpreting Selber as resting

on diversion of business to another outlet), writ ref'd, 175 So. 2d

647 (La. 1965).

Even when there is no breach of the broader duty of good

faith, Grisaffi argues, Louisiana law implies a duty of continuous

operation in percentage rental leases when there is no lease term

authorizing subletting. Dillard replies that a right to sublet is

inconsistent with an implied duty of continuous operation, because

the duty of continuous operation is a personal one. See Cascade

Drive Ltd. Partnership v. Wal-mart Stores, Inc., 934 F.2d 61, 62

(5th Cir. 1991); Riverside Realty, 174 So. 2d at 231. The argument

continues that, since the lease is silent about subletting, the

tenant has a right to sublease. La. Civ. Code art 2725 ("The

lessee has the right to underlease, or even to cede his lease to

another person, unless this power has been expressly

interdicted."). Grisaffi in turn argues that a right to sublet is
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inconsistent with a duty to continue the tenant's business only

when, as in Cascade, the lease expressly confers the right to

sublet. Cascade does not, he claims, apply to this lease because

the right to sublease arises by operation of law rather than from

an express clause. We disagree. There is no relevant reason to

distinguish between an express right to sublease and an implied

one--each is equally inconsistent with a duty of continuous

operation. Where a contract is silent, courts must assume that the

parties intended to bind themselves to any terms implied by law.

La. Civ. Code Ann. art. 2054.

III.

Dillard contends that the roof leaks were severe and

counterclaimed for a refund of rent paid. The district court

agreed, finding that substantial roof leaks caused recurring damage

and impaired the operation of the store. We are persuaded that the

district court's factual finding that the leaky roof made the

premises unusable as of May 1993 was not clearly erroneous.

Grisaffi replies that in any event Dillard was not entitled to

reimbursement of rent because it retained keys and periodically

inspected the premises, negating its claim of abandonment. We are

not persuaded. A tenant can cancel a lease and receive a refund of

rent retroactive to the date of judicial demand even if he retains

keys to the leased premises. Friendly Finance, Inc. v. Cefalu

Realty Inv., Inc., 303 So. 2d 558, 562 (La. Ct. App. 1974);
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Friendly Finance, Inc. v. Cefalu Realty Inv., Inc., 278 So. 2d 584,

586 (La. Ct. App.), writ ref'd, 281 So. 2d 747 (La. 1973).

We REVERSE the judgment's award to Grisaffi and AFFIRM the

judgment's award on the counterclaim to Dillard.

REVERSED IN PART AND AFFIRMED IN PART.