Opinion ID: 1237360
Heading Depth: 1
Heading Rank: 2

Heading: Implied Covenant of Continuous Operation.

Text: We have recognized an implied covenant to continue operation of a business arising from a lease agreement. Fashion Fabrics of Iowa v. Retail Investors, 266 N.W.2d 22, 28 (Iowa 1978). In Fashion Fabrics we held, as a matter of law, that the evidence showed there was an implied covenant by the lessor to continue operating its business during the period of the sublease. Id. at 27. We stated: A contract includes not only what is expressly stated but also what is necessarily to be implied from the language used; and terms which may clearly be implied from a consideration of the entire contract are as much a part thereof as though plainly written on its face. .... Courts are slow to find implied covenants. The obligation must arise from the language used or it must be indispensable to give effect to the intent of the parties; it must have been so clearly within their contemplation that they deemed it unnecessary to express it. It can be justified only on the ground of legal necessity and can arise only when it can be assumed it would have been made part of the agreement if attention had been called to it. Moreover, an implied covenant cannot be found when the contract is fully integrated. Nevertheless, courts confronted with commercial lease disputes have recognized the existence of implied covenants to continue operating a business on leased premises in two general situations. One involves the lessee and the other the lessor. In each situation the implication arises from circumstances which include a relationship of significant economic interdependence. When rent is fixed exclusively or primarily on the basis of a percentage of the lessee's gross revenues or profit, an obligation on the part of the lessee to continue operating in good faith has been implied. Id. at 27-28 (citations omitted). Generally, a covenant of continuous use and operation will be implied in cases involving commercial leases when the tenant is obligated to pay a significant part of the rental as a percentage of the tenant's gross receipts. See 49 Am.Jur.2d Landlord and Tenant § 69, at 99 (1995). However, other factors may be considered. Id. at 100-101. Here, the court instructed the jury that: In order for the plaintiff to recover on this cause of action, the plaintiff must prove all the following propositions: (1) That the rent in the lease is primarily based on a percentage basis. (2) That Taco Bell discontinued business at the lease premise and failed to pay percentage rent. (3) The amount of damages plaintiff has sustained. Rent is primarily based on a percentage basis when the base rent is shown to be insubstantial in comparison to the percentage rent. You must decide this by determining what the parties intended when they entered into the lease. The term insubstantial cannot be precisely defined; it is a relative term and not an exact term. If you determine that the base rent, in comparison to the percentage rent, was insubstantial, then the defendant did have an obligation to continue operating the restaurant, and your verdict shall be for the plaintiff. Our review of the court's rulings on a motion for a directed verdict and judgment notwithstanding the verdict is well settled: [W]here no substantial evidence exists to support each element of a plaintiff's claim, directed verdict or judgment n.o.v. is proper. Substantial evidence is that which a reasonable mind would accept as adequate to reach a conclusion. Where reasonable minds could differ on an issue, directed verdict is improper and the case should go to the jury. The trial court must consider the evidence in a light most favorable to the nonmoving party. On appeal, we consider the evidence in a way most favorable to upholding the verdict. Stover v. Lakeland Square Owners Ass'n, 434 N.W.2d 866, 873 (Iowa 1989) (citations omitted). We test the court's denial of a motion for new trial under an abuse of discretion standard. Id. The tenant urges there is no substantial evidence that the lease is primarily based on a percentage basis. Under the instructions of the court the jury was asked to determine what the parties intended when they entered into the lease. The intent of the parties may be determined from the terms of the lease, what is necessarily implied from the terms, and the circumstances surrounding the formation and execution of the lease. See Fashion Fabrics, 266 N.W.2d at 27-28. Under the terms of the lease the landlord was required to construct a building of unique design for operation of the tenant's business. The lease contained specific provisions regarding the use of the building. Under its express terms it was understood and agreed by lessee that in connection with its operation of a restaurant, or food vending establishment, it will deal exclusively in the sale of Mexican foods and is expressly restricted from the sale of the following items.... Lessor agrees not to engage in the sale of Mexican food at its adjacent food vending establishments. This language is equivocal and does not preclude an implied covenant for continued operation. The lease also provides subject to the written approval of the lessor, which shall not be arbitrarily withheld, lessee shall have the right to assign or sublet its interest in said premises. This is not a general right to assign negating an implied covenant for continued operation. Among the circumstances surrounding the formation and execution of the lease was the substitution of a percentage of gross sales rental payment in lieu of a cost of living provision. The landlord included a cost of living provision in the initial lease as a hedge against inflation. Had the cost of living adjustment been applied, the rent would have increased annually and for the last year of the lease would have tripled the base amount. The jury could find the parties intended the percentage rental to be a substitute for the cost of living provision and that the percentage rental would be substantial when compared with the base rent. Obviously the tenant was aware of the landlord's desire for both a return on its investment and a hedge against inflation. It is commonly known that such percentage rental provisions are intended as a protection against the ravages of inflation where a long term lease is involved. Bastian v. Albertson's, Inc., 102 Idaho 909, 914, 643 P.2d 1079, 1084 (1982). The lease did not contain an integration clause. It was for the jury to determine what the parties intended and what the parties considered to be relatively the more important or substantial part of the rental payment. See generally Walgreen Arizona Drug Co. v. Plaza Ctr. Corp., 132 Ariz. 512, 516, 647 P.2d 643, 647 (1982). We conclude there is substantial evidence upon which a jury could reasonably find the rent in the lease was primarily based on a percentage basis and that there exists an implied covenant of continued operation.