Opinion ID: 1284132
Heading Depth: 1
Heading Rank: 4

Heading: basis for implying a covenant in lease agreement

Text: Mercury's failure-of-consideration argument is based on (1) an inference from a four-corners' examination of the lease that Woolworth promised diligently to conduct its business so as to generate percentage rentals  a condition that was within the contemplation of the parties when they entered into the agreement but which they failed to include within the express terms of the lease and (2) after-developed facts that show consideration failed during the lease term because of Woolworth's lack of diligence to operate its business in a commercially prudent manner. In short, the asserted failure of consideration is sought to be rested on a two-part test: (a) an implied covenant to be inferred from the terms of the agreement [14] and (b) extrinsic evidence to show that the implied covenant was breached. As a general rule implied covenants are not favored in the law. [15] This view owes its force to the presumption that when the parties have entered into a written agreement that embodies their obligations, they have expressed all of the conditions by which they intend to be bound. [16] Courts are reluctant to imply covenants where the obligations sought to be imposed on the contracting parties are not expressed in the written text. [17] Absent illegality, contracting parties are free to bargain as they see fit. When the bargained-for agreement is reduced to writing, a court may not make a new contract for the parties or rewrite the existing contract. [18] This does not mean that covenants may never be implied from written agreements. [19] Because the courts are reluctant to tamper with the parties' written contract, [20] certain conditions are imposed before a covenant will be inferred from the language used. There are many decisions, mostly from other jurisdictions, laying down well defined rules that govern implied covenants in lease contracts, where as here, there is a provision for a guaranteed minimum rent and a further provision for a percentage rental. [21] The general rule enunciated in these decisions is that (1) the obligation must arise from the presumed intention of the parties as gathered from the language used in the written instrument itself or it must appear from the contract as a whole that the obligation is indispensable in order to give effect to the intent of the parties; and (2) it must have been so clearly within the contemplation of the parties that they deemed it unnecessary to express it. Recognized as a corollary to the general rule governing covenants that could be inferred from a written instrument is the principle that when the rental reserved in a lease is based upon a percentage of the gross receipts of a business and a guaranteed substantial minimum rent, a covenant would not be implied; but if the minimum rental is so low as to be nominal, or where there is no minimum rental, then a covenant might be implied. [22] We followed these principles in Monte Corp. v. Stephens. [23] Stephens was an action to recover damages for breach of a lease that provided both for a guaranteed minimum rental and a rental based on a percentage of gross receipts. We refused to imply a covenant that would have required the tenant to occupy the premises and generate percentage rentals throughout the term of the lease because the lease called for a substantial, adequate minimum rent.