Court Opinion

ID: 5699701
Source: CourtListenerOpinion
Date Created: 2022-01-12 15:38:46.144881+00
Date Added: 2024-06-11T08:40:14.830912
License: Public Domain

HalperN, J.
(dissenting). In my opinion, the Special Term correctly denied the defendant’s motion for summary judgment. The primary question, it seems to me, is whether a tenant under a percentage rental lease may deliberately divert business from the leased premises to a new store established by it across the street, with impunity, and thereby escape liability for the percentage rental upon the diverted sales. By closing the store upon the leased premises and concurrently opening a store across the street, the defendant diverted the business of the old establishment to the new one, just as effectively as if its employees had personally escorted prospective customers from the old establishment to the new one. Such conduct is “in direct violation of the covenant of good faith and fair dealing which exists in every contract ” (Goldberg 168-05 Corp. v. Levy, 170 Misc. 292, 294, mod. 256 App. Div. 1086). Elementary principles of good faith and fair dealing demand that the defendant pay the plaintiff the percentage rental upon the amount of the diverted sales.
There is no need, in order to make the defendant’s conduct actionable, to imply ány special covenant on the part of the defendant to use its best efforts to produce the maximum volume of sales on the premises. ‘ ‘ In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant .of good faith and fair dealing” (Kirke La Shelle Co. v. Armstrong Co., 263 N. Y. 79, 87).
It is recognized in the prevailing opinion that there would be liability for the diversion of business if it were done in bad faith. But the act of deliberate diversion, under the circumstances here charged, was itself an act of bad faith. There *377was no need to show malice or a subjective desire on the part of the defendant to canse loss to the plaintiff. The loss was the inevitable consequence of what the defendant did; it is chargeable with liability for the inevitable consequences of its intentional act.
It is suggested in the prevailing opinion that the diversion of sales was justified in this case because the diversion served the defendant’s business interests. There is nothing before us to show what the defendant’s purpose was; no affidavit was submitted by any officer or employee of the defendant who had knowledge of the facts; the motion for summary judgment was made solely upon the affidavit of the defendant’s attorney, raising only questions of law. We do not know what the defendant’s purpose was in closing the store on the plaintiff’s premises nine months before the expiration of the lease. That was certainly a longer time than was needed to effect an orderly transfer of inventory and equipment from one store to the other. The defendant’s purpose may have been to get the benefit of the use of better or more suitable quarters earlier, or it may have been to enable it to transact its business during the nine-month period on premises which were not subject to percentage rental. If the latter was its purpose, it clearly was not a legitimate purpose, from the standpoint of its effect upon the plaintiff’s interests. But even if we assume that the defendant’s purpose was the one first suggested, it afforded no justification for the defendant’s diverting its business from the store on the plaintiff’s premises and thereby evading its obligation to pay a percentage rental during the remainder of the term. Economic self-interest does not justify a deliberate act of diversion depriving the landlord of “the fruits of the contract”. The furthering of one’s business interests does not justify intentional interference with existing contractual rights (Campbell v. Gates, 236 N. Y. 457; Terry v. Dairymen’s League Co-op. Assn., 2 A D 2d 494, 500; Restatement, Torts, § 768, subd. [2]; Ann. 84 A. L. R. 43, 83-85; Ann. 26 A. L. R. 2d 1227, 1265-1267).
It may well be that the defendant’s business interests were served by closing the store on the plaintiff’s premises and opening a new store in place of it across the street. But if the defendant wished to make such a move nine months before the expiration of its lease of the plaintiff’s store and to hold overlapping tenancies in the two stores for that length of time, it had to pay the price for whatever business advantage it sought to gain by that arrangement. The price was the amount of the percentage rental payable upon the sales which would normally have been made in the store upon the plaintiff’s premises and which were diverted to the new store.
*378Upon the face of the pleadings and the affidavits before us, the plaintiff is clearly entitled to recover the percentage rental upon the diverted business. (Goldberg 168-05 Corp. v. Levy, supra; Cissna Loan Co. v. Baron, 149 Wash. 386; Selber Bros. v. Newstadt’s Shoe Stores, 194 La. 654, same case, after trial, 203 La. 316; Gamble-Skogmo v. McNair Realty Co., 98 F. Supp. 440, affd. 193 F. 2d 876; Seggebruch v. Stosor, 309 Ill. App. 385.)
As the principle is stated in 61 Harvard Law Review 317, at p. 326: “ To prevent complete frustration of the purpose of the percentage clause, courts should find no difficulty in implying the duty to refrain from diverting sales to a neighboring-location. ’ ’
Mutual Life Ins. Co. v. Tailored Woman (309 N. Y. 248, affg. 283 App. Div. 173) does not hold anything to the contrary. That case involved a unique set of facts and the decision must be read in the light of the special situation before the court. The plaintiff had leased to the defendant a Fifth Avenue store on a percentage basis. The landlord thereafter leased additional premises to the tenant on the fifth floor of the same building at a flat rental and gave the tenant permission to use the additional premises for the sale of all kinds of women’s wear. The tenant subsequently transferred the fur department from the original premises, which were subject to a percentage rental, to the additional premises where the sales were not subject to any percentage rental, under the express terms of the landlord’s agreement. As the Court of Appeals said, the “ defendant merely exercised that right [the right to sell all kinds of women’s wear in the additional premises] when it moved the fur department ” (pp. 253-254). Furthermore, the fur department was replaced by departments selling other merchandise so that the total volume of sales in the original premises exceeded the volume of sales which would have been reached if the fur department had remained there (283 App. Div. 173, 178). In these circumstances, both the Appellate Division and the Court of Appeals held that the defendant was not liable for a percentage rental upon all the sales in the fur department. However, the Appellate Division held the defendant liable for sales made in the fur department, on which commissions had been paid to employees working in the original premises who had referred customers to the fur department (pp. 178-179). This portion of the judgment was not disturbed by the Court of Appeals.
It will be found, upon analysis, that the Tailored Woman case is an authority in favor of the plaintiff rather than the defendant in our case. The court expressly approved the holding in Cissna Loan Co. v. Baron (149 Wash. 386, supra) *379and upheld the principle which “ penalize [d] unconscionable diversion of business from percentage-lease premises to others The court noted, however, that in view of the special circumstances in the case before it, “ [t]he present case does not fit into that pattern ” (p. 254).
As I analyze our case, the defendant’s conduct was actionable as a matter of law on the face of the papers before us, and summary judgment might well be ordered in favor of the plaintiff, in an amount to be determined upon a trial or hearing, but even if the issue is a debatable one, summary judgment in favor of the defendant is plainly improper. The issue of good or bad faith, upon which this branch of the case depends, under the analysis adopted in the prevailing opinion, is not one which can properly be decided on a motion for summary judgment. Apart from the fact that the defendant’s affidavit does not give us the requisite information as to the defendant’s purpose, the issue is not one which may appropriately be tried out on affidavits. It is peculiarly the type of issue which requires a plenary trial. ‘ ‘ It never could have been, or in justice ought to have been, the intention of those who framed our Practice Act and rules thereunder that the decision of such a serious question as this should be flung off on a motion for summary judgment” (Gravenhorst v. Zimmerman, 236 N. Y. 22, 38-39).
As the prevailing opinion notes, the complaint seeks recovery of more than the percentage rental upon the diverted business. The complaint asserts that there was an ‘ ‘ implied covenant on the part of the defendant to operate its business in, on and from the demised premises ⅜ ⅜ * and to use reasonable efforts to produce the gross sales contemplated by the parties ” and it alleges that ‘ ‘ reasonable efforts on the part of the defendant ’ ’ would have produced gross sales during the final rental year in the amount of $500,000. Whether the plaintiff is entitled to recover percentage rental upon sales which were not made, but which would have been made if the defendant had exercised reasonable efforts to promote sales in the store, presents a different question from that of the liability of the defendant for a percentage rental upon diverted sales. The answer to that question depends upon whether there is to be implied in the lease a covenant requiring the defendant to exercise diligent efforts to promote sales upon the premises. This is the principal question discussed in the prevailing opinion. The question is an open one in this State but there are numerous decisions in other States dealing with it (see cases collected in Ann. 170 A. L. R. 1113; Ann. 38 A. L. R. 2d 1113).
All the cases are in agreement that such a covenant is necessarily to be implied if the rental is to be determined solely on *380a percentage basis. However, where the percentage provision is accompanied by a provision for a stipulated minimum rental, the question of whether the covenant should be implied is a question of the intention of the parties to be determined in the light of all the circumstances under which the lease was executed. Such a question cannot be appropriately disposed of upon a motion for summary judgment. The intention of the parties must be determined upon a plenary trial, at which proof may be received as to the history of the relationship between the parties, their reasonable expectations and all the other factors bearing upon their intention in entering into the lease (O’Neil Supply Co. v. Petroleum Heat & Power Co., 280 N. Y. 50; Piedmont Hotel Co. v. Nettleton Co., 263 N. Y. 25; Fredburn Constr. Corp. v. City of New York, 280 N. Y. 402; Lippman v. Sears, Roebuck & Co., 44 Cal. 2d 136; 3 Williston on Contracts [rev. ed.], § 616, pp. 1772-1775).
The analysis of the decisions in the prevailing opinion itself demonstrates that it is improper to dispose of this branch of the case upon a motion for summary judgment. Under that analysis, the determination of whether a special covenant of the type described is to be implied depends principally upon whether the parties regarded the amount of the stipulated minimum rental as an adequate reflection of the full rental value of the premises or whether they contemplated that the full value would be realized only through the percentage provision. If the parties did not regard the minimum rental as ‘ ‘ substantial and adequate ’ ’, virtually all the cases hold that a covenant is to be implied requiring the tenant to exercise diligent efforts to produce the sales which, in turn, would produce the percentage rental to which the parties looked as the primary source of compensation to the landlord. The minimum rental provision then merely serves the function of assuring the landlord that even if the tenant is unsuccessful in his efforts, the landlord will receive some rental for the use of the premises. (Lippman v. Sears, Roebuck & Co., supra; Seggebruch v. Stosor, 309 Ill. App. 385, supra; Sinclair Refining Co. v. Davis, 47 Ga. App. 601; Sinclair Refining Co. v. Giddens, 54 Ga. App. 69.) On the other hand, if the minimum rental was “ substantial and adequate ’ ’, it may be found that the landlord intended to accept the minimum as a substitute for the tenant’s obligation to exert his best efforts to promote sales and hence there is no implication of a covenant on the part of the tenant to use such efforts (Percoff v. Solomon, 259 Ala. 482). The percentage rental is then regarded as a fortuitous bonus or windfall, which the landlord is to receive, if the volume of *381business exceeds the expectation of the parties, but the tenant is under no obligation to exert any effort to promote sales upon tbe premises. However, as we have seen, even in such a case, the landlord is entitled to the benefit of the bonus arrangement for which he bargained. The tenant may not deliberately divert the business by closing the store on the landlord’s premises and concurrently opening a new store on near-by premises, and if he does, he is liable for the percentage rental upon the diverted sales (Selber Bros. v. Newstadt’s Shoe Stores, 194 La. 654, same case, after trial, 203 La. 316, supra).
Whether the minimum rental in this case was regarded by the parties as “ substantial and adequate ” cannot be decided except upon a plenary trial. The question is one of the intention of the parties, their estimate of the full rental value of .the premises and their view as to the relationship between the minimum rental and the full rental value. Extrinsic evidence may properly be admitted upon a trial as to these matters ‘ ‘ to show that the minimum rental provision, in the contemplation of the parties, was not a substantial and adequate payment in lieu of payment of a percentage of the proceeds from the business contemplated by the lease.” (Lippman v. Sears, Roebuck & Co., 44 Cal. 2d 136, 146 supra.)
In the ease cited, the Supreme Court of California upheld a finding that ‘1 within the contemplation of the parties $285 per month was not a substantial and adequate minimum rent ” (p. 145). This finding, the court held, was “ a sufficient basis for a determination that Sears impliedly covenanted to use the demised premises for the sale of merchandise during the entire term of the lease. It was not necessary that the trial court go farther, and the characterization of the minimum rent as nominal is superfluous ” (p. 145).
There is nothing in the defendant’s affidavit to support the contention, which it now makes and which the majority of the court accepts, that the fixed minimum rental was intended by the parties to be a “ substantial and adequate ” rental for the premises and that the percentage rental was intended only to be a bonus. The defendant was the moving party and, under the explicit terms of rule 113 of the Eules of Civil Practice, the defendant was under the burden of establishing by “ evidentiary facts ” that there was no merit to the plaintiff’s claim and that there was no possible triable issue, a resolution of which in favor of the plaintiff might entitle the plaintiff -to recover. The defendant made no attempt to sustain this burden. The plaintiff was not called upon to submit any “ evidentiary facts ” in opposition to the motion unless and until the defendant complied with the requirements of the rule.
*382However, in the pleadings and in the exhibits certain facts appear which tend to support the view that the percentage rental was not regarded as a mere bonus or windfall but was regarded as a primary part of the consideration for the lease of the premises. The lease with which we are here concerned was a renewal lease. In many of the cases, the point is stressed that a special covenant to exercise diligence to promote sales is more likely to he implied if the lease is a renewal lease and if, in the light of the experience under the prior lease, a substantial return under the percentage provision is to he expected. On the other hand, if the venture is a new one and the parties have no basis for anticipating any rental beyond the fixed minimum rental, the courts are reluctant to imply such a special covenant (Masciotra v. Harlow, 105 Cal. App. 2d 376). We do not have before us the full history of the relationship between the parties but it appears that the premises had been occupied for a period to 21 years under a prior lease containing a provision for a fixed minimum rental and a percentage rental in addition. The minimum rental under the prior lease had been $3,300 per year; under the renewal lease here in controversy, the tenant agreed to pay $6,000 as a minimum rental. It may reasonably be inferred that, in the years immediately preceding the renewal, the additional percentage rental was'more than 100% of the minimum rental; otherwise the tenant would not have agreed to a virtual doubling of the minimum rental in the renewal lease. It is also reasonable to assume that the parties contemplated a similar growth of business under the renewal lease and looked to a doubling of the minimum rental by means of the percentage payments (Selber Bros. v. Newstadt’s Shoe Stores, 194 La. 654, same case, after trial, 203 La. 316, supra).
That the expectation was not a wholly vain one appears from the only data with respect to sales under the renewal lease which we have before us. The complaint alleges that the sales would have amounted to $500,000 during the final lease year, if the defendant had exercised reasonable efforts to promote sales. This would have produced a percentage rental of $11,400, almost twice the fixed minimum rental and the total rental would have been $17,400, almost three times the' minimum rental. The affidavit of the defendant’s attorney does not controvert this estimate. However, the defendant’s answer alleges that sales during the months of August, September and the first half of October of the final lease year amounted to $33,786.16. These sales were made during the last two and a half months before the defendant closed the store and it may reasonably be assumed that the defendant had decided before that time to close up *383and to move across the street. Even on the basis of the defendant’s figures, the average sales were $13,500 per month; at that rate, the annual sales would have been $162,000. This would have produced a percentage rental of $1,260 (3% of $42,000) which is over 20% of the minimum rental. This is much less than the amount estimated by the plaintiff but it is still a substantial amount. It is neither possible nor necessary to arrive at any determination of the exact amount of the percentage rental at this time. These facts are mentioned only to indicate that it may well be found upon a trial that the parties looked to the percentage arrangement as the source of a substantial part of the rental of the premises and not merely as a bonus or windfall.
The question of what was within the contemplation of the parties cannot be decided for or against either party upon the present papers and, in any event, no attempt should be made to decide it on affidavits on a motion for summary judgment.
Only a word need be added about the subletting and assignment clause in the lease, upon which the prevailing opinion relies as negativing the implication of a special covenant on the part of the tenant. Under a fair construction of this provision of the lease, the landlord had the right, on reasonable grounds, to withhold his consent to a subletting of the whole of the premises or an assignment of the lease; the lease prohibited him only from witholding his consent “unreasonably”. Therefore, no inference can be drawn from this provision that the landlord would be powerless to prevent a subletting or assignment which was likely to produce a lower amount of percentage rental. On the contrary, under the express terms of the provision, the landlord would have the right in such a case to refuse to give his consent unless an adjustment were made in the rental arrangement so as to assure him of substantially the same total rental as had been earned during the tenant’s operation of the premises. This would be a reasonable requirement upon which to condition his consent (cf. Chemung Canal Trust Co. v. Montgomery Ward & Co., 4 A D 2d 95). In any event, the inference which the prevailing opinion seeks to draw from the clause is an inference of fact of a controversial character, bearing upon the intention of the parties, which is to be considered with all the other inferences which may be drawn from the proof adduced upon a trial, relating to that subject. Despite any inference which may be drawn from the clause, the issue as to what the parties intended or contemplated at the time of executing the lease, remains a question of fact requiring a plenary trial and a summary disposition of it is unwarranted.
*384Tlie order denying the defendant’s motion for summary judgment should he affirmed.
All concur, except Bastow and HalperN, JJ., who dissent and vote for affirmance in an opinion by Halperít, J., in which Bastow, J., concurs.
Present—Kimball, J. P., Williams, Bastow, GoldmaN and Halperít, JJ.
Order reversed, with $10 costs and disbursements and motion granted, with $10 costs.