Just because a lease doesn’t have a continuous operation provision doesn’t mean that the tenant, even an anchor tenant, can “go dark” by boarding-up the premises if it continues to pay rent. Especially if doing so harms the landlord without a proper benefit to the tenant. That’s a lesson we learned a long, long time ago and which was reinforced long ago in a New Jersey unpublished court ruling. We’re thinking of a 1998 unpublished decision in the case of Berardi v. Acme Markets, Inc. It doesn’t appear to be available on-line so, after you’ve read to the end [and gotten at least an 80 on the final exam (just kidding)], just email firstname.lastname@example.org for a copy.
OK, we’ve gotten you this far by making a pretty broad statement – too broad and too general, designed to capture your interest – but one that could be the case if the facts are right. The real outcome depends on an unwritten provision in almost every kind of agreement. What, unwritten? Yes, the “implied covenant of good faith and fair dealing.” We’ve Ruminated about that before, such as HERE. Nonetheless, please read on and see how that covenant can work.
The Berardi case dealt with a supermarket with a long term lease in a shopping center. Even though it relocated to another shopping center about one-half mile away, it refused to give up the vacant premises at the old shopping center. It insisted that the lease allowed it to leave the space “dark” so long as it continued to pay rent and maintain the premises. It supported its position by pointing to a provision of its lease that, in essence, said that the tenant wasn’t obligated to continuously operate within the leased premises. The lower court, without regard to the facts, relying solely on the “law,” agreed with the tenant that the premises could remain “dark.” In reaching its conclusion, the lower court relied on three provisions of the lease. One was the cited provision, the one expressly saying that the tenant had no obligation to “continuously operate” its business at the shopping center. Another was the provision that allowed the tenant to assign the lease or sublet the premises if it obtained the landlord’s consent. The third was where the lease provided that it did not create a joint venture or partnership between the supermarket and its landlord.
Fortunately for the landlord, the appellate court believed otherwise and found that the matter could be presented to a jury. Yes, we can all argue that “the law is this” or that “the law is that,” but (at least in litigation, though seemingly not in life), facts matter. Basically, to reinforce a point that Ruminations has made time and time again, that point being you can’t just read the word you like and think you know the outcome, a lease (and every other agreement) is a complete document, meaning you have to give “life” to every part of the document. Also, the provisions of a lease or other agreement do not “hang in the air.” They only mean something when the “situation” arises. We can analyze (or opine on) a lease’s provision using whatever hypothetical scenarios we can think of, but when the rubber hits the road, we need to run those provisions up against the real facts. That’s why the appellate court ruled: “Call out the jury.” It is a jury that “officially” decides the facts and then applies the “law” (as explained to it by a judge) to those facts. [For those interested, the lyrics to Time and Time Again are here, but we don’t think they refer to the same kind of “center” we write about today. Click HERE for those lyrics.]
While the appellate court felt that the “no continuous operation” provision certainly appeared to grant the supermarket a “privilege” to close its store if it continued to pay the minimum monthly rental, it found that such a result was not the likely intention of the parties. Yes, intent matters. Where a contractual provision is capable of more than one understanding, the key to interpretation is the original intent of the contracting parties. So, construing the lease’s “no continuous operation” provision in light of the circumstances under which it was written, the appellate court believed that the parties contemplated protecting the supermarket from being forced to operate a store with unjust losses. It also believed that the lease’s provision was not intended to insulate the supermarket from competition in a new location in a way that would adversely impact the old shopping center. Furthermore, in that court’s mind, both the “no continuous operation” clause and the assignment and sublet provisions were intended to be protective shields for luckless tenants, not for use as swords of destruction against landlords. In addition, the appellate court found that construing a “no continuous operation” clause to permit a tenant to compel a shopping center to live with its anchor store in a boarded-up state would violate the implied covenant of good faith and fair dealing which underlies all New Jersey contracts (and that’s the law in many other, and an increasing number of, states).
What this “implied covenant (promise)” means is 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.” It is quite possible that “a party can violate the implied covenant of good faith and fair dealing without violating an express term of a contract.”
This court also examined the supermarket’s argument that the lease did not create a joint venture between it and the landlord, and therefore it owed no duty to the landlord to insure the success of other stores at the shopping center. The court recognized that there is an interdependence of stores in a shopping center and that an anchor store serves a function not unlike an obligation to pay percentage rent.
Basically, the appellate court felt that a jury, considering the fair dealing issue, might reasonably find the purpose of the supermarket’s insistence upon holding onto the boarded-up premises was to improperly block competition for its new supermarket. The jury might also find that the supermarket had the intent, even incidentally, to reduce the attractiveness of the old shopping center in favor of the newer center to which it had relocated. In light of those possible jury findings, it was proper to permit the landlord to pursue its claims. Yes, facts matter!