Daily Development for Tuesday, August 16, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD TENANT; COMMERCIAL; PERCENTAGE RENT; IMPLIED CONTINUOUS OPERATION: Although a tenant who relocates casino boat to an adjacent lot does not violate any implied duty of operation, even though rent for the original lot included an element of percentage rent, a court may determine that the use of the original site as a parking lot for the casino boat was nevertheless a use of the property that justified the landlord in collecting such percentage rent for the casino operation.

Raphael Skrmetta v.BTN, Inc., 2005 U.S. App. LEXIS 7621 (5th Cir. 5/3/05)

Landlord entered into a long term ground lease for the use of certain property to moor a “dockside gaming vessel.”  The use clause was permissive, and not restrictive.  The lease provided for a base rent of $500,000 per year plus a percentage rent payment . The percentage rent formula was based in part upon the concept of “Gross Gaming Win,” which was defined as:   .”. . . the sum of (a) all cash received by Tenant as winnings from gaming transactions at the Premises (including gaming transactions occurring on any gaming vessel permanently moored at the Premises or which takes on passengers at the Premises). . . . Gross Gaming Win [sic] shall not include (i) any revenues from the sale of . . . parking . . . ..:”

Tenant assigned to BTN, which promised, in order to obtain Landlord’s consent to the assignment, to ". maintain the character of the Boomtown Biloxi Casino operations in substantially the same manner."

BTN continued to operate the casino for about a year as before, and then announced plans to relocate the casino boat to an adjacent parcel, using the premises leased from Landlord as a parking lot.

The Landlord sued to enjoin the move.

The court first noted that the use clause, which did not state that the proposed use was exclusive, did not require the stated use.  Use clauses that are not stated to be restrictive are deemed merely permissive.  (This is consistent with the law in most states in most cases - with some clear exceptions.)  Then the court noted that  Mississippi is not receptive to arguments of implied covenants of continuous operation.

“[I]n the absence of an express clause for continuous operation, a tenant is not obliged to continue to use leased premises in a particular manner, even where the executing parties contemplated and/or intended that the premises would be used for a specific purpose for the duration of the lease agreement.”

Interestingly, the court further concluded that the tenant/assignee would not breach its promise to maintain the Casino operations in the same manner by moving the casino vessel to the adjacent premises because the use of the leased premises - as parking serving the Casino, did not change from the use of the premises by the assignor.  Nevertheless, the court concluded that the landlord was entitled to go to trial on the question of whether the tenant continued to owe the percentage rent based upon the revenues of the casino at its new location.

“Under the Ground Lease, revenue-based rents are calculated from winnings generated by gaming operations that occur "at the premises.". . .  Thus, the type of rent BTN will owe [Landlord]  turns on whether BTN's relocated vessel is considered to be "at the premises." As it stands, BTN's proposed relocation to the adjacent . . . site would place the vessel within feet of its current location. Post-relocation, customers may still pass across Landlord’s  premises to board and disembark the moored casino vessel, and the driveway entry to the casino vessel still passes through Landlord’s  property. Whether BTN will owe revenue-based rent to Landlord  post-relocation depends on whether "at the premises" means "contiguous to" or simply "very close to" the premises and whether "at the premises" is a term of limitation (i.e., a condition of payment) or a term of description (i.e., serving a utilitarian function in the Ground Lease but having no effect on the parties' rights as a matt!

 er of
law thereunder).” 

The court concluded that there was a dispute as to the meaning of the provision requiring percentage rent from operation “at the premises” and remanded for a factual determination of this issue. 

Comment 1: The Mississippi view on implied continuous the interpretation of the use clause and the question of implied covenants of continuous operation is consistent with the law of probably 60 - 70% of the cases that have addressed these questions. 

It is interesting, however, to note the extension of the analysis to the covenant made by the assignee tenant.  This covenant did seem to evince an intent of the parties to protect the percentage rent, and therefore arguably to be an express covenant of continuous operation.  Certainly is would have been broken if the assignee had closed down the casino?  Would it have been broken if the assignee has relocated the casino to a remote location?  If not, why not?   Because of the exclusion of parking revenues?  Perhaps - but this certainly seems to elevate the parking revenue exclusion to a primacy that it doesn’t deserve.

Comment 2: The court elected to deal with the question another way by remanding for a determination as to whether the operation of the casino on the adjacent property in fact fell within the parties’ agreement that percentage rent would be paid for operations “at the premises.”  But what if the trial court should conclude that the operations were not “at the premises?”  Then, wouldn’t the tenant be guilty of effectively closing the casino and reopening a new one nearby? 

The tenant would argue, with some persuasiveness, that the phrasing of the covenant made at time of assignment refers specifically to a named casino, which the parties understand was based on a boat and could be moved.  But the editor likes better the landlord’s argument that the only rationale purpose of the clause was to protect percentage rents. 

Readers are encouraged to respond to or criticize this posting.

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