DD 9/25/06 Extent of T's obligation to pay fee on sales of each new car when T relocates new car sales to new location.

Daily Development for Monday, September 25, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

LANDLORD/TENANT; COMMERCIAL; RENT; BONUS RENT: Bonus rent clause stating that a bonus must be paid “for every new car sold” relates only to cars sold on the leased premises, and tenant need not pay bonus when it relocates its new car facility.

Facilities, Inc. v. Rogers-Usry Chevrolet, Inc., 908 So. 2d 107 (Miss. 2005).

Facilities, Inc., as landlord, leased land to Rogers-Usry Chevrolet. The lease stated that the property would be used only as a retail automobile dealership. In addition to the base rent, the lease provided that if the tenant sold more than 100 new cars, the tenant would pay bonus rent of $100 per car. The tenant moved its new car sales to a different location, sold only used cars on the leased premises, and refused to pay any bonus rent to the landlord on the grounds that bonus rent was due only on the sale of new cars, not used cars.

The landlord argued that the lease meant that the tenant owed bonus rent from the sale of any new cars by tenant, even new cars sold at a different location than the leased premises. The tenant filed a declaratory judgment action in the Chancery Court of Rankin County to resolve the issue. The landlord counterclaimed for an accounting of the rent due. The Chancery Court held that the lease only required the tenant to pay bonus rent on new cars, and not on the sales of used cars.

On appeal, the Court of Appeals held the lease to mean that when the tenant sold more than 100 new cars in a month, regardless of the location, then the tenant would owe bonus rent to the landlord. The Court of Appeals reasoned that the lease was not ambiguous, and that the chancellor had inferred a limitation into the lease that bonus rent was only payable on new vehicles sold on the leased premises. The Court of Appeals also noted that the landlord argued that the bonus rent was intended to compensate the landlord for below-market rent.

On appeal: Held: Reversed.  The Supreme Court, reversed the decision of the Court of Appeals and affirmed and reinstated the decision of the chancellor.

The Supreme Court found that the Court of Appeals had relied on evidence outside of the four corners of the document in its decision. The fact that the lease was silent about whether bonus rent was payable on new vehicles sold at locations other than the leased premises did not make the lease ambiguous so as to justify looking outside the four corners of the document. The ordinary meaning of "rent" means consideration paid for use of land, and the landlord's argument that the sale of vehicles on other land was "rent" was not consistent with this ordinary meaning.

Reporter’s Comment 1:  In interpreting a contract the courts first look to four corners of the contract; second, if the meaning cannot be determined from the four corners, then the courts apply the Byzantine canons of construction best summarized in Pursue Energy Corp. v. Perkins, 558 So. 2d 349, 351-53 (Miss. 1990); third, if the contract remains ambiguous or unclear, the courts will consider extrinsic evidence about the parties' intent. Obviously some subjectivity exists in this process. For example, in this case both the Court of Appeals and the Supreme Court determined that the lease was unambiguous. They just determined that it unambiguously meant opposite things.

Reporter’s Comment 2:   Following the Supreme Court's reasoning, if the bonus rent had been characterized in the lease as a personal payment due by the tenant rather than characterizing it as rent, the landlord probably would have prevailed. By characterizing the payment as rent, the landlord tied the payment to the ownership of the dirt rather than making the payment a general contract obligation of this tenant that would have followed the tenant wherever he went.

Reporter’s Comment 3: The editor thinks that the holding that the failure to address an issue does not mean that the lease is ambiguous for purposes of this rule of construction is significant in leasing law because it is impossible to address every possibility in a lease, and thus leases are more likely to not address an issue than to be truly ambiguous. In fact, the longer the lease, the more likely it is that the lease will be ambiguous, as the parties lose track of defined terms.

Editor’s Comment 1: The problem with interpreting the clause to mean: “new cars, wherever sold,.” is that the tenant could expand into a much larger operation, through merger or otherwise, and grow into a multinational entity, selling millions of cars, and surely the parties didn’t contemplate that the landlord would reap a reward on every car.  This would be true whether or not the parties characterized the payment as rent or a personal obligation.

For instance, in Scot Properties v. Wal-Mart Stores, Inc., 238 F. 3d 571 (%th Cir. 1964), the lease provided that the tenant would pay percentage rent on “Gross Sales . . . whether such sales be obtained at the Demised Premises or elsewhere.”  The court found that to apply the percentage to Wal-Mart’s worldwide sales would be “preposterous,” but it suggested no other convincing rationale for the language.

On the other hand, in Cissna Loan Co. v. Barron, 270 P. 1022 (Wash. 1928), the tenant leased premises under a percentage rent clause and then leased and adjacent building, punched through the wall between the two premises, and moved several sales departments to the other building.  The only access was through tenant’s old space.   The court found that the percentage rent clause reached the gross sales in the adjacent premises. 

The Editor discusses this issue and collects the cases  Friedman on Lease - Randolph Edition at Section 6.7.  Note that the current edition includes the now reversed Court of Appeals decision here.

Editor’s Comment 2: In one fascinating Mississippi case, Vulcan Materials Company v. Miller, 691 So.2d 908 (Miss. 1997) (the DIRT DD for 11/17/97) a party transferred an option to acquire certain limestone quarry properties.  The option included the right to exploit information the seller had derived about related limestone deposits on nearby properties.  The sale of the option included a royalty clause whereby the buyer of the option had to pay the seller of the option a royalty relating to extraction of limestone from any of the parcels, and stated that the royalty obligation was a covenant that ran with the land to successive owners. And then the language became extremely broad: “[Buyer]  acknowledges that [Seller] discovered this mineral deposit and has made is possible for [Buyer] to do business in this regard. If [Buyer] should open any other business related to this industry, [Buyer] agrees to pay a royalty of five cents per ton on minerals produced from such other so!

 urce."

Later Buyer was acquired by another company, which shut down mining operations on the subject property and had other quarrying operations in other states.  The new company had assumed the obligations of the covenant concerning royalties.  Seller sought to apply the clause to all limestone extractions made by the new owner of the company. 

The court held that the covenant did not run with the land because it did not touch and concern the land.   But it then proceeded to find (properly) that the “touch and concern” problem is irrelevant if the party in question has assumed the promisor’s covenant.   Hence, the royalties were payable on the far flung operations of the new owner.  Two dissenters. 

The Reporter for this item was Rod Clement of Jackson, Miss., writing in the Mississippi Bar Real Property Section Newsletter.  The editor has made non-substantive changes.

Readers are encouraged to respond to or criticize this posting.

Items reported on DIRT and in the ABA publications related to it  are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters.  The same is true of all commentary provided by contributors to the DIRT list.  Accuracy of data provided and opinions expressed  by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.


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