by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

LANDLORD/TENANT; PERCENTAGE RENT; MAIL ORDER: Lease provision restricting tenant from establishing mail order, telephone order or like facilities within 100 miles of the premises or otherwise diverting mail or telephone order sales from the premises may be read to restrict tenant from establishing mail order facilities more than 100 miles from premises, but clause is too ambiguous to construe as a matter of law.

754 Fifth Avenue Assoc. L.P. v. Neiman-Marcus Group, Inc., 646 N.Y.S. 2d 990 (App. Div. 1996)

This case is somewhat important because it constitutes a New York interpretation of a clause that likely appears more often in New York leases than in other locations. But it may be less important for the same reason - there may in fact be little justiification for a clause like this outside of the New York area (depending upon what the clause really means).

The specific language of the clause in question is as follows:

[Tenant cannot] . . . without Landlord's prior written consent, establish mail order, telephone order, or other like facilities within one hundred (100) miles of the Demised Premises except if located (I) at the Demised Premises or (ii) in any other store operated by Tenant, or a corporation, partnership or other entity wholly owned by Tenant, nor otherwise divert mail or telephone order sales from the Demised Premises."

The lease defined "gross sales" for percentage rent purposes to include telephone sale from the Premises (which apparently had a telephone order operation during the early years of the lease) . There is no indication in the opinion, however, that the term included telephone or mail order sales from any of Tenant's other stores.

The Tenant moved its entire mail and telephone business nationwide to a Texas order center, which was more than 100 miles from the Premises under the lease. The landlord sued for breach of lease, and the trial court granted summary judgment to the tenant, reasoning that to rule otherwise would give no effect to the "100 mile" provision.

On appeal, held: reversed, 2-1. The appeals court also ruled that the landlord's motion for summary judgment also should be denied. It remanded the case for trial so that the court could take extrinsic testimony to construe what it regarded as an ambiguous lease provision.

The critical language of concern was the phrase "nor otherwise divert mail or telephone order sales . . . " The appeals court concluded that the establishment of the order center conceivable could constitute the "diversion" of sale. The dissenter relied upon other language of the lease, which became operative only in the event of a corporate merger that never occurred, to establish that the parties read the language of the "100 mile clause" to authorize relocation of all mail and telephone order facilities outside of the 100 mile radius.

Comment: The phrase "otherwise divert" may be read as subordinate to the "100 mile" limitation - so long as there are mail order and telephone order facilities on the Premises, no action can be taken to divert sales away from them. The phrase also can be read to be an additional restriction - even if the tenant should establish facilities outside of the 100 mile radius, it cannot divert mail and telephone stores from the Premises to that location. The latter construction, of course, is the one argued for by the landlord.

The problem with the landlord's construction is that it assumes that the lease also should be read to require the tenant to operate continuously a mail and telephone order center on the premises. There is no express language so providing (at least not mentioned by the court). Continuous operation clauses normally are not implied when the parties have made no effort to state the duty of continuous operation expressly. In any event, the typical judicial approach to implying such covenants involves evaluating a number of factors that the court does not suggest are relevant here.

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