Daily Development for
Friday, January 15, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; COMMERCIAL; GOOD FAITH AND FAIR DEALING: Unreported New Jersey appellate decision imposes duty on anchor tenant to relinquish leased but unused space even where lease states specifically that the tenant need not do so.

Berardi v. Acme Markets, Inc., No. 1827-8 (N.J. Super. 11/19/98).

Tenant had operated a grocery store as an anchor tenant in landlord's center for thirty years pursuant to a long term lease that, with renewals, still had twenty years to run. The rent was percentage rent with a minimum and the tenant was protected by exclusive rights clauses controlling the landlord. The lease provided a right to assign with landlord's permission, not unreasonably withheld, and to sublet even without specific permission, and provided that the lease would not be regarded as a joint venture or partnership between landlord and tenant. It contained no continuous operation clause. In fact, the lease contained an "anti continuous operation" provision giving the tenant the express right to cease operations and pay minimum rent: "Landlord agrees that nothing in this lease shall be construed as compelling Tenant to keep the store . . . open for business, but tenant shall have the privilege of closing said store at any time, provided Tenant shall continue to pay the minimum monthly rental as set forth in this Lease." Tenant closed the store and relocated to a new center about one half mile away. It continued to pay the minimum rent and refused to accept Landlord's offer to surrender the premises. Landlord brought suit to compel the tenant to surrender the premises so that landlord could relet to another anchor tenant.

The trial court granted summary judgment to tenant, based upon the above language.

On appeal: held: Reversed.

The court reasoned that the covenant, although on its face it authorized the tenant to "go dark" and continue to pay rent, had to be looked at in light of the probable intent of the parties. It postulated that the intent likely was to respond to a 1960 New Jersey case, Dover Shopping Center, Inc. v. Cushman's Sons, Inc., 164 A.d. 785 (N.J. Super 1960) that had enforced a specific continuous operation clause through injunction, even where the tenant was losing money - a relatively rare case for its time and, for that matter, today. In the court's view, the parties responded to this case by providing an express right in the tenant to close its operations.

Similarly, although the lease gave the tenant extensive control over the space as an economic asset, since it provided assignment and subletting rights, the court concluded that this clause, as well as the "anti-continuous operation clause" cited above, "are intended as protective shields for luckless tenants, not for use as swords of destruction against landlords where there is no similar equitable underlay."

Having dismissed the significance of these clauses in the instant case, the court went on to conclude that the duty of good faith and fair dealing barred the tenant from doing "anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." The court concluded a jury could find that this covenant required the tenant to relinquish its vacant space to the landlord.

The court cited to the theory of "economic interdependence" invented by New Jersey courts to impose equitable responsibilities on shopping center tenants.

It quoted an older New Jersey decision that indicated that a shopping center is "more akin to a joint venture of landlord and tenants than to the traditional independent relationships between a single landlord and tenant usually created in store leases." Consequently, it concluded that the tenant had some responsibility to make its decisions as to how to manage its space in landlord's premises with this economic relationship in mind.

It further speculated that if tenant were permitted to continue in the status quo, it might try to enforce the exclusive use clause to prevent landlord from renting any other space to an anchor grocery store.

Comment 1: Were this a reported opinion that might have a significant impact on precedent, the editor would list it as one of the ten worst decisions of the year. Most troublesome is the court's decision to ignore, misconstrue and devalue the express language of the lease.

The court's view of the probable purpose of the existing language in the "anti-continuous operation covenant" is pure speculation. There was no support for this conclusion brought forward by the landlord, apparently. Although the covenant might have been triggered by concerns raised in some cases around the country, it is unlikely that the case the court points to, Dover, is a major factor, since the Dover lease, unlike the instant one, contained an express duty of continuous operation and no New Jersey court at that time had held that there was an implied duty of continuous operation in a shopping center lease. (One case, Beasley v. Gottlieb, 35 A.d. 49 (N.J. Chanc. 1943), had implied such a conclusion in dicta in a case not involving a shopping center.)

Particularly troublesome is the fact that the tenant is deprived of a potentially valuable asset that it bargained for. Although the space was dark now, the tenant potentially could control the space until the year 2013. It had full rights of assignment and sublet. It is not uncommon for stores to relocate, leave their old space dark for a time, and then identify new profitable uses for that space.

The suggestion that the tenant might invoke the exclusive use clause to prevent the landlord from operating a grocery store elsewhere is certainly possible, given the continued value of the old space as a grocery store, but if the tenant did so, a court of equity certainly would have the equitable authority to refuse an injunction if the equities were inappropriate - the court need not reach the result it did in this case to forestall problems with the exclusive use clause.

Comment 2: Equally troublesome is the court's introduction of an implied duty on the part of a tenant to make its own economic decisions as to utilization of its express contract rights to protect the economic interests of the landlord, even at the cost of its own economic interests. The very language the court cites, which suggests that shopping centers are a form of partnership, could be refuted by the express language of the lease. But even setting that language aside, it is absurd to think that an arms length negotiation by two parties whom the court admits were "sophisticated real estate negotiators" would believe that they were entitled to any protections other than those expressly bargained for in the lease.

Certainly there were many other formulations of an "anti-continuous operation clause" that a sophisticated landlord would have bargained for had it in fact expected that the parties intended to prevent the tenant from "going dark aggressively" by maintaining the old space dead while relocating elsewhere. The base rent was relatively low - $916 per month for 15,500 square feet - and it was clear that the tenant was being given a lot of options in order to lure it to the center. The landlord got what it bargained for by having the tenant present in its center for thirty years. Now the landlord must pay for that benefit by honoring the terms of its lease. Instead, it brings in a new partner - the New Jersey courts - to create a business relationship that the landlord did not obtain in the original negotiation.

Comment 3: This is not the first New Jersey case to recognize special duties based upon a perceived "economic interdependence" between landlords and tenants in shopping center situations. Perhaps the most influential such decision is Ingannamorte v. Kings Super Markets, Inc., 260 A.d. 841 (N.J. 1970), which involved a fixed rent lease but otherwise had facts so similar to the instant case that it is astonishing that the court did not cite it. Ingannomorte has been frequently cited elsewhere for the "economic interdependence " theory, but it is distinguished as often (or more often) than it is followed, and this thinking is not yet the dominant thinking in American courts.

Even in New Jersey, there is reason (prior to this case) to believe that the Ingannamorte reasoning had been discredited. In Monmouth Real Estate v. Manville, 482 A.d. 186 (NJ Super 1984), involving a grocery store lease similar to the one in this case, a grocery store had operated for many years and recently had become unprofitable. A nearby competitor bought an assignment of the lease and closed the store down. The court found no breach of the implied duty of good faith and fair dealing, commenting that such tactics were "legitimate business practices," unless they amounted to a breach of antitrust laws - as to which there was no evidence in the case. This case seems diametrically opposed to Monmouth, but the court fails to cite either.

Comment 4: Few judges have ever made a dollar selling a can of soup. Few, also, have dealt with the problem of what one has to give in order to lure attractive tenants to their premises. Absent hopeless ambiguity, or hostile or vindictive conduct, courts have little ability and no business speculating about parties' intentions in complex and sophisticated business transactions.

As the court, in fact acknowledges here, lawyers for parties to commercial leases do read the advance sheets, and every layer of uncertainty injected by ad hoc rewriting of contract terms generates more bargaining complexity, increased layers of negotiations, and ultimately ballooning costs for the bargaining process, costing the community far more in the long run than any savings realized by this landlord in wresting from the tenant the asset for which it had bargained.

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