Caseflicks

Court of Appeals of Minnesota • 1994

Plaza Associates v. Unified Development, Inc.

524 N.W.2d 725 | 1994 Minn. App. LEXIS 1240

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Takeaway

In short, this case shows that courts will not infer a continuous-operation covenant into a carefully negotiated commercial lease—especially where fixed rent is substantial, the tenant may assign or sublet, and the parties could have written the obligation expressly.

Background

Plaza Associates leased shopping-center space to Walgreen in 1951 for operation of a drugstore. The lease required Walgreen to open within a stated period, but made its only consequence for failing to open the commencement of rent. It limited Walgreen’s use to a drugstore, gave Walgreen an exclusive right to operate a drugstore in the center, and permitted it to assign or sublet for drugstore use without Plaza’s consent. Rent consisted of a fixed base amount plus a percentage of sales above a specified threshold.

The parties renegotiated the lease in 1970 and again in 1980. The 1980 modification extended the term through 1998, moved Walgreen to larger premises in the same mall, and raised its eventual fixed rent to $6,666.66 per month, while retaining percentage rent. Walgreen operated there until January 1992, when it moved its drugstore across the street. It left the leased premises vacant but continued paying the fixed rent.

Plaza sought a declaratory judgment that the lease impliedly required Walgreen to use good-faith efforts to keep operating a drugstore on the premises through 1998, as well as damages from Walgreen’s departure. On cross-motions for summary judgment, the district court ruled for Walgreen. Plaza appealed.

Issues

Issue #1

Whether the lease impliedly required Walgreen to continuously operate a drugstore on Plaza’s premises through the end of the lease term.

Holding

No. The lease did not contain an implied covenant requiring Walgreen to remain open and operate on the premises through 1998.

Reasoning

Contract interpretation is a question of law reviewed de novo. Minnesota generally disfavors implied covenants. A court may supply one only when it follows from the contract’s language or is indispensable to carrying out the parties’ intent; it cannot add a term merely because the term might have been useful to one party.

The rent structure did not make continued operation indispensable. An operating covenant is less likely when the tenant pays substantial fixed rent and percentage rent is the smaller component. Walgreen paid $6,666.66 monthly in fixed rent after the 1980 modification, and Plaza offered no evidence that this amount was insubstantial. Although percentage rent later increased, it was always the lesser portion of Walgreen’s total rent.

The record also indicated that the 1980 fixed rent approximated the lease’s market value when the parties agreed to it. The parties sharply increased the fixed rent from the prior amount, and Walgreen paid no percentage rent during the first two years after taking the new space. Plaza’s managing partner likewise testified that the base rent approximated fair market value. Thus, Plaza was not left dependent on sales-generated percentage rent to receive market-level rental value.

The parties were sophisticated commercial actors who actively negotiated both the original lease and later modifications. Plaza’s representative had negotiated hundreds of commercial leases and knew how to use an express operating covenant. Their detailed agreements covered many aspects of their relationship but omitted a continuous-operation provision, supporting the conclusion that the omission was intentional rather than an unstated term for the court to supply.

That conclusion was reinforced by Plaza’s use of an express operating covenant in another tenant’s lease shortly before the 1980 Walgreen modification. Because Plaza knew how to demand such a clause and did not do so here, the court would not infer that the parties silently included one.

Walgreen’s broad right to assign or sublet the premises for drugstore use without Plaza’s consent was inconsistent with a personal obligation to remain and operate its own business. Even a right limited to the same type of business tends to negate an implied promise that the original tenant itself must continue operating.

The use and exclusivity provisions did not change the result. A clause providing that the premises may be used as a drugstore restricts Walgreen if it uses the property; it does not affirmatively require Walgreen to use it at all. Similarly, Plaza’s promise not to lease to another drugstore did not create a reciprocal unstated promise that Walgreen would stay open. Shopping-center landlords and major tenants understand their economic interdependence and can expressly allocate the risk of a tenant’s departure.

The provisions concerning opening the store likewise did not require continued operations. Those provisions were weakened by language making Walgreen liable for rent, rather than for operating, if it failed to open. The agreed remedy therefore confirmed that payment of rent could satisfy Walgreen’s obligation even without an operating business.

Issue #2

Whether an obligation of good faith or best efforts required Walgreen to continue operating at the premises.

Holding

No. Even assuming the argument was properly before the court or had relevance in the landlord-tenant context, the record showed no bad faith by Walgreen.

Reasoning

Walgreen argued that Plaza had not properly raised the good-faith and best-efforts theory in the district court. The court noted the general rule that issues not raised below ordinarily cannot be considered on appeal, although a party may make a new appellate argument supporting a proposition presented at trial.

The court found it unnecessary to resolve the procedural or doctrinal questions. Nothing in the record showed that Walgreen acted in bad faith when it moved its store across the street while continuing to pay the substantial fixed rent required by the lease. A generalized duty of good faith therefore could not create the continuous-operation obligation the contract itself did not contain.