27 N.Y.2d 718 (1970)

When interpreting a commercial lease agreement, courts must adhere to the unambiguous language of the contract, even if a party argues a different interpretation would be more commercially reasonable.

Summary

River View Associates, the landlord, sued Sheraton Corporation, the guarantor of a lease, over the calculation of “overage rent” based on a percentage of net profits. The dispute centered on the definition of “additional rent” and whether certain expenses should be deducted when calculating net profit. The trial court sided with the landlord, but the Appellate Division reversed. The New York Court of Appeals affirmed the Appellate Division (but on a split vote), holding that even if the guarantor’s interpretation seemed commercially sound, the clear language of the lease dictated that the disputed expenses were not deductible. The dissent argued the lease language unambiguously supported the landlord’s position.

Facts

River View Associates (Landlord) leased property to Inverurie Corporation for a Sheraton Motor Inn. Inverurie assigned the lease to Hudson Sheraton Corporation, a subsidiary of Sheraton Corporation of America (Sheraton). Sheraton guaranteed the tenant’s obligations for the first 12 years of the 21-year lease. The lease stipulated a fixed annual rent plus “overage rent” based on 27.5% of the tenant’s net profit exceeding $1,030,000. A dispute arose over whether certain expenses (real estate taxes, utilities, insurance, etc.) should be deducted when calculating “net profit” for the purpose of determining overage rent.

Procedural History

The Landlord sued Sheraton in the Supreme Court, New York County. The trial court ruled in favor of the Landlord, finding that Sheraton had improperly deducted certain expenses, thus understating the net profit and the overage rent due. The Appellate Division reversed the trial court’s decision. The Landlord appealed to the New York Court of Appeals.

Issue(s)

Whether the term “additional rent reserved in this lease,” as used in the net profit calculation clause of the lease, includes all sums and charges the tenant is required to pay under the lease, or only the “overage rent” itself.

Holding

No, the term “additional rent reserved in this lease” only includes the “overage rent”.

Court’s Reasoning

The court, in a memorandum decision affirming the Appellate Division, deferred to that court’s reasoning, which is not fully explained in the Court of Appeals decision. The dissent, however, illuminated the core disagreement. The dissent argued that the lease language was unambiguous. Section 1.01 defined “additional rent” broadly as “all other sums and charges required to be paid by Tenant under the terms of this lease.” Section 13.02 stated that “net profit” should be calculated *before* deducting “the fixed net rent and additional rent reserved in this lease.” The dissent contended that the majority’s interpretation effectively rewrote the contract. Quoting Black v. General Wiper Supply Co., the dissent stated: “We may not, however, make a new bargain for them. Our function is limited to construction of the agreement that the parties actually made.” The dissent found it crucial that Section 13.02 used the phrase “additional rent reserved *in this lease*,” rather than a more limited phrase like “additional rent reserved *in this article*,” which would have supported the defendant’s interpretation. The dissent maintained that the only reasonable construction was that “additional rent” included all sums the tenant was required to pay under the lease, and thus, those sums could not be deducted when calculating net profit.