New York Law Review

Tag: Implied covenant

  • MGM Court Reporting Service, Inc. v. Greenberg, 74 N.Y.2d 691 (1989): Express Contract Terms Override Implied Covenants

    MGM Court Reporting Service, Inc. v. Greenberg, 74 N.Y.2d 691 (1989)

    When parties expressly define the limits of a non-solicitation restriction in a contract, a court will not imply a broader restriction, even if one party sought a more general prohibition during negotiations.

    Summary

    This case addresses whether a non-solicitation covenant can be implied when the parties have already negotiated and expressly defined the limits of such a restriction in a contract. MGM Court Reporting Service sued Stanley Greenberg, a former shareholder, alleging he breached an implied restrictive covenant by soliciting MGM’s clients after selling his shares back to the company. The New York Court of Appeals held that because the parties had explicitly limited the non-solicitation restriction to three specific customers, a broader limitation could not be implied. The court affirmed the dismissal of MGM’s claims, emphasizing that express contractual terms take precedence over implied covenants.

    Facts

    Stanley Greenberg, a 40% shareholder in MGM Court Reporting Service, commenced dissolution proceedings against the corporation, alleging oppressive actions by the majority shareholder, Michael Yesner. Yesner and MGM then elected to purchase Greenberg’s shares. During settlement negotiations, Yesner attempted to secure a general prohibition against Greenberg soliciting MGM customers. The final settlement agreement, however, contained a specific non-solicitation clause that restricted Greenberg from performing services for only three named companies for a period of five years. Greenberg later started his own court reporting business and allegedly began soliciting MGM’s clients. MGM then sued Greenberg for breach of an implied covenant against impairment of goodwill.

    Procedural History

    MGM Court Reporting Service sued Stanley Greenberg in New York State court, alleging breach of an implied restrictive covenant and breach of fiduciary duty. The trial court’s decision is not specified in the provided text. The Appellate Division granted Greenberg’s motion for summary judgment, concluding that a non-solicitation covenant could not be implied because the sale of Greenberg’s shares was akin to a sale “under compulsion.” MGM appealed to the New York Court of Appeals.

    Issue(s)

    Whether a court can imply a broader non-solicitation restriction when the parties have expressly defined the limits of such a restriction in a written contract.

    Holding

    No, because the parties expressly limited the non-solicitation restriction to three specific customers, a more general limitation may not be implied.

    Court’s Reasoning

    The Court of Appeals reasoned that the parties’ explicit agreement regarding the non-solicitation restriction precluded implying a broader restriction. The court emphasized that the parties had negotiated and expressly defined the reach of the limitation on solicitation. The court stated, “The parties having thus negotiated and expressly defined the reach of the limitation on solicitation, a more general limitation may not be implied.” There was no claim that the agreed restriction was anything other than a specific non-solicitation covenant limited to three customers. The court distinguished the case from situations where the agreed restriction is not what it appears to be. Because the parties had the opportunity to include a broader restriction and did not, the court declined to imply one. The court did not reach the issue of whether the sale of shares was “under compulsion,” as the Appellate Division had.

  • Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981): The Indefinite Duty Not to Solicit Former Customers After Sale of Good Will

    Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981)

    When a business is sold, the seller has a permanent, implied duty to refrain from soliciting former customers to protect the transferred good will, regardless of any express covenants restricting competition.

    Summary

    Mohawk Maintenance Co. sued Kessler, the former owner, for soliciting its customers after selling the business. The court addressed whether the duty not to solicit former customers after the sale of a business’s good will is limited in duration. The court held that this duty is permanent and not subject to the “reasonableness” test applied to express covenants restricting competition. The court reasoned that the implied duty protects the transferred good will, a vested property right of indefinite duration, and prevents the seller from undermining the value of what was sold.

    Facts

    Kessler sold his controlling interest in Mohawk Maintenance Co., a building maintenance business, for $2,000,000. The sale agreement included an express covenant restricting Kessler from competing with Mohawk for five years. Kessler also entered an employment agreement with Mohawk, containing a separate anticompetition clause effective for 24 months after termination. Kessler voluntarily resigned from Mohawk in August 1978 and formed a competing business, Sure-Way Maintenance Services. Kessler allegedly solicited some of his former Mohawk customers.

    Procedural History

    Mohawk sued Kessler and Sure-Way, seeking damages and an injunction to prevent competition until August 1980 (based on the employment agreement’s anticompetition clause) and a permanent injunction against soliciting Kessler’s former Mohawk customers. Special Term granted partial summary judgment to Mohawk, enjoining Kessler from soliciting customers who were actively dealing with Mohawk in 1972 when the business was sold and finding the contractual limitations on his freedom to compete were intended to remain in effect for the 24-month period following the actual termination of his employment with Mohawk. The Appellate Division affirmed with a minor modification, clarifying that Kessler could accept unsolicited business from former customers. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the duty of a seller of a business to refrain from soliciting the patronage of customers who were actively being served by the business at the time of sale, arising from the transfer of good will, is indefinite in duration or subject to limitations of reasonableness applicable to express covenants not to compete.

    Holding

    Yes, because the duty to refrain from soliciting former customers is permanent and not subject to the durational limitations applied to express covenants restricting competition. The law imposes this duty to prevent the seller from impairing the good will they purported to sell.

    Court’s Reasoning

    The court distinguished between the duty to refrain from soliciting former customers (implied upon the sale of good will) and the duty to refrain from competing (arising only from express agreements). While express covenants restricting competition must be reasonable in scope and duration, the implied duty not to solicit is permanent. The court reasoned that the purchaser of good will acquires the right to expect continued patronage from the business’s established customers. The seller is not allowed to derogate from their own grant, and “ ‘[a] man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of good will, that the vendor does not solicit the custom which he has parted with; it would be a fraud on the contract to do so’ ”. The court found that the sale of Mohawk included a transfer of good will, evidenced by the purchase price and the express covenants against competition. The court emphasized that “the defendants remain under a positive and permanent duty to refrain from interfering with the rights acquired by plaintiff as a result of its acquisition of Mohawk’s ‘good will’”.

  • Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62 (1978): Implied Covenants Against Assignment in Leases

    Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62 (1978)

    A covenant limiting the right to assign a lease will only be implied if it is clear that a reasonable landlord would not have entered into the lease without such an understanding, and failure to recognize such a covenant would deprive the landlord of the benefit of their bargain.

    Summary

    Rowe, the landlord, sought to prevent A&P, the tenant, from assigning its lease to Southland Corp. Rowe argued that the lease contained an implied covenant against assignment without the lessor’s consent because the rental included a percentage of gross receipts. The New York Court of Appeals held that no such implied covenant existed. The court reasoned that the base rent was substantial, the percentage clause was not a material part of the lessor’s fundamental expectations, and Rowe, an experienced attorney, could have negotiated an express restriction on assignment. The court emphasized that restrictions on the free alienation of land are disfavored and construed strictly.

    Facts

    In 1964, Robert Rowe leased property to A&P for a supermarket. The lease had a base rent of $14,000 per year for 10 years with renewal options, and no restrictions on assignment. In 1971, the parties renegotiated, resulting in a new 15-year lease with a higher base rent of $34,420 plus 1.5% of gross receipts exceeding $2,294,666. The lease still lacked any restriction on assignment. A&P later decided to close the store and assigned the lease to Southland Corp. Rowe objected, claiming A&P breached an implied covenant against assignment.

    Procedural History

    The Supreme Court dismissed Rowe’s petition, finding no bad faith and an unqualified right to assign absent express restrictions. The Appellate Division reversed, stating that the lower court placed too heavy a burden on the petitioner. The Appellate Division reasoned that the percentage rent clause indicated the landlord’s reliance on the tenant’s abilities. A&P appealed to the New York Court of Appeals.

    Issue(s)

    Whether a real property lease agreement, which includes a percentage of gross receipts as part of the rental payment but does not contain an express restriction on assignment, contains an implied covenant limiting the lessee’s power to assign the lease without the lessor’s consent.

    Holding

    No, because the base rent was substantial, the percentage clause was not a material part of the lessor’s fundamental expectations, and the landlord was an experienced businessman who could have negotiated an express restriction on assignment.

    Court’s Reasoning

    The court emphasized the principle of freedom of contract, subject to limitations like public policy and good faith. It noted that courts disfavor covenants restricting assignment because they restrain the free alienation of land. Such covenants are construed strictly, even if expressly stated. An implied limitation on assignment should only be recognized if failure to do so would deprive a party of the benefit of their bargain. The court distinguished this case from Nassau Hotel Co. v. Barnett & Barse Corp., 212 NY 568, where the landlord received only a percentage of gross receipts. Here, the base rent was substantial, and the percentage clause was triggered only after a high sales threshold. The court noted that Rowe was an experienced attorney who could have negotiated an express restriction on assignment. The court quoted Mutual Life Ins. Co. of N.Y. v. Tailored Woman, 309 NY 248, 253, stating, “such lack of foresight does not create rights or obligations”. The court stated, “It has long been the law that covenants seeking to limit the right to assign a lease are ‘restraints which courts do not favor. They are construed with the utmost jealousy, and very easy modes have always been countenanced for defeating them’ (Riggs v Pursell, 66 NY 193, 201)”.

  • Smith v. Wait, 28 N.Y. 324 (1863): Enforceability of a Lease Despite Landlord’s Lack of Title

    Smith v. Wait, 28 N.Y. 324 (1863)

    A tenant’s obligation to pay rent under a lease is independent of the landlord’s actual title to the property, especially where the lease contains an implied covenant of quiet enjoyment, and the tenant has not been evicted.

    Summary

    This case addresses whether a tenant can avoid paying rent by claiming the landlord had no valid title to the property. Smith (landlord) sued Wait (tenant) for unpaid rent under a two-year lease. Wait argued Smith lacked title and that a third party, Williams, had obtained a judgment to recover possession. The court held that Wait was obligated to pay rent because the lease implied a covenant of quiet enjoyment, which served as sufficient consideration, and because Wait had not alleged actual eviction from the premises. The court emphasized that the agreements for quiet enjoyment and rent payment were independent.

    Facts

    The key facts are:

    1. Smith leased property to Wait for a two-year term in a written agreement, reserving rent payable quarterly.
    2. The written lease was not an indenture (a deed executed by both parties) but a parol demise (oral or simple written lease).
    3. Wait allegedly promised to pay the rent.
    4. Wait claimed Smith lacked any interest or estate in the property.
    5. A third party, Williams, obtained a judgment against Wait in a separate action to recover possession of the property.
    6. Wait did not allege that he had been evicted or deprived of possession as a result of Williams’ judgment.

    Procedural History

    The case originated from a suit by Smith against Wait for unpaid rent. Wait presented a defense claiming Smith lacked title and that Williams had obtained a judgment to recover possession. The lower court’s ruling on the demurrer is not specified, but the Court of Appeals reviewed the case on appeal from that ruling.

    Issue(s)

    1. Whether a tenant can refuse to pay rent based on the landlord’s alleged lack of title to the property when the lease contains an implied covenant of quiet enjoyment.
    2. Whether a judgment obtained by a third party to recover possession constitutes a valid defense against rent payment when the tenant has not alleged actual eviction.

    Holding

    1. Yes, because the agreement for quiet enjoyment implied in the lease is independent of the landlord’s actual title and serves as sufficient consideration for the tenant’s promise to pay rent.
    2. No, because the tenant must plead and prove actual eviction from the premises to assert a valid defense against rent payment based on a third party’s claim.

    Court’s Reasoning

    The court reasoned that the agreement to pay rent and the agreement for quiet enjoyment are independent covenants. The implied covenant of quiet enjoyment acts as a sufficient consideration for the tenant’s promise to pay rent, regardless of the landlord’s actual title. The court referenced The Mayor of New-York v. Mabie and Tone v. Brace to support the existence of an implied agreement for quiet enjoyment. Drawing on Whitney v. Lewis, the court highlighted that a covenant for quiet enjoyment is sufficient consideration even if the grantor lacks title.

    Furthermore, the court stated that to properly plead an eviction as a defense, the tenant must allege an actual eviction or expulsion from the premises and being kept out of possession until after the rent became due. Simply stating that a third party obtained a judgment to recover possession is insufficient. As the court noted, “In pleading an eviction, the plea must state an eviction or expulsion of the tenant from the demised premises, and the keeping him out of possession until after the rent became due; otherwise it is bad.”

    The court underscored the principle that without a deed executed by both parties or an actual entry, the strict landlord-tenant relationship might not exist, but the independent agreement for quiet enjoyment remains enforceable.