New York Law Review

Tag: Percentage Rent

  • Bombay Realty Corp. v. Magna Carta, Inc., 825 N.E.2d 125 (N.Y. 2005): Defining Gross Sales in a Sublease Agreement

    Bombay Realty Corp. v. Magna Carta, Inc., 825 N.E.2d 125 (N.Y. 2005)

    In a sublease agreement requiring percentage rent based on gross sales, gross sales include only the income actually received by the sublessee and do not include revenues paid directly to a third party by the sublessee’s customers.

    Summary

    Bombay Realty, the lessor, sought additional rent from Cellular 2000, the sublessee, arguing that “gross sales” should include the total value of service contracts customers signed with Southwestern Bell (Cingular Wireless), even though those payments went directly to Southwestern Bell, not Cellular 2000. Cellular 2000, a cell phone retailer, only included its commission from Southwestern Bell in its gross sales calculation. The New York Court of Appeals held that “gross sales” only included income payable to Cellular 2000, not the amounts paid by customers directly to Southwestern Bell for cellular service plans. This decision emphasized interpreting contract terms in harmony and considering the practical realities of accessing financial records.

    Facts

    Bombay Realty leased property to Colonie Seafood Shoppe, who then subleased to Magna Carta Restaurants. Magna Carta subsequently subleased to Cellular 2000 and Beyond, LLC. Cellular 2000 operated a retail communications store, selling cell phones and service plans. Customers purchasing cell service signed contracts directly with Southwestern Bell (later Cingular Wireless), who then billed the customers. Southwestern Bell paid Cellular 2000 commissions and residual fees. The sublease required Cellular 2000 to pay a percentage rent to Bombay based on 5% of gross sales exceeding $480,000, with “gross sales” defined as “income generated by the business conducted by the lessee… including income derived from the sale of all services and all products whether for cash or for credit.” Cellular 2000 calculated its gross sales based only on its commissions from Southwestern Bell.

    Procedural History

    Bombay Realty filed a RPAPL article 7 action against Magna Carta and Cellular 2000, seeking additional rent. The Supreme Court initially ordered Cellular 2000 to provide documentation. When Cellular 2000 only provided commission information, the Supreme Court granted summary judgment to Bombay Realty. The Appellate Division affirmed, reasoning that basing rent on actual profit, rather than gross sales, would deviate from the original lease’s compensation methodology. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the term “gross sales,” as defined in the sublease agreement, includes the total value of service contracts entered into between Cellular 2000’s customers and Southwestern Bell, or only the commissions Cellular 2000 received from Southwestern Bell.

    Holding

    No, because the term “gross sales” includes only the income payable to Cellular 2000 and does not include income resulting from plans entered into by a customer and payable to Southwestern Bell, a third party.

    Court’s Reasoning

    The Court of Appeals reasoned that all parts of a contract must be read in harmony. The term “gross sales” must be tied to the gross income actually received by Cellular 2000. Since customers paid Southwestern Bell directly for service contracts, Cellular 2000’s income consisted only of the commissions received from Southwestern Bell. To include the total value of the service contracts would be inconsistent with the lease terms and impractical. The court noted that only Southwestern Bell had access to the complete income information related to each account, and it would be unreasonable to expect Southwestern Bell to open its books to Cellular 2000 for the purpose of calculating rent. The court referenced the principle that the “reasonable expectation and purpose of the ordinary business [person] when making an ordinary business contract” should be considered. The court reversed the Appellate Division’s order, denied Bombay Realty’s motion for summary judgment, and granted Cellular 2000’s cross-motion for summary judgment.

  • 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)”.