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.