Food Fair Stores, Inc. v. Blumberg
1964 Md. LEXIS 654, 234 Md. 521, 200 A.2d 166 (1964)
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Rule of Law:
In a percentage lease agreement, a court will not imply a covenant that the lessee must use its best efforts to maximize gross sales where the lease includes a substantial minimum guaranteed rent and there is no evidence of bad faith on the part of the lessee.
Facts:
- In 1949, the lessors and Food Fair Stores, Inc. entered into a percentage lease for a supermarket to be built by the lessors in Glen Burnie, Maryland.
- The lease set rent at 1% of gross sales up to $2 million, but guaranteed a minimum annual rent of $10,560.
- The lease also contained a provision (paragraph 12) stating that if the lease were assigned for supermarket purposes, the rent would convert to a fixed amount, either $13,200 or the average rent of the prior years, whichever was greater.
- In 1951, Food Fair Stores, Inc. assigned the lease to a wholly-owned subsidiary, Food Fair Stores of Maryland, Inc.
- In 1956, as part of another corporate reorganization, the lease was assigned again to a new wholly-owned subsidiary, Food Fair Stores, Anne Arundel, Inc., though the lessors were not formally notified.
- For many years, the supermarket was highly successful, and the lessors received the maximum possible percentage rent of $20,000 annually.
- Following the opening of two additional Food Fair stores in the surrounding area, sales at the leased premises declined after 1959, causing the lessors' percentage-based rental income to decrease.
Procedural Posture:
- The lessors sued the lessees in a Maryland trial court for termination of the lease and damages, alleging breach of an implied covenant to maximize business volume.
- The lessees filed a demurrer (similar to a motion to dismiss) to the implied covenant claim.
- The trial court (Judge Cullen) sustained the demurrer, dismissing the lessors' claim based on an implied covenant.
- The case proceeded to trial on other issues, where the court (Judge Jones) awarded the lessors damages based on an express assignment provision in the lease.
- The lessees appealed the damage award to the Court of Appeals of Maryland, and the lessors cross-appealed the trial court's dismissal of their implied covenant claim.
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Issue:
Does a percentage lease that includes a substantial minimum rent create an implied covenant that the lessee must use its best efforts to maximize gross sales from the leased premises?
Opinions:
Majority - Prescott, J.
No. A percentage lease with a substantial minimum rent does not create an implied covenant to maximize sales. While every contract contains an implied covenant of good faith and fair dealing, whether a more specific covenant to maximize sales exists depends on the parties' intent as expressed in the contract and the surrounding circumstances. The court found that where a lease provides for a substantial minimum rent, as this one did, the percentage rent feature is often treated as a bonus, and no further obligations on the tenant's business operations will be implied. The lease was long, detailed, and the product of prolonged negotiations, yet it contained no express covenant restricting the lessee's right to expand or otherwise directing its business operations. The lessee's expansion by opening other stores was a normal, competitive business practice, not an act of bad faith intended to divert sales.
Analysis:
This decision establishes that Maryland courts will not readily imply a covenant to maximize sales or restrict competition in commercial percentage leases that contain a substantial, non-nominal minimum rent. It places the burden on landlords to expressly negotiate for such protections if they want to safeguard their percentage rental income against a tenant's future business decisions. The ruling reinforces the principle of freedom of contract, indicating that in sophisticated commercial agreements, courts will enforce the terms as written rather than inserting broad, unwritten obligations that could hinder normal business practices like expansion.
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