Goldberg 168-05 Corp. v. Levy
170 Misc. 292 (1938)
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Rule of Law:
In every contract, including a percentage lease, there exists an implied covenant of good faith and fair dealing. A tenant cannot intentionally divert business from the leased premises for the sole purpose of depressing gross receipts to a level that triggers a contractual right to cancel the lease.
Facts:
- On September 17, 1929, the plaintiff's assignor leased commercial premises to the defendant, Levy, for a term ending in 1938.
- The lease required a minimum annual rent plus a percentage of the gross receipts of the business conducted on the premises.
- The lease included a clause allowing the tenant, Levy, to cancel the lease if the total gross sales for any calendar year did not equal $101,000.
- Levy took possession and, with the landlord's consent, allowed his company, Crawford Clothes, Inc., to occupy the premises and conduct business.
- The plaintiff alleged that Levy, who controlled Crawford Clothes, willfully mismanaged the business and diverted customers to another store he operated nearby.
- This alleged diversion of business caused the gross income at the leased premises to fall below the $101,000 threshold.
- On June 1, 1937, Levy gave notice of his intent to terminate the lease, and on October 30, 1937, both Levy and Crawford Clothes, Inc. vacated the premises.
Procedural Posture:
- The plaintiff, Goldberg 168-05 Corp., filed a complaint in a New York trial court against the defendants, Levy and Crawford Clothes, Inc.
- The complaint alleged two causes of action: breach of the lease agreement and a conspiracy to reduce the gross income of the business.
- The defendants filed a motion to dismiss the complaint for failure to state facts sufficient to constitute a cause of action.
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Issue:
Does a tenant in a percentage lease, which allows for cancellation if gross receipts fall below a specified threshold, violate the implied covenant of good faith and fair dealing by intentionally diverting business away from the leased premises to trigger that cancellation clause?
Opinions:
Majority - Steinbrink, J.
Yes, a tenant who intentionally diverts business to trigger a cancellation clause in a percentage lease violates the implied covenant of good faith and fair dealing. The lease agreement, while not explicitly stating the tenant must refrain from such conduct, is 'instinct with an obligation' to act fairly. The promise to pay rent based on a percentage of gross receipts implicitly includes a promise to use reasonable efforts to generate those receipts, as established in Wood v. Duff-Gordon. Just as a tenant cannot abandon the premises to avoid liability, they cannot achieve the same result by intentionally diverting business for the sole purpose of depressing gross receipts to invoke a cancellation clause. Such conduct is a direct violation of the covenant of good faith and fair dealing inherent in every contract. While the contract claim against the assignee, Crawford Clothes, Inc., is dismissed because its liability based on privity of estate ended upon vacating the premises, the cause of action for conspiracy to unlawfully reduce income is valid against both defendants.
Analysis:
This case is a foundational application of the implied covenant of good faith and fair dealing to commercial percentage leases. It establishes that a tenant cannot actively and intentionally sabotage its own business operations on the leased premises to exploit a cancellation clause tied to revenue. The decision prevents parties from using technical contract provisions as a sword to undermine the fundamental purpose of the agreement. This precedent significantly protects landlords in performance-based rent agreements by ensuring tenants have a duty to operate the business in a commercially reasonable and fair manner.
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