Rowe v. Great Atlantic & Pacific Tea Co.
412 N.Y.S.2d 827, 385 N.E.2d 566, 46 N.Y.2d 62 (1978)
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Rule of Law:
A covenant restricting the lessee's right to assign a lease will not be implied where the lease is silent on assignability and provides for a substantial fixed base rent, even if it also includes a percentage rent clause dependent on the lessee's sales.
Facts:
- In 1964, Robert Rowe leased property to the Great Atlantic & Pacific Tea Co. (A&P) for use as a supermarket.
- In 1971, the parties negotiated and executed a new 15-year lease under which Rowe expanded the building for A&P.
- The new lease required A&P to pay a substantial fixed base rent of $34,420 per year.
- The lease also included a percentage rent clause, entitling Rowe to 1.5% of annual gross receipts only after they exceeded a threshold of $2,294,666.
- A&P made no promise or warranty that sales would ever reach the threshold required to trigger the percentage rent clause.
- The lease contained no express provision restricting A&P's right to assign the lease.
- As part of a corporate retrenchment, A&P closed its store on the premises in 1975.
- Over Rowe's objections, A&P then assigned the remainder of its lease to the Southland Corp. for the operation of a Gristede Brothers supermarket.
Procedural Posture:
- Robert Rowe commenced a proceeding in the Supreme Court, Suffolk County (the trial court of first instance), against A&P and Southland Corp. to recover possession of the property and damages.
- Following a nonjury trial, the Supreme Court dismissed Rowe's petition on the merits.
- Rowe, as appellant, appealed to the Appellate Division (the intermediate appellate court).
- The Appellate Division reversed the judgment of the Supreme Court and ruled in favor of Rowe.
- A&P and Southland Corp., as appellants, then appealed to the Court of Appeals of New York, the state's highest court.
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Issue:
Does a commercial lease that includes both a substantial fixed base rent and a percentage rent clause, but is silent on assignability, contain an implied covenant preventing the lessee from assigning the lease without the lessor's consent?
Opinions:
Majority - Gabrielli, J.
No. A commercial lease that is silent on assignability does not contain an implied covenant against assignment simply because it includes a percentage rent clause, especially when there is also a substantial, fixed base rent. Covenants restricting the assignment of leases are strongly disfavored by the law because they restrain the free alienation of land. A party asserting the existence of an implied-in-fact covenant bears a heavy burden to prove that the promise is implicit in the agreement as a whole. Such a covenant against assignment will be recognized only if it is clear that a reasonable landlord would not have entered into the lease without such an understanding, which typically occurs when the landlord relies on a unique skill of the lessee and the rent is entirely or primarily based on a percentage of sales. Here, the base rent was substantial and not out of line with market rates, protecting Rowe's primary financial expectations. The percentage clause was secondary and would only be triggered at a high sales volume, indicating it was a bonus or inflation hedge, not the fundamental basis of the bargain. Given that both parties were sophisticated and engaged in extensive negotiations, the court refused to imply a term that the parties themselves omitted from their detailed written agreement.
Analysis:
This decision reinforces the strong legal presumption in favor of the free assignability of commercial leases. It clarifies that a percentage rent clause is not, by itself, sufficient to imply a covenant against assignment when a substantial fixed rent protects the landlord's primary economic interest. The ruling places a high evidentiary burden on parties claiming the existence of implied covenants, particularly those disfavored by law. For future cases, this precedent instructs courts to look at the entire economic structure of the lease and the sophistication of the parties, solidifying the principle that landlords who wish to restrict assignment must do so with an express clause in the lease agreement.
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