Seggebruch v. Stosor
33 N.E.2d 159, 1941 Ill. App. LEXIS 972, 309 Ill. App. 385 (1941)
Rule of Law:
In a percentage lease where rent is based on a lessee's sales, an implied covenant exists requiring the lessee to use reasonable diligence in operating the business and preventing them from acting to willfully deprive the lessor of their bargained-for income by diverting business to a competing enterprise.
Facts:
- Plaintiff Rougas leased premises improved with a brick building used as a gasoline station to Defendant Grimes.
- The lease, effective from July 1, 1937, to June 30, 1942, stipulated that Grimes would pay Rougas 1 1/2 cents for each gallon of gasoline sold from the premises as rental.
- Prior to May 1, 1939, Grimes sold approximately 12,000 gallons of gasoline per month from Rougas's premises.
- Shortly before May 1, 1939, Grimes acquired an adjoining lot and erected another gasoline station thereon.
- Since May 1, 1939, Grimes began operating the new gasoline station and reduced sales at Rougas's station to approximately 200 gallons per month.
- Grimes admitted that there was no change in the total volume of gasoline sales, meaning the sales at both stations combined were about the same as the sales at Rougas's station when it was operated alone.
Procedural Posture:
- On June 29, 1939, Rougas filed a forcible detainer suit against Grimes to recover possession of the premises.
- On March 6, 1940, Rougas filed a 'Separate Action in Chancery' (an equity suit) in the circuit court of Cook county, alleging fraud and seeking lease cancellation and damages for lost rent.
- On April 23, 1940, the chancery case was heard before the circuit court of Cook county without a jury.
- The circuit court entered a decree finding in favor of Rougas, awarding her $1,696.25 in damages and noting a previous judgment in the forcible detainer case granting her possession of the premises.
- Grimes, the defendant, appealed from the part of the circuit court's decree that awarded Rougas $1,696.25 in damages. No appeal was taken from the judgment in the forcible detainer case.
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Issue:
Does a lessee operating a gasoline station under a percentage lease, where rent is tied to sales volume, breach an implied covenant of reasonable diligence by constructing and operating a competing station on an adjoining lot and diverting the bulk of sales from the leased premises?
Opinions:
Majority - Mr. Presiding Justice O’Connor
Yes, a lessee operating under a percentage lease breaches an implied covenant of reasonable diligence by constructing and operating a competing station on an adjoining lot and diverting the bulk of sales from the leased premises. The court affirmed the chancellor's finding that although no express covenant prohibited Grimes from conducting a similar business elsewhere, it was 'clearly implied that defendant would use reasonable diligence in operating the gas station on plaintiff’s premises.' The court reasoned that in an undertaking where the lessee's operations directly determine the rental income, the lessee is obligated to operate in a way that reasonably produces the contemplated rental and must not, by their own act, deprive the lessor of their share of the bargain. Citing Thebest Laundry & Cleaning Co. v. Dufy, which referenced Grossman v. Schenker, the court reiterated that 'what is implied in an express contract is as much a part of it as what is expressed.' The opinion further supported this by referencing Daughetee v. Ohio Oil Co. and Stoddard v. Illinois Imp. Co., cases where implied covenants of reasonable diligence were found in leases for resource extraction (oil/gas and quarrying) even without explicit language. The court concluded that Grimes 'willfully and deliberately and purely with the intention of injuring the Plaintiff built himself a station right next door and transferred to the new place' and that 'the law will not stand by and allow such an evident wrong to be committed without finding some remedy.'
Analysis:
This case is significant for solidifying the doctrine of implied covenants in percentage leases, particularly when the lessor's income is directly tied to the lessee's sales volume. It establishes that courts will infer an obligation of good faith and reasonable diligence on the part of the lessee to prevent them from deliberately undermining the lessor's expected benefit, even in the absence of explicit contractual language. The ruling protects lessors from opportunistic behavior by lessees who might otherwise exploit a lease's silence to divert business to a competing venture, thereby ensuring the foundational principle of mutual benefit in such agreements. Future cases involving similar lease structures may cite this precedent to argue for implied duties of operational effort and loyalty.
