Stop & Shop, Inc. v. Ganem
347 Mass. 697, 200 N.E.2d 248 (1964)
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Rule of Law:
In a commercial percentage lease that includes a substantial minimum base rent, a covenant for the lessee to continuously operate its business will not be implied unless the lease expressly requires it or the lessor proves the base rent is significantly below the fair rental value.
Facts:
- On August 24, 1953, the plaintiff-lessee entered into a 13.5-year lease with the defendant-lessors for a property in Haverhill, Massachusetts.
- The lease stipulated a minimum annual rent of $22,000, plus a percentage rent of 1.25% on gross sales exceeding approximately $1.27 million, payable only if total sales from the Haverhill and another Lawrence location exceeded $3 million.
- The lease did not specify the required use of the premises but required the lessee to maintain records of all sales.
- At the time of the lease, the lessee was known to be in the supermarket business, and the property had previously been a market.
- The lessee operated a supermarket on the premises from 1953 through 1962, paying percentage rent in only two of those years (1956 and 1957).
- Beginning in 1956, the lessee opened two other competing supermarkets in Haverhill, one within a half-mile and the other within one mile of the leased property.
- The lessee notified the lessors of its intent to cease operating the supermarket after January 1, 1963, but planned to continue paying the minimum rent and other required costs under the lease.
Procedural Posture:
- The plaintiff-lessee filed a bill for declaratory relief in the Superior Court, seeking a judgment that it was not obligated to continue operating a supermarket on the leased property.
- The defendant-lessors filed a counterclaim seeking to reform the lease to require continuous operation and to include sales from the lessee's other local stores in the rent calculation.
- The lessee demurred to the counterclaim.
- The Superior Court sustained the demurrer with leave to amend denied, from which the lessors did not appeal.
- The Superior Court entered a final decree in favor of the lessee, ruling the lease contained no implied covenant to operate the business.
- The defendant-lessors (appellants) appealed the final decree to the Supreme Judicial Court of Massachusetts.
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Issue:
Does a commercial percentage lease that contains a substantial minimum rent, but no express term requiring continuous operation, create an implied covenant that the lessee must continue to operate its business on the premises?
Opinions:
Majority - Whittemore, J.
No. A covenant to continuously operate is not implied in the lease. An omission to specify an agreement in a written lease is evidence that there was no such understanding, and covenants are not extended by implication unless the implication is clear and undoubted. The presence of a substantial minimum rent, as opposed to a nominal one, suggests that the parties relied on this fixed rent and the lessee's self-interest as sufficient assurance of payment, without needing a separate promise of continuous operation. The burden would be on the lessors to show a significant disparity between the fixed rent and the property's fair rental value to justify implying such a covenant, and they failed to do so. Furthermore, since the lessee is free to cease operations based on its business judgment, it is also free to open competing stores elsewhere, absent any bad faith or specific intent to harm the lessors' interest, which was not alleged here.
Analysis:
This decision establishes a significant precedent for commercial percentage leases in Massachusetts by creating a strong presumption against an implied covenant of continuous operation when a substantial minimum rent exists. It places a high evidentiary burden on lessors who wish to argue for such an implied term, requiring them to prove the base rent is essentially nominal compared to the property's fair rental value. The ruling provides commercial tenants with greater flexibility to make strategic business decisions, such as closing underperforming locations or expanding in other areas, without fear of breaching their lease, so long as they fulfill their express financial obligations.
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