Walgreen Arizona Drug Co. v. Plaza Center Corp.
647 P.2d 643, 132 Ariz. 512, 1982 Ariz. App. LEXIS 459 (1982)
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Rule of Law:
A fixed base rental in a commercial lease, without a percentage-of-sales component, does not give rise to an implied covenant of continuous operation. Furthermore, a transfer of a leasehold is a sublease, not an assignment, if the original lessee retains any reversionary interest, however small.
Facts:
- On June 5, 1964, a lease was executed for a store in a planned shopping center, which would become the Tower Plaza Shopping Center.
- The lease required the tenant to pay a fixed monthly rent of $9,932.61 and did not include any percentage-of-sales rent.
- The lease permitted the tenant to sublet the premises at any time but restricted assignments to parent, subsidiary, or affiliated corporations.
- Tower Plaza, the eventual landlord, considered the tenant, an affiliate of Walgreen Arizona Drug Company (Walgreen), to be the 'major' tenant intended to draw customer traffic to the center's other 'satellite' businesses, which paid percentage-based rent.
- In late 1977, Walgreen decided to suspend its retail operations at the location.
- On December 31, 1977, Walgreen closed its store but continued to pay the full fixed monthly rent.
- In September 1978, Walgreen entered into an agreement with Fed-Mart, structured as a 'sublease,' which provided that the premises would revert to Walgreen one day before the expiration of Walgreen's primary lease with Tower Plaza.
Procedural Posture:
- Walgreen Arizona Drug Company (Walgreen) filed a declaratory judgment action in the trial court against Plaza Center Corporation (Tower Plaza).
- Tower Plaza filed a counterclaim against Walgreen and a third-party complaint against Fed-Mart Corporation, seeking a declaration that the lease was terminated.
- Fed-Mart filed an answer and a counterclaim for declaratory relief.
- Walgreen and Fed-Mart moved for partial summary judgment on the issue of lease termination.
- The trial court granted partial summary judgment in favor of Walgreen and Fed-Mart.
- Tower Plaza, as appellant, appealed the trial court's grant of summary judgment to this intermediate appellate court.
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Issue:
Does a commercial tenant in a shopping center breach its lease by ceasing operations and subletting to another entity when the lease contains only a fixed rent, provides an express right to sublet, and lacks an express covenant of continuous operation?
Opinions:
Majority - Jacobson, J.
No. A commercial tenant does not breach its lease by ceasing operations because a covenant of continuous operation will not be implied from a fixed-rent lease, even in an integrated shopping center. Furthermore, a transfer of the leasehold that retains a reversionary interest for the original tenant is a permissible sublease, not a prohibited assignment. The court reasoned that implied covenants are disfavored, and the primary basis for implying a covenant of continuous operation is a percentage-of-sales rental structure, which this lease lacked. A fixed base rental, by itself, gives rise to no such implication, and extrinsic evidence about the rent's 'inadequacy' is irrelevant without a percentage lease. The court explicitly rejected the theory that the interdependent nature of a shopping center is sufficient to imply such a covenant, stating that landlords must bargain for such terms expressly. Regarding the transfer to Fed-Mart, the court applied the common law rule that a transfer is a sublease if the original lessee retains a reversionary interest. Because Walgreen retained a one-day interest at the end of the term, the transaction was a sublease, which the lease expressly permitted.
Analysis:
This decision reinforces the traditional judicial reluctance to imply covenants into written commercial leases, placing a heavy burden on landlords to expressly include continuous operation clauses if they are desired. It firmly establishes that, in the absence of a percentage-rent clause, the status of a tenant as an 'anchor' in an 'integrated' shopping center is insufficient grounds to imply a duty to operate. The ruling also affirms the formalistic, but predictable, common law distinction between a sublease and an assignment, clarifying that parties can structure transactions to fall under the sublease category by retaining even a minimal reversionary interest, thereby avoiding restrictions on assignments.
