Playing the Percentages
by Ron Davis
A tenant who moved from a Pennsylvania shopping center to another location can simply ignore the continuing rent-collection plan that the center’s owners devised.
The shopping center, located in Philadelphia, had leased space to the tenant–a supermarket–under a 10-year agreement. But before the lease expired, the tenant moved from the center to nearby property.
While operating at the center, the supermarket paid not only a regular monthly rent, but also a percentage rent based on any sales over a breakeven point. At the new location, however, the tenant continued to pay the base rent, though never paid any percentage rent.
The shopping center’s owners eventually sued the supermarket operator, alleging breach of contract and breach of the promise of good faith and fair dealing. Specifically, the center’s owners argued the supermarket operator reneged on its obligations when it abandoned the leased premises, failed to account for percentage rent on sales at the reopened supermarket, and failed to maintain the leased premises at the shopping center.
Moreover, the owners added, the former supermarket tenant “has not only failed to apply its best efforts to drive sales over the base rent, but is, in fact, competing with that obligation and attempting to restrain overall trade at the shopping center by refusing to terminate the lease.”
In response, the tenant pointed out that the lease does not guarantee the payment of percentage rent. Instead, percentage rent payments depend on reaching a certain dollar amount in gross receipts.
A Pennsylvania court, in ruling in favor of the tenant, explained, “The lease contains no language requiring the supermarket to use its best efforts to drive its gross receipts above the breakeven point. The obligation to pay a substantial minimum annual base rent supports the interpretation that payment of percentage rent is not obligatory but conditional.
“Also,” the judges continued, “in addition to the lease making the payment of percentage rent contingent upon a dollar value, the lease specifically provides that the percentage rent arises from the gross receipts from the leased premises. No evidence exists that the drafters of the lease intended to collect percentage rent from locations other than the shopping center leased premises.” (Erie Plaza Partners v. Save-A-Lot Food Stores, 2004 WL 2554618 [Pa.Com.Pl.])
Decision: November 2004
Published: December 2004