Citation. 206 Cal. App. 3d 1376, 254 Cal. Rptr. 179, 1988 Cal. App.
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Brief Fact Summary.
A lease did not fix the amount of rent to be paid each month, but instead determined it to be based on a percent of deliveries. The lessee stopped operating before the lease ended, and so only paid a minimal amount of rent.
Synopsis of Rule of Law.
A covenant of continued operation in good faith will be implied into commercial leases containing percentage rental provisions if the minimum rent is not substantial.
The College Block (Plaintiff) leased real property to Atlantic Richfield Company (Defendant) for 20 years. Defendant agreed to build and operate a gas station on the property. The rent was determined by a percentage of the gasoline delivered, and irrespective of the gallons delivered, Plaintiff was to receive a minimum of $1000 each month. Thirty-nine months before the lease was to expire, Defendant closed the station and paid Plaintiff the $1000.00 each month for the months remaining on the lease. The lease did not contain an express covenant requiring it to operate the station; Plaintiff claims that the covenant is implied.
Does an implied covenant of continued operation arise when a lease does not fix rent, but guarantees a percentage based upon deliveries?
Both parties share a business risk in a percentage lease, depending on if the location is successful. Inherent in all percentage leases is the idea that the business must continue to operate if it is to be successful. To make a commercial lease mutually profitable when the rent is a minimum plus a percentage, or is based totally on a percentage, a covenant to operate in good faith will be implied into the contract if the minimum rent is not substantial.
Contracts are to be interpreted so as to make them reasonable without violating the intention of the parties. A covenant of continued operation can be implied into commercial leases containing percentage rental provisions in order for the lessor to receive that for which he bargained.
Here, the rent was tied to the operation of the station. Without the operation of the station, there would be no way to calculate the rent. Both parties are entitled to their reasonable expectations at the time the contract was entered into. If both parties believed there would be continued operations, the covenant will be implied.
If the base rent is small, a court will usually find an implied covenant to operate a business continuously.