Goldblatt Bros., Inc., Matter of

• Decision Date: 08 July 1985
• Docket Number: No. 84-1814,84-1814
• Citation: 766 F.2d 1136
• Parties: 13 Collier Bankr.Cas.2d 115, Bankr. L. Rep. P 70,642 In the Matter of GOLDBLATT BROS., INC., Debtor. Appeal of BENEFICIARIES OF AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO LAND TRUST NO. 7906.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1136

766 F.2d 1136

13 Collier Bankr.Cas.2d 115, Bankr. L. Rep. P 70,642

In the Matter of GOLDBLATT BROS., INC., Debtor Appeal of BENEFICIARIES OF AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO LAND TRUST NO. 7906.

No. 84-1814.

United States Court of Appeals Seventh Circuit.

Argued April 5, 1985.

Decided July 8, 1985.

Richard M. Bendix, Schwartz, Cooper, Klob & Gaynor, Chicago, Ill., for appellant.

Gerald F. Munitz, Nachman, Munitz & Sweig, Ltd., Chicago, Ill., for appellee.

Before CUDAHY and ESCHBACH, Circuit Judges, and MORTON, Senior District Judge. ^*

CUDAHY, Circuit Judge.

The question before us is whether the district court properly affirmed a bankruptcy order that approved a debtor's assumption of an unexpired lease over the landlord's objection. The debtor, Goldblatt Bros., Inc. ("Goldblatt") rented a store from the beneficiaries of American National Bank & Trust Company of Chicago, as Trustee under Trust No. 7906 ("American"), under a lease executed in 1957 and amended in 1977. On June 15th, 1981, Goldblatt filed a voluntary petition in bankruptcy under Chapter 11 of the Bankruptcy Code. Pursuant to 11 U.S.C. Sec. 365(d)(2), American filed an application in the Bankruptcy Court to compel Goldblatt to assume or reject the lease. After Goldblatt notified American of its intention to assume the lease, American objected on the grounds that Goldblatt had not met the conditions precedent to assumption of the lease set forth in Secs. 365(b)(1) and 365(b)(3) of Chapter 11. On August 9, 1983, the Bankruptcy Court entered an order overruling American's objections and approving Goldblatt's assumption of the lease. Mem. and Order, No. 81 B 7075 (N.D.Ill. Aug. 9, 1983). The district court affirmed in a Minute Order, No. 83 C 4326 (N.D.Ill. April 27, 1984) and American appeals. We affirm.

The amended lease obligates Goldblatt to pay American $180,000 in base rent annually, as well as percentage rent of up to 3% of gross sales. Percentage rent becomes due only when sales exceed certain specified amounts. Goldblatt agreed in Article V of the lease that it would "use, occupy and maintain the demised premises solely for a store for the sale, at retail, of general merchandise including foods." It also promised to conduct its business "continuously, without interruption, keeping the demised premises open for business during all hours when a majority of the other [Chicago Goldblatt] stores remain open for business...." During the bankruptcy proceedings, however, the store was closed for about two months (between January and March of 1982), apparently for remodeling. When it reopened, Goldblatt discontinued using the second floor of the store for retail sales, and confined its sales area to the first floor, which represents about 50% of the total rented space.

I.

Section 365(b)(1) of the Bankruptcy Code provides that where there has been a default by the debtor under an unexpired lease, the trustee may not assume that lease on behalf of the debtor unless the trustee first cures the default, compensates the other party to the lease for damages resulting from the default and provides adequate assurance of future performance under the lease. ¹ One of American's principal objections to Goldblatt's assumption of the lease is its contention that Goldblatt's failure to use the second floor of the store constituted a "default" under Sec. 365(b)(1), for which American had to be compensated prior to assumption. Specifically, American argues that the provisions of the lease obligating Goldblatt to use the rented premises "solely" for a retail store, and to operate its business "without interruption" require Goldblatt to use all of the rented space for retail sales.

Clearly, under Illinois law, an exclusive use restriction can be violated not only by prohibited uses but also by a commercial tenant's failure to operate its business on the leased premises. See Fox v. Fox Valley Trotting Club, 8 Ill.2d 571, 134 N.E.2d 806 (1956); Simhawk Corp. v. Egler, 52 Ill.App.2d 449, 202 N.E.2d 49 (1964), appeal denied, 31 Ill.2d 630 (1965). Generally, cases finding such a violation involve tenants who cease doing business entirely and abandon the premises, thus violating their agreement to "use" the premises solely for operation of their business. This case is somewhat different, since Goldblatt has continued to use the rented store to sell retail items during normal business hours, but has simply stopped using the second floor for sales. ² American nevertheless argues that, at least where a lease requiring partial percentage rent is involved, exclusive use and continuous operation provisions require a tenant to occupy leased premises in their entirety. Since Goldblatt is not obligated to pay percentage rent until a given level of sales is achieved, and since its 50% reduction in selling area presumably diminishes its total sales volume, American argues that Goldblatt has disabled itself from paying percentage rent just as surely as if it had ceased operations entirely. Therefore, Goldblatt has, under the rationale of the cited cases, violated the lease. American contends that any other rule would allow a tenant to use only a "few square inches of space" for the intended use as long as it continued to pay base rent, thereby frustrating the landlord's legitimate expectation of receiving percentage rent.

We do not agree that anything less than complete occupancy of rented retail space necessarily constitutes a material breach of a partial percentage rent lease. Certainly the cited cases do not establish so broad a proposition. Unlike the situation in which a tenant completely shuts down operations, here the lease provisions are not literally violated: the store is in fact being operated "continuously," albeit on a smaller scale, and it is "being used solely" for a store at retail, even though not all the space is devoted to sales. We do find some merit in American's argument that a tenant is obligated to make good faith efforts to generate the amount of rent, including percentage rent, contemplated in its lease, see Goldblatt Bros., Inc. v. Addison Green Meadows, Inc., 8 Ill.App.3d 490, 290 N.E.2d 715 (1972), but we do not think a mere failure to use all the rented space for sales is necessarily inconsistent with such an obligation. A variety of circumstances can be imagined in which a retail tenant might reasonably expect that some reduction in selling area would aid, rather than deter, its sales efforts. In general, of course (and with the obvious qualification that the tenant is presumably interested in the net while the landlord may be oriented to the gross) maximizing profitable sales is in the tenant's best interest as well as the landlord's. Therefore, as long as the tenant does not violate the explicit requirements of the lease, we think it is entitled to some discretion to exercise its business judgment in deciding how best to achieve its goal. ³

This is not to imply, however, that a failure to use a portion of rented space for the intended use can never constitute a breach of exclusive use or continuous occupancy lease provisions. At least given a partial percentage rent requirement, we agree with American that some reasonable occupancy requirement defined by area, as well as by time, can fairly be implied. Thus if a tenant were to discontinue using all but a tiny portion of the rented premises, drastically reducing sales, this could well violate a percentage rent lease even if the tenant remained open during normal business hours. See Seggebruch v. Stosor, 309 Ill.App. 385, 33 N.E.2d 159 (1941) (tenant's reduction in sales of gas from 12,000 to 200 gallons per month violated implied covenant of reasonable diligence). Yet, as we have noted, the mere failure to use every foot of available space for sales should not be considered a default. Between these two extremes, we think each case must turn on its own facts particularly noting the reasonable expectations of the parties under all the circumstances.

In this case, we agree with the bankruptcy court that the lease does not require that all the rented space be used for sales. The lease contained no promise by Goldblatt to maintain any particular volume of business or even to use best efforts to maximize sales. Significantly, unlike some leases, the percentage rent payable was not tied in any way to selling area. The base rent was very substantial and was payable in...