Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp.

• Decision Date: 17 May 1978
• Docket Number: No. 60400,60400
• Citation: 266 N.W.2d 22
• Parties: FASHION FABRICS OF IOWA, INC., d/b/a Fashion Place, Appellee, v. RETAIL INVESTORS CORPORATION, d/b/a Fashion Place Ready-to-Wear, and Moss Stores, Inc., Appellants.
• Court: Iowa Supreme Court

Page 22

266 N.W.2d 22

FASHION FABRICS OF IOWA, INC., d/b/a Fashion Place, Appellee, v. RETAIL INVESTORS CORPORATION, d/b/a Fashion Place Ready-to-Wear, and Moss Stores, Inc., Appellants.

No. 60400.

Supreme Court of Iowa.

May 17, 1978.

Victor V. Sprengelmeyer, of Sprengelmeyer & Henkels, Dubuque, for appellants.

O'Connor, Thomas, Wright, Hammer, Bertsch & Norby, Dubuque, for appellee.

Considered by MOORE, C. J., and LeGRAND, REES, HARRIS and McCORMICK, JJ.

McCORMICK, Justice.

The determinative question in this appeal is whether a commercial sublease contained an implied covenant by the sublessor to continue operating its adjacent business during the term of the sublease. The trial court held it did not. We hold it did and therefore reverse and remand.

This appeal arises from judgment entered for plaintiff Fashion Fabrics of Iowa, Inc. (Fashion Fabrics), d/b/a Fashion Place, in its action for rent against defendants Retail Investors Corporation (Retail Investors), d/b/a Fashion Place Ready-to-Wear, and Moss Stores, Inc. (Moss).

Fashion Fabrics sells fabrics, patterns and accessories at retail to customers who wish to make their own clothing. Moss sells women's apparel at retail. Retail Investors performs management services for Moss.

Fashion Fabrics leased approximately 26,000 square feet of space in the Kennedy Mall shopping center in Dubuque. On March 17, 1974, it entered an agreement to sublease approximately 6,700 square feet of this space to Moss. This space was accessible from the main and side malls and from Fashion Fabrics' adjacent space. The sublease had a term of three years with an annual rent fixed at $24,753, payable in monthly installments of $2,063, or ten percent of Moss's gross sales in the leased space, whichever was greater. Moss subsequently assigned the sublease to Retail Investors. Because Moss and Retail Investors are in the same position in this appeal, we will refer to them both as "Moss".

Moss commenced occupancy in April 1974. Fashion Fabrics had been operating its business in the adjacent space for some time. On October 16, 1974, Fashion Fabrics notified Moss by letter of its intention to terminate its Dubuque operation. After conducting a going-out-of-business sale in November, it vacated its premises on November 16, 1974. Several weeks later Fashion Fabrics rented the vacated space to Flower City, a retail business which sells live and artificial plants, flowers and decorations.

On December 31, 1974, Moss wrote Fashion Fabrics that it intended to vacate the premises on or before January 31, 1975, alleging the sublease was based on Fashion Fabrics' continuing in business at the site, Moss had incurred damages because of the closing, and the closing excused Moss from further performance.

Moss closed its doors January 22, 1975, and was packing its remaining merchandise the following day when Fashion Fabrics brought this action for rent and penalty under the sublease. The action was accompanied by attachment of Moss's inventory.

In its answer Moss alleged as an affirmative defense that Fashion Fabrics had materially breached the sublease in ceasing its operation on the adjacent premises in November 1974. This allegation was also the basis of a counterclaim in which Moss sought damages.

After trial to the court at law, the trial court held Moss breached the sublease by vacating the premises. It awarded Fashion Fabrics judgment of $24,567 for rent through September 1975 and for an early-termination penalty provided in the sublease. This appeal followed.

In order to decide the appeal we must review the trial court's interpretation and construction of the sublease. This task is governed by principles of interpretation and construction of contracts generally. Baron v. Crossroads Center of Iowa, Inc., 165 N.W.2d 745, 749 (Iowa 1969).

Interpretation involves ascertaining the meaning of contractual words; construction refers to deciding their legal effect. Interpretation is reviewed as a legal issue unless it depended at the trial level on extrinsic evidence. Construction is always reviewed as a law issue. Allen v. Highway Equipment Co., 239 N.W.2d 135, 139 (Iowa 1976).

The trial court did not deem it necessary to consider extrinsic evidence in determining the meaning of the sublease in this case. Therefore, its interpretation and construction are both reviewed here as matters of law. Connie's Const. v. Fireman's Fund Ins., 227 N.W.2d 207, 210 (Iowa 1975); see Santa Clara Properties Co. v. R.L.C., Inc., 217 Cal.App.2d 840, 32 Cal.Rptr. 333 (1963); 3 Corbin on Contracts § 554 (1960).

Although the trial court refused to consider it in determining the meaning of the sublease, substantial extrinsic evidence was received in this case. We have held extrinsic evidence is admissible as an aid to interpretation when it throws light on the situation of the parties, antecedent negotiations, the attendant circumstances and the objects they were striving to attain. Hamilton v. Wosepka, 261 Iowa 299, 306, 154 N.W.2d 164, 168 (1967).

Extrinsic evidence is also admissible before the issue of interpretation is reached in order to determine whether the writing is or is not an integrated agreement or whether, if integrated, it is completely or partially integrated. Restatement (2d) of Contracts § 240 (Tent. Draft 1-7).

We believe the trial court erred in failing to consider the extrinsic evidence for each purpose. We base this conclusion on a review of the writing and the extrinsic evidence.

In its opening clause the sublease provided:

WHEREAS, FASHION FABRICS OF IOWA, INC. conducts a store in premises which it leases within the Kennedy Mall, Dubuque, Iowa.

WHEREAS, the parties desire to establish a Ladies Ready-to-Wear Department in said store for the sale at retail of the articles, merchandise and services set forth in ARTICLE TWO hereof, on the terms and conditions hereinafter set forth, * * * . (emphasis supplied).

In article two of the sublease, under the title "USE", the sublease provided:

(Fashion Fabrics) grants to Moss the right and privilege of conducting in the Moss Space in said Store during the period of this Agreement a Ladies Ready-to-Wear Department, including the right to display, offer for sale and sell at retail ladies' new ready-to-wear soft apparel * * * . (Fashion Fabrics) agrees not to permit the sale from the Store by (it) or any other sublessee of (Fashion Fabrics) within the store premises of ladies' ready-to-wear soft apparel or accessories. (emphasis supplied).

The sublease contained additional provisions showing a close working relationship between the two businesses. Fashion Fabrics promised to furnish Moss with wrapping supplies and to pay bank charges for credit purchases made by customers of Moss on bank credit cards. Moss agreed to furnish its own trade fixtures and cash desk. Each agreed to conduct its business without interfering or competing with jeoparding or obstructing the business of the other. Then the sublease contained this provision Moss agrees at all times (Fashion Fabrics) is open for business to have at least one employee present in the Moss Space to conduct Moss's business. (Fashion Fabrics) will provide Moss with a written schedule of (its) business hours. It is further understood and agreed between the parties that Moss's business in the Moss Space shall only be open for business the same hours that (Fashion Fabrics) is open and that under no circumstances shall Moss's business be open on Sundays. (emphasis supplied).

After reviewing the sublease the trial court rejected Moss's contention that Fashion Fabrics had covenanted to keep its own business operating during the term of the lease. The court held the only language supporting the contention was the reference at the outset to the parties' desire to establish the Moss business as a ladies' ready-to-wear department in the Fashion Fabrics store. The court said this language was surplusage at best.

We do not agree. Courts must strive to give effect to all the language of a contract. Gendler Stone Products Co. v. Laub, 179 N.W.2d 628, 630 (Iowa 1970). Because an agreement is to be interpreted as a whole, it is assumed in the first instance that no part of it is superfluous; an interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect. Restatement (2d) of Contracts § 229 (Tent. Draft 1-7). Considering the additional language of the sublease, especially that which limits Moss's business hours to Fashion Fabrics' business hours, we do not think the parties' characterization of the Moss operation as a ladies ready-to-wear department of Fashion Fabrics' store can be characterized as surplusage.

We also think the trial court should have considered the extrinsic evidence in order to determine what the parties meant by the language used. See Pappas v. Hauser, 197 N.W.2d 607 (Iowa 1972).

Extrinsic evidence showed Fashion Fabrics had at least tentatively committed itself to rent space in stores of Moss in Burlingame, California, and Reno, Nevada, when the parties negotiated the Dubuque sublease. In the California and Nevada stores the roles were to be reversed, with Moss operating the host stores and Fashion Fabrics operating departments within them. The departments were to operate as concessions of the main store.

A concession lease is based on the principle that the host store generates customer traffic for the smaller enterprise and, in turn, benefits because it receives a rental which at some point increases as gross sales of the concession increase. For the concessionaire to benefit from customer traffic, the businesses must be compatible. The host must attract customers likely to have some interest in what the smaller unit has to sell.

The host store is frequently a general merchandiser, and the concessionaire is often a specialty business. In its purest form...