Rowe v. Great Atlantic & Pac. Tea Co., Inc.

• Decision Date: 06 December 1978
• Citation: 46 N.Y.2d 62,412 N.Y.S.2d 827,385 N.E.2d 566
• Parties: , 385 N.E.2d 566 Robert L. ROWE, Respondent, v. GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 827

412 N.Y.S.2d 827

46 N.Y.2d 62, 385 N.E.2d 566

Robert L. ROWE, Respondent, v. GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., et al., Appellants.

Court of Appeals of New York.

Dec. 6, 1978.

Alan M. Gelb, Donald S. Snider, James E. Merriman and Philip S. Kaufman, New York City, for Great Atlantic & Pacific Tea Company, Inc., appellant

Thomas P. Dougherty, Baldwin, and Edward S. St. John, New York City, for The Southland Corp., appellant.

Abraham D. Sofaer, New York City, for respondent.

OPINION OF THE COURT

GABRIELLI, Judge.

We are called upon to determine whether a certain real property lease agreement contains an implied covenant limiting the lessee's power to assign the lease. The property subject to the lease is located in Sag Harbor, New York. In 1964, petitioner, Robert Rowe, an experienced attorney and businessman and the owner of the land involved herein, leased the property to respondent Great Atlantic & Pacific Tea Co. (A&P) for use as a "general merchandise business". The agreement required Rowe to erect a building on the property, and provided for a yearly rental of $14,000 for a 10-year term. It also granted A&P options to renew for two additional seven-year periods, at a slightly lower rental. The lease contained no restrictions on assignment of the lease by A&P. Rowe constructed the building as agreed, and A&P took possession and utilized the premises for a supermarket.

Some years later, both parties sought to renegotiate the agreement. Rowe desired a higher rental because of increases in taxes and other expenses, while A&P wished to have the building enlarged. Following protracted negotiations, a new lease was executed in 1971, in which it was provided that Rowe would expand the building by an additional 6,313 square feet, and that the base rental would be increased to $34,420 per year. This figure was reached by estimating the cost to Rowe of the improvements to the building and then computing a rate of return agreed to by the parties and adding that to the old rental. The new lease was for a period of 15 years, and provided A&P with the option to renew for three additional seven-year periods at the same rental. In addition to the base rental, the new lease provided that Rowe was to receive 1 1/2% Of the store's annual gross receipts in excess of $2,294,666 and less than $5,000,000. In other words, unless gross receipts reached the $2,294,666 mark, the percentage clause would be inoperable. There was no warranty, stipulation or promise by A&P that sales would climb to the minimum necessary to trigger the percentage clause. The lease contained no restriction on the lessee's right to assign the lease. Nor did it make any reference to assignability other than providing that the lease would bind the heirs and assigns of the parties.

Unfortunately for all concerned, the new store did not fare as well as had been hoped. Indeed, A&P entered into a period of retrenchment in which it decided to close several of its less profitable stores, and the Sag Harbor store was one of those selected. Following months of discussion with Rowe and others, and over Rowe's objections, A&P in 1975 shut down its operation in Sag Harbor and assigned the lease of the premises to respondent Southland Corp., which operates a chain of supermarkets under the name Gristede Brothers. Rowe then commenced this proceeding seeking to recover possession of the premises as well as money damages. His claim is premised on the theory that A&P breached an implied covenant against assignment without consent of the lessor.

Following a nonjury trial, Supreme Court dismissed the petition on the merits, concluding that in the absence of bad faith, which was not shown, A&P had the unqualified right to assign the lease since there existed no provision limiting that right. With respect to Rowe's claim that the lease contained an implied covenant limiting A&P's right to assign, the court concluded that he had not met his burden of proof on this issue in that he had failed to prove that no reasonable landlord would have entered into this lease without an implicit understanding that the lessee could not freely assign the lease. The court reasoned that in order to show the existence of such an implicit covenant, the lessor would first be required to prove that without the percentage rent clause, which was the only factor indicating that there might actually exist such an implied agreement, the lease would have been unconscionable.

Petitioner appealed and the Appellate Division reversed, stating that the trial court had placed too heavy a burden upon petitioner. Noting that the courts will find the existence of an implied covenant limiting the right to assign if the lease is such that the landlord entered into it in reliance upon the special ability or characteristics of the lessee, the court reasoned that the existence of a percentage clause in a lease is a strong indication of such reliance. Although the existence of a base rental in addition to the percentage rental would be some evidence to the contrary, the Appellate Division concluded that in this case that was not true because in the court's judgment the base rental was not substantial. Accordingly, the Appellate Division reversed Supreme Court and ruled in favor of petitioner. We cannot agree with that determination.

A lease agreement, like any other contract, essentially involves a bargained-for exchange between the parties. Absent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party. It is, of course, far too late in the day to seriously suggest that the law has not made substantial inroads into such freedom of private contracts. There exists an unavoidable tension between the concept of freedom to contract, which has long been basic to our socioeconomic system, and the equally fundamental belief that an enlightened society must to some extent protect its members from the potentially harsh effects of an unchecked free market system. Thus, rightly or wrongly, society has chosen to intervene in various ways in the dealings between private parties. This intervention is perhaps best exemplified by statutes mandating the express or implicit inclusion of certain substantive or procedural provisions in various types of contracts (e. g., Insurance Law, § 167; Real Property Law, §§ 226-b, 234, 235-b). It is also illustrated by judicial decisions to the effect that there exists in every contract certain implied-by-law covenants, such as the promise to act with good faith in the course of performance (e. g., Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 166). In a similar vein, the law has developed the concept of unconscionability so as to prevent the unjust enforcement of onerous contractual terms which one party is able to impose under the other because of a significant disparity in bargaining power (e. g., Uniform Commercial Code, § 2-302). Despite all this, there yet remains substantial room for bargaining by the parties.

Contrary to petitioner's contentions, this appeal does not implicate any of the methods utilized by society to police both the substance of contracts and the process of contracting. There has been no violation of law or of public policy, nor does it appear that A&P acted in bad faith. Moreover, the status of the parties to this contract is not such that the doctrine of unconscionability would normally be applicable even if there were any indications that the contract was unusually one-sided. Finally, we are not here confronted with a situation in which a party seeks to apply a covenant which must be implied by law in a particular contract. Rather, it is petitioner's claim that the parties in fact impliedly did agree that A&P could not assign the lease without Rowe's permission, and simply neglected, for one reason or another, to verbalize that understanding and to incorporate it into their written contract.

That a particular provision has not been expressly...