Walker v. Associated Dry Goods Corp.

Brune, C. J., delivered the opinion of the Court. This case involves the interpretation of a lease of a shopping center and a modification thereof. The lease provides for a fixed rental and for “additional rent” to be paid by the lessee based upon a scale of percentages of “net sales” above a minimum figure. The controversy is whether or not the net sales of the sub-tenants of four shops are to be included in computing the additional rent.

The Chancellor held that they were not, and the lessors appeal. Negotiations extended over several years prior to the execution of the original lease (referred to below as “the lease”), ¹⁷⁰ which is dated December 1, 1952. The lessor, called “Landlord” in the lease, was Drumcastle, Inc., a corporation of which Amelia H. Walker, Talbott H. Walker, M. Cooper Walker and Katherine W. W. Sanger were the only stockholders. On December 2, 1952, Drumcastle, Inc., assigned its interest in the lease in equal shares to its four stockholders as individuals.

Talbott H. Walker died in April, 1957. The First National Bank of Baltimore and Nicholas G. Penniman, III, qualified as executors and are now trustees under his will, and as such they now hold a one-fourth undivided interest in the lease. (The assignees of the lease, including since the death of Talbott H. Walker the above-named trustees, are sometimes collectively referred to below as “the Walkers.”) The original lessee, called “Tenant” in the lease, was Associated Dry Goods Corporation (“Associated”), which operates a division in the Baltimore area known as “Stewart & Co.” The particular store here involved is located on the east side of the York Road in Baltimore County, but the entire shopping area tract consists of about 9.3 acres, of which roughly 7.2 acres are in Baltimore County and 2.1 in Baltimore City. Other agreements having some bearing on the controversy include: an agreement dated September 24, 1953, between the Walkers and Associated as parties of the first part and a group of neighborhood or improvement associations, incorporating as a part thereof a revised site plat attached thereto; and an agreement modifying the lease, dated April 13, 1954, between the Walkers, Associated and Stewart & Co. Limited.

(There was a further modification of provisions of the lease with regard to a restaurant and other property retained by the Walkers on which there was a restaurant, but it has no direct relevance here.) The appellee also offered in evidence two other documents which were admitted over the objection of the appellants. The first of these was a letter dated April 17, 1952, from Mr. Lewis P. Seiler, then President of Stewart & Co., to Mr. James W. Rouse, of Moss-Rouse Company, real estate agents for the Walkers. This letter outlined proposed terms of a lease. The second was a letter in reply, dated April 21, 1952, from Mr. Rouse to Mr. Seiler, agreeing to some of the suggested terms and proposing changes with regard to others. ¹⁷¹ The lease as finally drafted is a rather elaborate document covering twenty-four pages in the printed record extract.

It is divided into twenty-two Articles, each with its own heading, and some Articles contain several Sections. Each Section is numbered first, according to the Article in which it is contained, and then serially according to its position in that Article, the first Section in each Article being designated as “.01”, the second as “.02”, and so on. Section 1.01, inter alia, describes the demised premises, Section 2.01 fixes the term of the lease as 32 years and 2 months, Section 15.01 provides for 6 renewal periods of 10 years each, and Article Sixteen deals with the tenant’s option to purchase, which is exercisable on specified notice prior to the expiration of the original term or of any renewal term. Article Three is entitled “Construction of Store Building.” Section 3.01 provides in part: “The Tenant agrees to construct upon the leased premises * * * a building (hereinafter called the store building) suitable for use for the sale of goods, wares and merchandise at retail, which shall contain not less than 66,000 square feet of selling area.” Then follow provisions as to how selling area is to be determined.

Section 3.02 provided that this building be completed by April 1, 1955. The building went into operation on February 8, 1955. Article Four deals with rent. Section 4.01 establishes fixed rentals for certain periods, and there is no controversy with regard thereto.

Section 4.02 provides for the payment of “additional annual rent” measured by the amount, if any, by which a percentage rental computed on a basis therein stated exceeds the fixed rental for the same period. The basis is 5/10ths of 1% on the first $6,000,000 of annual net sales, 4/10ths of 1% on the next $1,000,000 of such sales, 3/10ths of 1% on the next $1,000,000 and 2/10ths of 1% on all annual net sales in excess of $8,000,000. Section 4.03 first provides that “[f]or the purposes of calculating percentage rental the term ‘annual net sales’ shall mean gross sales included in ‘gross sales,’ as hereinafter provided, less ¹⁷² discounts, returns and allowed claims.” It then provides, inter alia: (a) that “[sjales made by the Tenant at or from the leased premises shall be included in ‘gross sales;’” (b) that “[sjales made by persons other than the Tenant at or from buildings other than the store building erected as provided in ARTICLE THREE hereof shall not be included in ‘gross sales;’ ” (c) that “[rjetail sales made at or from the said store building by any person or corporation whatever shall be included in ‘gross sales,’ ” subject, however, to the proviso that if, after the “store building” shall have been completed, it is later expanded by adding additional selling area, sales made by any person other than the Tenant in or from such additional selling area shall be excluded from “gross sales;” (d) that sales by any person other than the Tenant from a retail establishment partly within the “store building” as completed in accordance with Article Three and partly within an “additional selling area” or another building on the leased premises shall be prorated according to the respective areas; and (e) that all sales made by an affiliate of the Tenant or by any subtenant or licensee whose operations are conducted as a part of the Tenant’s retail business shall be treated as sales made by the Tenant. Article Five is entitled “Tenant’s Operation of Store Building.” Section 5.01 required the Tenant to operate a retail business in the “store building” for seven and a half years after its completion.

During that period it forbade the Tenant’s reducing the selling area devoted to such operations below 66,000 square feet and the Tenant’s “by voluntary action substituí [ing] any other person or corporation as the occupant or tenant of the said building or as the operator of the retail business to be conducted therein * * The latter prohibition was not to apply to concessions or to licenses to others to conduct departments operated as part of the Tenant’s retail business. Section 5.02 authorizes the Tenant after the 7]7> year period to restrict or discontinue its retail operations and to sublet to others all or any part of the “store building.” Section 5.03 gives the Landlord an option, subject to certain conditions, to require the Tenant to purchase the leased property if it reduces or discontinues operations pursuant to Section 5.02. ¹⁷³ Under Article VI, entitled “Alterations, Improvements and New Construction”, the Tenant has the right to erect or to permit others to erect other buildings on the leased premises, and no additional “fixed rent” or “additional annual rent” is payable in respect thereof. The Tenant also has the right to make alterations, changes or improvements in or to the “store building” and other buildings; and “except as provided in Section 5.01 * * * may demolish all or any part of any such building.” Article Seventeen is entitled “Assignment, Mortgage and Sub-Leases.” Section 17.01 permits the Landlord tOi convey and otherwise dispose of the demised premises and its interests under the lease at any time. This power was exercised the day after the lease was executed by its assignment of the lease to Drumcastle’s stockholders.

Section 17.03 authorized the Tenant to “sublet the premises or any part thereof, subject only to its obligation to construct a retail store with not less than 66,000 square feet of selling space, as set forth in ARTICLE THREE hereof and to operate said store as set forth in ARTICLE FIVE hereof.” The next document in point of time is the agreement of September 24, 1953, between the Walkers, Associated, and several neighborhood or improvement associations revising the general shopping center plan previously agreed upon between the Walkers and the associations. It is relevant to the present controversy only because of the plat attached thereto. This plat shows two separate proposed structures. The northern structure is shown as containing a large area marked “Stewart’s” and, at its southern end, a group of three stores designated as “A Shops.” (The fourth shop involved in this controversy is not shown on this plat and was apparently added to the plan at some later stage prior to the completion of the original building.) The southern structure, as shown on this plat, contains what are designated as “B Shops” (rather vaguely delineated) and “C Store.” Each of the two principal structures is outlined by a relatively heavy black line.

The “A Shops” are marked off by light interior lines; and the same is true as to the “B Shops” and the “C Store” in the southern structure. ¹⁷⁴ The agreement dated April 13, 1954, between the Walkers, Associated, and Stewart & Co. Limited (called the “Realty Company”) amends the lease. This agreement recites, inter alia: (a) the assignment of the lease by Drumcastle, Inc., to the Walkers (called in this agreement the “Owners”); (b) the desire of Associated to assign its rights under the lease to its wholly owned subsidiary, the Realty Company, so that the latter “may erect and finance the building or buildings to be erected on the leased premises in accordance with the terms of [the1] lease;” (c) that “the Realty Company proposes to sublease the premises to Associated for purposes of operation;” and (d) that “Associated and the Realty Company have requested the Owners to consent to the assignment of said lease and the sublease to Associated.” By the first three operative provisions of the agreement, (1) Associated agreed to assign its interest under the lease to the Realty Company; (2) the Realty Company agreed to sublease the premises to Associated for purposes of operation; and (3) Associated agreed “that it will not be relieved of any of its obligations under [the] lease by reason of its assignment thereof to Realty Company.” The fourth operative provision reads as follows: “4. The parties hereto agree that wherever in said lease operation of a store building by the Tenant is referred to, such reference shall be taken to mean operation by Associated whether as tenant or subtenant, and that the percentage rental provided for by Article Four of said lease shall be based upon the sales of Associated whether as tenant or subtenant of said premises.” Under the fifth operative clause it was agreed that any options granted to the Tenant under the lease might be exercised “either by the Realty Company as Tenant or by Associated either as tenant or subtenant.” Finally, by the sixth operative clause, the Walkers consented to the assignment of the lease by Associated to the Realty Company and to the sublease by the Realty Company to Associated “on the terms and conditions hereinbefore set forth.” ¹⁷⁵ At the trial the appellants presented the testimony of an architect who had been employed in the construction of the shopping center to the effect that the northern structure constituted only one building. He testified that the “A Shops” were separated from the Stewart’s area and from each other by cinder block partition walls one story high, which were not weight-bearing walls, that though these stores had separate heating, ventilating and air-conditioning controls, the heating and air-conditioning and the sprinklers therein were all parts of central systems serving the entire structure,