UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 97-50066
SCOT PROPERTIES LTD,
Plaintiff - Appellant,
VERSUS
WAL-MART STORES INC,
Defendant - Appellee.
Appeal from the United States District Court
For the Western District of Texas
April 3, 1998
Before MAGILL,* SMITH, and DEMOSS, Circuit Judges.
DEMOSS, Circuit Judge:
Wal-Mart Stores, Inc. (“Wal-Mart”) operated a discount retail
store at 9817 Dyer in El Paso, Texas. Wal-Mart acquired the right
to operate the store at that location pursuant to a sublease
obtained from Gibson Distributing Company, Inc., Permian Basin.
Under this sublease agreement and several subsequent amendments to
the agreement, Wal-Mart agreed to pay a base amount of rent
(“minimum rent”) plus a percentage of its gross sales over a
*
Circuit Judge of the Eighth Circuit, sitting by
designation.
specified amount for each year of the sublease (“percentage rent”).
In 1994, Wal-Mart began to construct a new store at 4530
Woodrow Bean - Transmountain Drive, about two miles away from the
store on Dyer. The Dyer store was permanently closed at the end of
the day on August 15, 1995. The new Wal-Mart on Transmountain was
opened on August 16, 1995. Because Wal-Mart no longer operated its
retail business at the Dyer location after opening the
Transmountain store, it produced no further gross sales at the Dyer
premises. Consequently, Wal-Mart continued to pay its minimum rent
under the sublease but ceased paying percentage rent because there
were no gross sales generated at that location.
Scot Properties, Ltd. (“Scot”), the successor to the
sublessor’s interest in the space at 9817 Dyer leased by Wal-Mart,
seeks to recover lost percentage rent under several theories.
First, it claims that Wal-Mart has breached the sublease by
deserting the Dyer premises. The sublease provides that a default
occurs “[i]f the Demised Premises shall be deserted for a period of
over 30 days.” Second, Scot claims that Wal-Mart breached by
failing to continue to pay percentage rent. The sublease provides
that Wal-Mart shall pay minimum rent and percentage rent based on
gross sales, “whether such sales be obtained at the Demised
Premises or elsewhere.” Scot argues that this language covers
gross sales at the Transmountain store, and therefore Wal-Mart
still owes percentage rent. Finally, Scot alleges that Wal-Mart
has violated express and implied covenants in failing to pay
percentage rent based on gross sales at the Transmountain store.
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The “or elsewhere” language referenced above is alleged to create
an express covenant that covers sales at the Transmountain store.
The numerous implied covenants alleged by Scot are all based on the
idea that Wal-Mart was obligated to continue operations that would
generate percentage rent.
Scot and Wal-Mart filed motions for summary judgment in the
district court. Summary judgment was entered in favor of Wal-Mart.
Scot appeals, seeking reversal of the judgment entered by the
district court. Scot requests that we render judgment in its
favor, or, in the alternative, remand the case for trial. We
affirm.
I. Standard of Review
Summary judgment is appropriate when “the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law.” FED. R. CIV. P. 56(c). We
review a grant of summary judgment de novo. See, e.g., Wren v.
Towe, 130 F.3d 1154, 1158 (5th Cir. 1997).
II. Desertion
On August 15, 1995, Wal-Mart conducted its last day of retail
business at the Dyer location. Because Wal-Mart removed its
inventory, signs, and fixtures and boarded up the Dyer location,
Scot contends that Wal-Mart has deserted the premises and is
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therefore in default of its obligations under the sublease.1 Wal-
Mart, on the other hand, argues that it has not deserted the
premises because it continues to be the tenant in occupancy,
retains the keys and controls the space to the exclusion of all
(including the landlord), meets all of the lease obligations
(including payment of minimum rent and whatever percentage rent may
be due), pays utilities and taxes, maintains a security system,
secures and controls access to the premises, and continues to seek
out potential assignees or subtenants for the space.
In construing the unambiguous terms of a contract, we give the
words their ordinary meaning unless other provisions suggest a
contrary meaning. See Southern Life & Health Ins. Co. v. Simon,
416 S.W.2d 793, 795 (Tex. 1967). The term “desert” means “to
withdraw from or leave permanently or less often temporarily (as a
place): QUIT.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH
LANGUAGE UNABRIDGED 610 (1971); see also BLACK’S LAW DICTIONARY 446 (6th
ed. 1990) (“To leave or quit with an intention to cause a permanent
separation; to forsake utterly; to abandon.”). Wal-Mart’s conduct
1
The sublease contains the following provision:
13. DEFAULT CLAUSE
(a) If the Demised Premises shall be deserted
for a period of over 30 days . . . this Sublease,
if the Sublessor so elects, shall thereupon become
null and void, and the Sublessor shall have the
right to reenter or repossess the Demised Premises,
either by force, summary proceedings, surrender or
otherwise, and dispossess and remove therefrom the
Sublessee or other occupants thereof and their
effects, without being liable to any prosecution
therefor. * * *
2 R. 283-84.
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with respect to the leased premises does not constitute desertion.
It is not enough for Scot to simply show that Wal-Mart has removed
its day-to-day business operations from the site. A desertion
implies a complete and permanent separation -- a construction that
is inconsistent with Wal-Mart’s continued maintenance of the
property.
Scot seeks to apply a definition of “deserted” that would make
the term synonymous with “vacated.” Along this line of reasoning,
Scot relies heavily on the case of PRC Kentron, Inc. v. First City
Ctr. Assocs., II, 762 S.W.2d 279 (Tex. App.--Dallas 1988, writ
denied) (Hecht, J.), in which the court held that when a lease
provides for default when the tenant “deserts or vacates,” the
tenant defaults “if it moves out, regardless of how long it is
gone, whether it intends to return, and whether it pays rent in the
meantime.” PRC Kentron, 762 S.W.2d at 283. If that were the
applicable standard in the present case, Scot would have a stronger
argument. On the facts of this case, however, the PRC Kentron case
is easily distinguishable. The lease in that case specified that
the tenant was in default when it “deserts or vacates” the
premises. Here, Wal-Mart was only obligated not to desert. The
court in PRC Kentron expressly acknowledged that “vacate” sets up
a lower standard than “desert.” Id. at 282. It noted that
“desert” contains an element of “intent to forsake” which is more
fully suggested by the term “abandon.” Id. “Vacate” does not
contain that element. See id. Thus, the standard ultimately
applied by the court in PRC Kentron is inapplicable to the present
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dispute because that formulation only tells us whether the tenant
vacated the premises. Scot has the greater burden of demonstrating
desertion, which it has not met.
Sophisticated parties negotiated this sublease with the
assistance of counsel, and we presume that they were fully aware of
the implications of the language chosen to express their agreement.
See Accelerated Christian Educ., Inc. v. Oracle Corp., 925 S.W.2d
66, 74 (Tex. App.--Dallas 1996, no writ) (citing M/S Bremen v.
Zapata Off-Shore Co., 407 U.S. 1, 12, 15 (1972)). As demonstrated
by the discussion in PRC Kentron, a range of vocabulary was
available to the parties to express what conduct was intended to
trigger the default clause. The parties chose the term “deserted,”
which does not describe Wal-Mart’s conduct with respect to the Dyer
premises. We will not ignore the unambiguous terms of the parties’
agreement. We therefore conclude that the district court properly
determined that Wal-Mart did not desert the premises.
III. Percentage Rent
Scot offers two arguments that the express language of the
sublease requires Wal-Mart to pay percentage rent based upon the
gross sales at the Transmountain store. First, Scot argues that
Wal-Mart is in default because it has failed to pay percentage rent
reserved under the sublease for ten days after written notice.
Second, Scot claims that Wal-Mart has violated an express covenant
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to pay percentage rent based on Wal-Mart’s annual gross sales.2
Both of these arguments depend ultimately on Scot’s interpretation
under the sublease of the definition of gross sales.
The sublease provides that “[t]he term ‘Gross Sales’ as used
herein means gross sales of Sublessee, whether such sales be
obtained at the Demised Premises or elsewhere.” Scot asserts that
gross sales obtained at Wal-Mart’s Transmountain store are
2
The relevant sublease provision provides:
3. RENTAL: Sublessee shall pay to Sublessor
as rent for said Demised Premises as follows:
* * *
(b) Percentage Rent:
(1) Beginning with the second (2nd)
Sublease Year and for each successive year during
the sublease term and any extensions, Sublessee
shall pay, in addition to the Minimum Rent,
Percentage Rent according to the following
schedule:
(a) February 1, 1984 through
January 31, 1989 one percent (1%) of
Sublessee’s Gross Sales exceeding
Sixteen Million Dollars
($16,000,000.00);
* * *
(e) February 1, 2004 through
February 5, 2009 one percent (1%) of
Sublessee’s Gross Sales exceeding
Twenty Five Million Dollars
($25,000,000.00);
* * *
(5) The term “Gross Sales” as used
herein means gross sales of Sublessee, whether such
sales be obtained at the Demised Premises or
elsewhere and whether evidenced by check, credit,
charge account, exchange or otherwise, and shall
include, but not be limited to the amounts received
from the sale of goods, wares and merchandise, and
for services performed, together with the amount of
all orders taken, received or filled at the Demised
Premises. * * *
* * *
2 R. 274-77.
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“obtained . . . elsewhere,” and therefore included in the
definition of gross sales for the purposes of calculating the
percentage rent owed under the sublease. In support of this
interpretation, Scot offers the following definition of
“elsewhere”: “in or to another place.” Scot also observes that the
Transmountain store is obviously a replacement for the Dyer store,
as evidenced by the timing of the opening of the Transmountain
store and the closing of the Dyer store, as well as the fact that
Wal-Mart referred to the old Dyer store as “Store 0500” and now
refers to the new Transmountain store as “Store 0500.”
We suspend our disbelief and engage Scot’s argument.
Indubitably, the Transmountain store is not located on the demised
premises, and therefore it is located “elsewhere.” That Scot is
therefore entitled to collect percentage rent from gross sales at
the Transmountain store, however, simply does not follow. This is
so because with such an interpretation the “elsewhere” language
would encompass the new Transmountain store even if the Dyer store
had never closed, and, for that matter, every other Wal-Mart store
in the universe.
In its appellate brief, Scot belittles this reasoning, which
was also employed by the district court:
Imagining that the “elsewhere” language gave Scot a
claim for Percentage Rent on gross sales of every
Walmart store in the country, the district court
spooked itself into disregarding the “elsewhere”
language itself and Scot’s simple and reasonable
claim that Walmart owes Percentage Rent on its
gross sales at the Demised Premises and the
Transmountain Store -- nothing more, nothing less.
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Scot Brief at 16-17 (emphasis in original, record citations
omitted). If the claim is truly “simple and reasonable,” Scot
would have demonstrated how the “elsewhere” of the sublease covers
the gross sales at the Transmountain store, and “nothing more,
nothing less.” They did not. We cannot.
Whatever sales are covered by the reference to “gross sales
. . . obtained . . . elsewhere,” and we decline to pontificate
about the circumstances which would create such a sale, we are
confident that they do not cover Wal-Mart sales made at stores
other than one that may be located at 9817 Dyer in El Paso, Texas.
The lease does not entitle Scot to percentage rent based on gross
sales at Wal-Mart stores in Never-Never Land, Erewhon, or Area 51
-- nor the one at 4530 Woodrow Bean - Transmountain Drive in El
Paso, Texas. In evaluating all parts of the sublease and the
circumstances surrounding the formulation of the sublease, see
Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d
587, 591 (Tex. 1996), we can safely conclude that the sublease was
not intended to bestow upon the sublessor a one-percent cut of Wal-
Mart’s global gross sales. Scot’s expansive definition of gross
sales subject to percentage rent under the sublease is an
unreasonable, and therefore unacceptable interpretation. See id.
We thus conclude that the district court correctly determined that
Scot is not entitled to percentage rent based on sales at the
Transmountain store.
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IV. Implied Covenants
Finally, Scot resorts to arguing that the various agreements
relevant to the sublease created implied covenants which were
breached when Wal-Mart closed its Dyer store and opened its
Transmountain store. Specifically, Scot alleges that the parties
agreed that Wal-Mart’s obligations under the sublease included the
following duties: (a) payment of “percentage rent”; (b) payment of
adequate rent (including “percentage rent”); (c) not diverting
rent, including “percentage rent,” from the landlord; (d) not
diverting sales income from the landlord; (e) occupation, use, and
operation of the “Demised Premises”; and (f) reasonable operation
of its business.3
None of the aforementioned alleged agreements are expressly
set out in the sublease or in any of the subsequent agreements
pertaining to the sublease. Scot is thus in the position of
suggesting that we read implied covenants into the sublease.
Implied covenants are disfavored under Texas law. See Danciger Oil
& Refining Co. v. Powell, 137 Tex. 484, 490, 154 S.W.2d 632, 635
(1941); Nalle v. Taco Bell Corp., 914 S.W.2d 685, 687 (Tex. App.--
Austin 1996, writ denied).
Texas courts have repeatedly refused to imply the sort of
“continuous operations” covenant advocated by Scot. See, e.g.,
Nalle, 914 S.W.2d at 687-88; Weil v. Ann Lewis Shops, Inc., 281
3
Scot also alleged that Wal-Mart is subject to an implied
covenant not to desert the premises. As discussed, supra, Wal-Mart
is expressly prevented from deserting the premises by the terms of
the sublease, and we have concluded that Wal-Mart has not deserted
the premises.
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S.W.2d 651, 656 (Tex. Civ. App.--San Antonio 1955, writ ref’d);4
Palm v. Mortgage Inv. Co., 229 S.W.2d 869, 873-75 (Tex. Civ.
App.--El Paso 1950, writ ref’d n.r.e.). The reasoning applied in
these cases applies to the present case.
First, we reject Scot’s contentions that covenants to actually
pay percentage rent or to pay an “adequate” rent should be implied.
See Nalle, 914 S.W.2d at 688; Weil, 281 S.W.2d at 656. When the
parties negotiated the amount of minimum rent due under the
sublease, they determined the minimally adequate rent. It was
within the contemplation of the parties that Wal-Mart’s gross sales
in any given year might not be sufficient to generate percentage
rent under the sublease. In such a case, the minimum rent is the
sublessor’s protection against receiving an inadequate amount. See
Nalle, 914 S.W.2d at 688; Weil, 281 S.W.2d at 656. This much seems
obvious from the sublease’s use of the term “minimum rent,” which
would be a misnomer if that amount were not actually the minimum
amount of rent that might be due. The sublease is a detailed
agreement negotiated by sophisticated parties with the assistance
of counsel, and we cannot conclude that the new terms suggested by
Scot were contemplated by the parties but inadvertently left out of
the agreement. See Danciger Oil & Refining, 137 Tex. at 490, 154
S.W.2d at 635.
4
Notably, because the Supreme Court of Texas refused the
writ of error in Weil, that decision has the same precedential
authority as an opinion of the Supreme Court. See Hamilton v.
Empire Gas & Fuel Co., 134 Tex. 377, 383-84, 110 S.W.2d 561, 565-66
(1937).
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Second, we reject Scot’s contentions that Wal-Mart was
impliedly obligated to occupy, use, or operate the Dyer premises,
or to reasonably operate its business on the premises. As the Texas
courts have noted, dictating such an implied term is improper if
for no other reason than that it would be impossible to determine
what constitutes reasonable operations or to determine damages for
failure to continuously operate. See Weil, 281 S.W.2d at 656.
Moreover, it bears repeating that when sophisticated parties have
negotiated extensively to produce a well-written and comprehensive
sublease, it takes an exceptional case to imply additional terms in
the agreement. See Danciger Oil & Refining, 137 Tex. at 490, 154
S.W.2d at 635; Nalle, 914 S.W.2d at 688; Weil, 281 S.W.2d at 656;
Palm, 229 S.W.2d at 873-74. This point is especially salient in
this case since Wal-Mart has been held liable for breaching a lease
by ceasing operations when the lease contained a clause obligating
Wal-Mart to “operate its business . . . with due diligence and
efficiency in an effort to produce all of the gross sales which may
be produced by such manner of operation.” United Dominion Realty
Trust, Inc. v. Wal-Mart Stores, Inc., 413 S.E.2d 866, 868 (S.C. Ct.
App. 1992). If the parties agreed that Wal-Mart was obligated to
continuously operate, they knew how to make the sublease reflect
that agreement. They did not do that, and, indeed, it is more
likely that the parties either had no agreement on the subject or
specifically agreed not to include the language. Whatever the
case, Texas courts have not implied continuous operations covenants
in this scenario, and neither will we.
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Implicitly, then, we also conclude that Wal-Mart had no
implied obligation to avoid diverting rent or sales proceeds from
the sublessor. The suggestion that Wal-Mart cannot conduct
activities off the premises that might cause there to be fewer
gross sales at the Dyer location presumes that Wal-Mart has an
obligation to actually conduct business operations and generate
percentage rent. We have concluded that they do not.
In sum, we conclude that the district court correctly declined
to find that Wal-Mart had breached any implied covenants. This
result is consistent with Texas law, which has taken a negative
view of implied covenants, particularly those of the variety
advocated by Scot. As the Supreme Court of Texas has stated, “[i]t
is not enough to say that an implied covenant is necessary in order
to make the contract fair, or that without such a covenant it would
be improvident or unwise, or that the contract would operate
unjustly.” Danciger Oil & Refining, 137 Tex. at 490, 154 S.W.2d at
635. That is all that Scot has done. We, therefore, are powerless
to rewrite the lease to which the negotiating parties freely
agreed.
V. Conclusion
For the aforementioned reasons, we AFFIRM the judgment of the
district court.
AFFIRMED.
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