754 Fifth Avenue Associates, L. P. v. Neiman Marcus Group, Inc.

—Order, Supreme Court, New York County (Ira Gammerman, J.), entered November 4, 1994, which denied plaintiff’s motion for summary judgment and to strike defense affidavits, and granted defendant’s motion for summary judgment dismissing the complaint and for declaratory judgment on its counterclaims, and order, same court and Justice, entered December 5, 1995, which denied plaintiff’s motion for renewal, modified, on the law, to deny defendant’s motion for summary judgment, and otherwise affirmed, without costs.

Plaintiff is the landlord of premises located at 754 Fifth Avenue, the site of the Bergdorf Goodman department store. The premises are leased to defendant, the parent corporation of Bergdorf Goodman and the Neiman Marcus department stores. According to the lease, the annual rent for the premises, above and beyond a fixed amount, is based in part on a percentage of "Gross Sales,” which, as defined in the lease, include sales from Bergdorf Goodman’s mail and telephone order operations conducted at the same premises. The original parties to the lease were the company that owned the store (Goodman family members) and a holding corporation that was controlled by the same family. Plaintiff purchased the premises and interest in the lease in 1979.

In 1972, when Bergdorf Goodman was sold to the company that later created defendant corporation, there was a lease "restatement” that, insofar as is relevant, in section 5.2 (f), "Operation; Prohibitions,” provided that the tenant could not "without Landlord’s consent, establish mail order, telephone order, or other like facilities, within 100 miles of the Demised Premises except if located at the Demised Premises or any other store operated by Tenant nor otherwise divert mail or telephone order sales from the Demised Premises.”

The lease was thereafter amended on three occasions; each time there was an increase in the fixed rent as well as changes in the language of this particular provision. In 1982, it was amended to provide that the tenant could not "without Landlord’s prior written consent, establish mail order, telephone order, or other like facilities, within one hundred (100) miles of the Demised Premises except if located (i) at the Demised Premises, or (ii) in any other store operated by Tenant or a corporation, partnership or other entity wholly owned by Tenant, nor otherwise divert mail or telephone order sales from the Demised Premises.”

This section, now numbered 6.3 (f), was further amended in 1987, when Bergdorf Goodman opened a Men’s Store directly across the street at 745 Fifth Avenue, to read as follows:

"13. Sections 6.3 (e) and 6.3 (f) of the Lease are hereby deleted in their entirety and replaced by the following:

"(e) [tenant shall] not operate, nor will any Affiliate of Tenant operate, any other retail establishment in the Borough of Manhattan, New York City, selling merchandise of substantially the same type as is sold at the Demised Premises or the 745 Premises, except for a retail establishment that is a Permitted Satellite Business or that complies in all respects with Section 6.7;

"(f) [tenant shall] not, without Landlord’s prior written consent, establish mail order, telephone order, or other like facilities, within one hundred (100) miles of the Demised Premises except if located (i) at the Demised Premises or the 745 Premises, (ii) at a Permitted Satellite Business, or (iii) in any other store operated by Tenant or a corporation, partnership or other entity wholly owned by Tenant, nor otherwise divert mail or telephone order sales from the Demised Premises or the 745 Premises or any Permitted Satellite Business.”

In 1992, defendant built a mail and telephone order facility in Texas and, in 1993, moved all mail and telephone order operations of the Neiman Marcus stores to that site, as well as the mail and telephone order operations of Bergdorf Goodman. Having centralized all such operations at the new Texas facility, defendant thereafter refused to include any of the sales from the Texas operations in calculating the percentage rent for the Bergdorf Goodman store.

At issue is whether the establishment of the Texas facility breaches the disputed provision of the lease. Plaintiffs position is that relocation is the ultimate "diversion” of business, while defendant maintains that relocation, at least beyond 100 miles, is not prohibited by the lease.

Both parties moved for summary judgment; defendant also moved for declaratory judgment to the effect that it is not obligated to include in its rent payments a percentage of the sales generated from the Texas facility. Although the parties apparently agreed that these motions could be determined solely upon the lease itself, each thereafter submitted or incorporated by reference matters outside that document (and each disputes that it violated the stipulation).

The IAS Court granted summary judgment to defendant, finding that the language of the lease did not prohibit defendant from establishing the Texas facility and moving all Bergdorf Goodman mail and telephone order operations to that site. The court also found that defendant was not obligated to include in its Bergdorf Goodman rent a percentage of the Texas facility’s telephone and mail order sales. To construe the lease otherwise, the court found, would be to render the 100-mile clause meaningless. Such interpretation is, of course, to be avoided if possible (see, Matter of Trump [Refco Props.], 194 AD2d 70, 75, lv denied 83 NY2d 754). The court rejected plaintiff’s construction of the relevant provision of the contract as imposing a total restriction on relocation of the telephone and mail order operations; such construction created an inherent contradiction in the very terms of the lease, which set forth specific and limited circumstances under which defendant was so restricted.

We find to the contrary that the court’s construction (whether or not it considered any "extrinsic evidence,” as defendant alleges) would render the critical language of the disputed provision ("nor otherwise divert”) meaningless. That being said, examination of the lease alone leaves several unanswered questions, among them whether this final clause totally bars relocating the mail order business or only bars relocation to the extent that business is actually diverted from the store; whether, at the very least, defendant acted in good faith in relocating, an element of particular significance in percentage leases (see, Daitch Crystal Dairies v Neisloss, 8 AD2d 965, affd 8 NY2d 723), and an issue that cannot be resolved on summary judgment (see, Tuttle v Grant Co., 6 NY2d 754); and whether, even if relocation did not breach the lease, under the "Gross Sales” definition, some percentage of the Texas facility’s sales must be included in the rent calculation for the premises in question because there is still sufficient nexus between the sole existing Bergdorf Goodman store and the telephone and mail orders for its merchandise (see, Mutual Life Ins. Co. v Tailored Woman, 309 NY 248). Accordingly, we find that summary judgment, while properly denied to plaintiff, should have been denied to defendant as well.

The IAS Court also seemed to consider issues such as whether the percentage rent based on the mail and telephone order operations was an integral part of defendant’s lease obligation, a factual question beyond the parameter of a summary judgment motion. In addition, the court pointed to the third amendment to the lease — an amendment that never took effect — for further proof that the parties believed relocation was not prohibited by the disputed provision. Plaintiff cites this amendment to support the opposite conclusion.

The third amendment was executed in 1990 in anticipation of defendant’s acquisition of Bloomingdale’s and/or Saks Fifth Avenue. It was to take effect only upon the acquisition, which in fact never transpired, and addressed various ramifications of such acquisition. Specifically, insofar as relevant, the parties were forced to contemplate that, with defendant operating local stores in direct competition with Bergdorf Goodman, it was possible that defendant might consider relocating Bergdorf Goodman’s mail and telephone order operations. The third amendment thus provided that if such a step were taken after the acquisition (if defendant moved the mail and telephone orders from the Demised Premises "[it being understood that the provisions of Section 6.3 (f) of the Lease shall not be modified by this sentence]”), then defendant would pay a "Mail Order Substitute Payment,” a complicated formula based on numerous factors, in each subsequent year.

We cannot conclude that examining how the parties addressed the wide-range consequences of acquiring competing stores (which would threaten Bergdorf Goodman’s "Gross Sales” on many fronts, not just its mail and telephone order business) dispels the ambiguities of the parties’ original understanding. It is unclear whether the relocation contemplated in this last amendment was within or beyond the 100-mile range (or whether it mattered). One could even argue that this last amendment simply represented the "Landlord’s prior written consent” required by section 6.3 (f) for such a step, and the terms attendant upon that consent, rather than proof that relocation does not constitute diversion. Indeed, as plaintiff argues, if relocation outside the 100-mile area had always been an option, there would be little incentive, for defendant to agree to a substitute payment. In the same vein, one wonders why defendant, having agreed to the third amendment, would believe it was free to relocate to Texas without a similar "substitute” payment agreement.

Finally, we note that the cases cited by both sides involve construction of percentage rent leases where there is no provision for contingencies such as moving from the leased premises (Tuttle v Grant Co., supra), securing other space in addition to the leased premises (Mutual Life Ins. Co. v Tailored Woman, supra), or assignability of the lease (Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62). In contrast, the parties here endeavored to cover various contingencies as circumstances evolved, as demonstrated by the three amendments. However, they did not do so with sufficient clarity such that the lease in and of itself resolves the present dispute over a particular and unanticipated development. Accordingly, summary judgment was unwarranted.

Concur — Milonas, J. P., Ellerin, Rubin and Nardelli, JJ.