Speakman, J.c.c. (temporarily assigned).
This case requires the determination of the following questions: (1) under the lease between the parties whereby the defendant-tenant conducts a retail store in the premises located in Montclair and which provides that part of the rent is computed on the basis of a percentage of the defendant's sales, is there an implied covenant which prevents the defendant from transferring merchandise and departments from the store in the leased premises to a new store erected by the defendant directly across the street; (2) may the defendant assign the lease or sublet the premises without the consent of the landlord; and (3) are certain mentioned items "fixtures" or "improvements" within the meaning of paragraph NINTH of the lease which provides that the "tenant will expend for fixtures and/or improvements" an amount fixed by a formula set forth therein? After a brief statement of the facts giving rise to these questions they will be disposed of in the order mentioned.
Plaintiff, a New Jersey corporation, is the owner of property at No. 50 Church Street, Montclair, New Jersey, in the heart of the Montclair retail shopping area, on which is erected a building of which defendant occupies the first floor and about 3,000 feet of the basement. The offices on the second floor are occupied by other tenants under leases providing for fixed rentals, but which are not involved here.
Defendant Hahne & Company, a New Jersey Corporation, operates its principal place of business at No. 615 Broad Street, Newark, New Jersey, where a general department store is conducted. Since the institution of this suit Hahne's has been absorbed by its parent corporation, Associated Dry Goods Corporation, a corporation of Virginia, which has been added as a party defendant. Unless otherwise specified, reference to "defendant" will be understood as defendant, Hahne & Company.
Defendant has conducted a retail mercantile store in the leased portion of the building since 1937, when it was originally constructed, beginning originally with a junior miss shop and adding and removing various categories of merchandise over the years. As of February 21, 1951 it was selling in the store ladies' coats, dresses, suits, skirts and other outer and undergarments; children's clothing in junior and infant's sizes, children's shoes; toiletries and miscellaneous items of apparel, and some accessories.
Defendant's occupancy of the Montclair property has been under a series of agreements with Robertshaw Realty Co., then owner, dated May 7, 1937, June 14, 1937, May 11, 1939, January 31, 1942 and March 28, 1946, respectively, the latter being currently effective. The Robertshaw Realty Co. sold the building, subject to defendant's lease, to 4602 Realty Co. by deed dated June 20, 1946. That grantee, on July 15, 1946, executed a mortgage to Phoenix Mutual Life Insurance Company, as well as an assignment of lessor's interest in defendant's lease as additional security. The 4602 Realty Co. then transferred title, subject to the lease, by deed dated July 15, 1946, to Louis Ritter who thereafter sold the property to the plaintiff by bargain and sale deed dated September 6, 1946.
The term of the 1946 lease commenced April 1, 1946 and ended July 31, 1952, with two renewal options of five years each. These options were not to be exercised later than February 1, 1952 and February 1, 1957, respectively. The first option had not been exercised at the time of the filing of the complaint on January 5, 1951. However, that option
had been exercised at the time the pretrial order was filed, June 23, 1952.
The 1946 lease contains the usual provisions setting forth a description of the demised premises, the term of the lease, the amount and manner in which the rent is to be paid, and various covenants as to encumbrances, taxes, sidewalks, heat, municipal ordinances, liability for acts of tenant, waste, repairs, judgments, right of entry, etc. The lease, however, is silent as to the manner in which the business is to be operated, except for the habendum clause which provides "for the use and occupation of the demised premises by the tenant for retail mercantile purposes."
The rental provided for in the 1937 and 1939 leases was "4% of the net sales of the tenant on said premises," with a minimum annual rental of $8,400. This rent scale remained the same until the 1942 lease, when it was reduced to 4% of the net sales up to $334,882 and 2% of the sales in excess of that sum, with the same minimum rental of $8,400 per year, payable in equal monthly installments of $700. The additional rent, over and above the $8,400 was payable on December 1 of each year. The rental under the 1946 lease is the same as that provided in the 1942 lease.
At the time the rent was reduced in 1942 a new clause required the tenant to expend a sum equivalent to the amount of the reduction (2% of sales in excess of $334,882) for "fixtures and/or improvements within the demised premises." This same provision appears in the NINTH paragraph of the 1946 lease. The defendant claims credit for expenditures under this clause amounting to $10,004.63 for the year ending October 31, 1947, $19,228.17 for the year ending October 31, 1948, and $7,081.35 for the year ending October 31, 1949; while plaintiff asserts defendant is only entitled to credit for those years as follows: 1947 -- $3,518.74, 1948 -- $4,044.40 and 1949 -- $451.64.
Under plaintiff's operation of the store the dollar volume of sales rose from $206,157 in 1938, when the minimum rental of $8,400 was paid, to a high of $941,003.28 in 1948,
when a rental of $25,517.71 was paid. Thereafter the rental and sales decreased as set forth in the following schedule:
For the lease year ending:
October 31, 1949 $24,987.04 on sales of $914,470.24
October 31, 1950 24,938.47 on sales of 912,041.86
October 31, 1951 17,812.05 on sales of 555,720.74
October 31, 1952 (estimated) 14,097.64 on sales of 370,000.00
Hahne Realty Co., a company affiliated with the defendant, acquired title to lands at the southwest corner of Park and Church Streets, Montclair, opposite the defendant's store located in plaintiff's building, by deed recorded May 29, 1946. An announcement of that purchase and of the defendant's proposal to construct a two-story department store building for its own use was published in the Newark Evening News of May 29, 1946, and in the Montclair Times of June 6, 1946. By the pretrial order, the parties agreed that some time in 1947 plaintiff's agent and attorney, Mr. Markowitz, had actual knowledge of the defendant's intention to build, and received a notice of an application for a zoning variance for that purpose early in 1948. The notice of the board meeting was served on plaintiff on March 8, 1948.
Markowitz stated that some time in 1948 he asked Mr. Squire, defendant's vice president, about the defendant's new building but did not receive an answer. In January 1949 visible work began on this building in the form of test borings. In May 1949 the drilling of the first of two wells was begun. In June 1949 demolition of the existing structure was commenced. Excavation for the new building began in September 1949 and construction progressed regularly thereafter. Some time between the later part of 1949 and the early months of 1950 Squire informed Markowitz that he did not think that defendant would operate both stores. However, a letter of July 31, 1950, written by defendant's president, Mr. Buck, to plaintiff stated that the term of the lease ran until July 31, 1952 and that there were still two five-year renewal options. He informed Markowitz in the summer of 1950 that no conclusion had been reached by the defendant as to the proposed use to
which the new building would be put. At the conference of September 14, 1950 Buck affirmatively stated that the defendant intended to occupy the premises. The new building was completed in 1951 and the new store opened for business on February 20, 1951.
Mr. Architect, plaintiff's vice-president, informed defendant on October 20, 1950 and again on November 10, 1950 that plaintiff would hold the defendant responsible for any depreciation in the rental-income resulting from the promotion of business in, or the removal of departments from the leased premises to, the new store.
The defendant decided sometime between November 1, 1950 and January 14, 1951 to continue the old store under the name "Hahne's Budget Shop," and to modify the price range of the merchandise sold there to provide a greater assortment and a larger selection. Pursuant to this plan the departments were remobilized so that the new store now carries the toiletries and children's shoe departments and the higher-priced ladies' and children's apparel, and the "Budget Shop" now carries lower-priced ladies' and children's apparel. In addition, there have been established in the new store new departments, such as furniture, draperies, curtains, rugs, carpets, lamps, gifts, linens, blankets, and men's clothing and furnishings.
The defendant's new store was constructed in accordance with the latest standards of department store design. Its modern furnishings, fixtures and equipment are calculated to attract the shopper and its departments are arranged so that the shopper may wander through them with ease and convenience. These ...