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

Tom, J.,

dissents in a memorandum as follows: I respectfully dissent and vote to affirm the order of the IAS Court.

The building in issue houses the Bérgdorf Goodman department store, which is designated as 754 Fifth Avenue, New York, New York (the "Premises”). In 1972, the Goodman family sold Bergdorf & Goodman Company to Broadway-Hale Stores, which subsequently changed its name to Carter Hawley Hale Stores, Inc. ("CHH”). In 1979, the real estate and interest in the lease were sold to plaintiff 754 Fifth Avenue Associates (the "Landlord”). In 1987, CHH formed a new company, The Neiman Marcus Group, Inc. ("NMG”), and transferred ownership of both Bergdorf Goodman and Neiman Marcus to that entity, including assignment to NMG of its interest in the lease agreement (the "Lease”) to the Premises.

Under the Lease, NMG is obligated to pay to the Landlord a Minimum Rent and Percentage Rent. The calculation of the Percentage Rent is based on a percentage of "Gross Sales”, which includes sales attributable to Berdorf’s mail and telephone orders.

Prior to NMG’s formation, CHH and the Landlord entered into a document entitled "Lease Restatement” (the "Restatement”) on or about January 26, 1982. Paragraph 6.3 (f) of the Restatement,^* which falls under the heading "Operation; Prohibitions”, provides, in pertinent part, that CHH 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.”

As the result of CHH’s transfer of its interests to NMG, the parties entered into the First Amendment to Lease Restatement (the "First Amendment”), dated December 2, 1987, pursuant to which a new minimum annual rent was imposed, and which provided for Percentage Rent consisting of 4.3% of any gross sales in excess of the gross sales base.

In 1988, NMG desired to open a Bergdorf Goodman Men’s Store across the street from the Premises (at 745 Fifth Avenue). As a result, the Landlord and NMG entered into the "Second Amendment to Lease Agreement”, dated November 15, 1988 (the "Second Amendment”), which provided, inter alia, that NMG had the right to open a "Permitted Satellite Business” dealing in merchandise different than that sold in the original store. Paragraph 13 of the Second Amendment provides:

"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 retain 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 1990, NMG was contemplating the acquisition of Bloomingdales, Saks Fifth Avenue, or both and, although the transaction was never consummated, the parties, in anticipation thereof, entered into the Third Amendment To Lease Restatement (the "Third Amendment”), dated April 30, 1990. The Third Amendment provides, in relevant part: "If Tenant moves its mail /telephone order operations 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), Tenant shall pay to Landlord for each Lease Year.” (Emphasis added.) While the foregoing provision never took effect as the contemplated acquisitions did not take place, nevertheless, this Amendment constituted a valid contract which clearly set forth the parties’ intent.

In 1992, NMG constructed a mail and telephone order facility in Las Colinas, Texas, in order to consolidate the Bergdorf Goodman and Neiman Marcus stores’ mail and telephone sales departments. In July 1993, the mail and telephone receipt and fulfillment operation at the Premises was closed, and the space formerly used by that service is now used for sales space and support, generating revenue which defendant maintains is included in Gross Sales for the purposes of Percentage Rent paid to the Landlord. Defendant, however, has refused plaintiff’s demand that mail/telephone orders for Bergdorf Goodman merchandise generated in Texas be included in Gross Sales.

Landlord, which takes the position that the Texas consolidation constituted a diversion of Bergdorf Goodman business prohibited by the mail order restriction, commenced this action seeking a declaration that NMG’s conduct constitutes a' breach of the Lease or, in the alternative, a declaration that despite the move, the Texas sales should be included in the gross sales. NMG counterclaimed for a declaration that it was not obligated to include the Texas mail and telephone orders in the Percentage Rent and that plaintiff is estopped from claiming a breach of the Lease. Plaintiff moved, and defendant cross-moved, for summary judgment and by decision and order entered on November 4, 1994, the IAS Court dismissed the complaint.

The interpretation of the provisions of a lease requires the application of the same rules of construction as those applied to other agreements (Backer Mgt. Corp. v Acme Quilting Co., 46 NY2d 211, 217; Matter of Wallace v 600 Partners Co., 205 AD2d 202, 205, affd 86 NY2d 543). It is well settled that the courts may not resort to extrinsic evidence where the intent of the parties is clear from the language on the face of the contract (W.W.W. Assocs. v Giancontieri, 77 NY2d 157, 162; Doherty v New York Tel. Co., 202 AD2d 627, 628) and the question of whether or not a writing is ambiguous is a question of law for the court (W. W. W. Assocs. v Giancontieri, supra, at 162; Christian, Podleska, & Van Musschenbroek v Goldman, Sachs & Co., 203 AD2d 9, 10, lv dismissed 85 NY2d 830). When interpreting a writing, the courts should "adopt an interpretation which gives meaning to every provision of a contract” (Muzak Corp. v Hotel Taft Corp., 1 NY2d 42, 46; Two Guys v S.F.R. Realty Assocs., 63 NY2d 396, 403; Trump v Refco Props., 194 AD2d 70, 75, lv denied 83 NY2d 754; American Express Bank v Uniroyal, Inc., 164 AD2d 275, 277, lv denied 77 NY2d 807).

A reading of the Restatement and the three subsequent Lease Amendments shows that the terms contained therein are consistent and clearly reflect the intent of the parties. A review of the mail order restriction contained in section 6.3 (f) of the Second Amendment plainly reveals two components: first, a provision that NMG may not unilaterally establish a mail/telephone operation within the prescribed 100-mile radius; and second, a provision that NMG will not "otherwise” (emphasis added) divert mail/telephone business from the Premises.

The flaw in the Landlord’s argument that the relocation of the mail/telephone operation outside the 100-mile radius is necessarily a diversion of that business is that it would render the first provision meaningless, for if it is a banned "diversion” for any move whatsoever of the mail/telephone operation out of the Premises, then there is no need for a separate provision banning a move within a 100-mile radius.

The language of the Third Amendment further negates the Landlord’s contention that section 6.3 (f) outright prohibits the relocation of the mail/telephone operations from the Premises and that any such move constitutes a diversion of business. The Third Amendment permits NMG to move the mail / telephone order operations from the Premises under certain conditions, and further explicitly provides that this Amendment does not modify the mail/telephone restriction of section 6.3 (f) of the Lease. Ergo, if the Lease is not modified by the Third Amendment allowing a relocation of the operation, then the earlier amendments must be read to allow a move of the mail/telephone aspect of the business.

In addition, it is important to note that the Lease and Amendments were negotiated and drafted by experienced business persons represented by counsel, and in each revision, the two-tiered provision concerning the mail/telephone restrictions was maintained. Since the Lease addresses, in the precise context, diversion and relocation of the mail/telephone business, "the courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include * * * '[S]uch lack of foresight does not create rights or obligations’ ” (Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62, 72). Here, nowhere in the Lease or the Lease Amendments does it provide that the tenant is prohibited from relocating its mail/telephone operations outside the 100-mile radius, but rather, the language of the Amendments is consistent in that it restricts the tenant from establishing such facility within 100 miles from the Premises.

Were it not for the 100-mile restriction, summary judgment might well be inappropriate as a question of fact would exist concerning whether or not the relocation of the mail/telephone operation was a bad faith diversion (see, Tuttle v Grant Co., 6 NY2d 754). However, in my view, the 100-mile provision unequivocally demonstrates that the move in question was not a lease violation, and, other than the move itself, the Landlord provides no proof of bad faith.

Accordingly, I would affirm the decision of the IAS Court granting defendant’s cross-motion for summary judgment dismissing the complaint.

* This subsection was essentially a restatement, with modifications, of paragraph 5.2 (f) of the original lease, which stated that 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.