## Facts

- In 1965, College Block (landlord) leased an undeveloped parcel to Atlantic Richfield Company (ARCO) for a 20-year term.
- The lease required ARCO to build and operate a gasoline service station on the property and allowed ARCO to construct and replace buildings used for station operations.
- The permitted use was limited to a service station.
- ARCO agreed to pay applicable taxes on the property.
- College Block agreed not to operate a gasoline station on other property it owned or controlled that would compete with the leased station.
- The lease permitted ARCO to cancel if it could not obtain necessary governmental permits.
- Rent was based on a percentage of gasoline delivered, with a minimum rent of $1,000 per month regardless of gallons delivered.
- ARCO built the station and operated it for about 17 years.
- On January 1, 1983—39 months before lease expiration—ARCO closed the station but continued paying the $1,000 monthly minimum through the end of the term.
- College Block sued for additional rent, claiming the lease included an implied covenant requiring ARCO to keep operating so College Block could receive percentage rent.
- After College Block presented its case, the record contained no evidence showing whether, at lease formation, the parties viewed the $1,000 minimum as a “substantial” minimum rent.
- Before ARCO presented evidence, the trial court ruled as a matter of law that the lease contained an implied covenant requiring ARCO to operate a gasoline station for the entire 20-year term.
- Based on that ruling, the parties stipulated that if the station had operated, College Block would have received about $3,250 per month; judgment was entered for College Block on that basis.

## Issues

1. When, if ever, may a court imply a covenant of continued operation in a commercial percentage-rent lease that also provides a stated minimum rent?
2. Did the trial court err by ruling, as a matter of law and before ARCO presented evidence, that the lease contained an implied covenant requiring operation for the full lease term?

## Decision

- The Court of Appeal reversed the judgment and remanded for further proceedings.
- The court held the trial court acted too soon by implying a continued-operation covenant as a matter of law on an incomplete factual record.
- The court stated that, although the lease structure and surrounding provisions supported an expectation of ongoing service-station operation, the covenant could not be imposed without further fact finding—particularly on whether the minimum rent was “substantial” at the time of contracting.

## Legal Principles

- Implied covenants are not favored; they must arise from the lease language and a showing of legal necessity, not from a court’s preference for a better deal for one party.
- In percentage-rent leases, a court may imply a duty to operate in good faith (which can include continued operation) when the lessor’s expected return depends materially on percentage rent rather than on a protective minimum rent.
- A stated minimum rent can defeat implication of a continued-operation covenant if the minimum rent is substantial enough that the lessor receives an adequate return even without percentage rent.
- Whether minimum rent is “substantial” is a fact-dependent question that turns on the parties’ bargain and circumstances at the time the lease was made; it is not automatically resolved by the dollar amount alone.
- A trial court should not impose a continued-operation covenant as a matter of law where the record lacks evidence on material formation-time facts and the tenant has not had a chance to present its case.

## Conclusion

Because the lease did not expressly require continuous operation and the trial record lacked evidence on whether the $1,000 minimum rent was substantial when agreed to, the Court of Appeal reversed the judgment that had imposed a continued-operation covenant as a matter of law and remanded for further proceedings to develop and resolve the necessary factual questions.


College Block v. Atl. Richfield Co., 206 Cal. App. 3d 1376, 254 Cal. Rptr. 179 (Cal. Ct. App. 1988)