## Facts

- Goldberg 168-05 Corp. (Goldberg) leased commercial property to Joseph Levy (Levy) for use as a clothing store.
- The lease required Levy to pay a fixed minimum rent plus additional rent calculated as a percentage of the store’s gross sales.
- The lease also included a clause allowing Levy to cancel the lease if the store’s gross sales fell below a stated minimum amount.
- Levy gave notice that he was terminating the lease based on the low-sales cancellation clause.
- Levy then vacated the premises and refused to pay further rent.
- Goldberg sued Levy for breach of contract, alleging Levy caused the sales shortfall by running the business in bad faith—negligently or willfully mismanaging the store and intentionally diverting sales to another nearby store he operated—so that sales would drop below the cancellation threshold.
- Levy moved to dismiss the complaint for failure to state a cause of action.

## Issues

1. Whether a landlord states a claim for breach of a percentage-rent lease when it alleges the tenant intentionally or willfully caused gross sales to fall below the contract’s cancellation threshold in order to terminate the lease.

## Decision

- The court denied Levy’s motion to dismiss.
- The court held that, even though the lease allowed cancellation upon low sales, the tenant could not rely on that condition if the tenant brought about the sales decline through bad-faith conduct aimed at triggering the cancellation right.
- The court treated the landlord’s allegations of intentional diversion of business and deliberate mismanagement as sufficient at the pleading stage to state a claim for relief.

## Legal Principles

- Every contract includes an implied covenant of good faith and fair dealing that limits how a party may exercise contractual discretion or conditional rights.
- Under the prevention doctrine, a party may not take advantage of a condition precedent (or condition allowing termination) when that party’s wrongful conduct caused the condition to occur or fail.
- In a percentage-rent lease, where the landlord’s return is tied to the tenant’s sales performance, the tenant must operate the business in good faith and may not deliberately reduce or divert sales to avoid paying percentage rent or to manufacture a basis for cancellation.
- On a motion to dismiss, allegations that the tenant intentionally engineered the low-sales condition are enough to proceed to proof; the tenant’s state of mind and business conduct are not resolved on the pleadings.

## Conclusion

Goldberg stated a viable breach-of-contract claim by alleging that Levy intentionally diverted and mismanaged the clothing business to force gross sales below the lease’s cancellation threshold, because the tenant could not in good faith create the very condition used to justify terminating a percentage-rent lease; therefore, the court denied Levy’s motion to dismiss.


Goldberg 168-05 Corp. v. Levy, 170 Misc. 292 (1938)