## Facts

- Landlord-successors owned a shopping center in Harrodsburg, Kentucky and inherited a long-term commercial lease for a 6,300-square-foot drugstore space.
- Tenant-successor held the lease rights for the drugstore space under a lease executed in 1966 with a 15-year initial term and three five-year renewal options.
- The lease required a low fixed base rent ($940.50 per month) plus percentage rent (2% of sales over $564,300, with specified exclusions).
- Historically, percentage rent sometimes exceeded base rent by a large margin, indicating the landlord’s return depended substantially on sales-based overages.
- After the shopping center’s main tenant left, the drugstore’s profits declined; the tenant closed the store but continued paying only base rent.
- The tenant opened another successful drugstore nearby while keeping the leased premises dark.
- The lease imposed strict limits on assignment, subletting, and permitted users, restricting the landlord’s ability to replace the tenant with another drugstore operator.
- The landlord sought to install another drugstore in the space; the tenant refused to relinquish its lease position.

## Issues

1. Whether a percentage-rent commercial lease with below-market base rent and strict use/subletting restrictions includes an implied covenant of continuous operation requiring the tenant to keep the store open.
2. Whether the tenant breached that implied covenant by ceasing operations while continuing to pay only base rent.

## Decision

- The court treated lease interpretation as a question of law on undisputed facts and applied summary-judgment standards.
- The court denied the tenant’s motion for summary judgment.
- The court granted the landlords’ cross-motion for summary judgment on liability, holding the lease included an implied covenant of continuous operation and that the tenant breached it by closing the store and paying only base rent.
- Remaining matters (including damages) were left for further proceedings.

## Legal Principles

- Under Kentucky contract law, implied covenants are disfavored but may be recognized when necessary to effectuate the parties’ manifest intent as shown by the contract’s structure and context.
- A covenant of continuous operation may be implied in a percentage-rent lease where factors show the landlord bargained for ongoing operations to generate overages, including:
  - Base rent substantially below market rent.
  - Percentage rent historically constituting a significant portion of total rent.
  - A long lease term with renewal options.
  - Tight restrictions on assignment, subletting, and permitted use that limit the landlord’s ability to mitigate a dark store.
  - Lease purpose and economic context indicating sales-based rent was central consideration.
- A tenant may not use a low-base/percentage-rent lease and restrictive use provisions to keep premises dark, block competitors, and deprive the landlord of the expected sales-based return.

## Conclusion

The court implied a continuous-operations covenant from the lease’s economic design and restrictions, concluding the tenant could not cease operating while retaining control of the premises and paying only low base rent, and entered summary judgment for the landlords on breach liability.


Lagrew v. Hooks-SupeRx, Inc., 905 F. Supp. 401 (E.D. Ky. 1995)