Summary
holding that an agreement is not a lease of personal property and thus can include an automatic renewal provision
Summary of this case from Deutsch v. Health Ins. Plan of Greater New YorkOpinion
Argued October 13, 1960
Decided November 30, 1960
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, FRED G. MORITT, J.
Jesse B. Hecht for appellant. Aaron D. Bernstein and Charles E. Bernstein for respondent.
In September of 1955, the defendant Caliguira, operating a pizzeria and restaurant in Brooklyn, entered into a written contract with the plaintiff Feder providing for the installation in his premises of an automatic coin-operated phonograph, a juke box, "for the duration of [the] agreement and any renewal term thereof". The agreement provided for the parties to share the gross proceeds of the machine's operation, placing the proprietor under no financial burden, his only obligation being to keep the juke box connected to an electric outlet on the premises, "in readiness for operation during all business hours" and "to furnish the necessary electric current for * * * [its] operation".
Specifically, it was stipulated that Feder was to receive the first $20 realized each week from the machine; Caliguira was to receive the next $20 up to $40 and, of sums over $40, each was to share "50/50".
The contract was for a period of three years, it being recited, however, that it "shall renew itself automatically for like periods, at the same terms and conditions, unless either party gives to the other written notice of its intention to cancel said agreement, by registered mail, at least thirty days prior to the expiration of this agreement or any renewal period thereof." The three-year term expired on September 10, 1958. Neither party gave notice of termination and, when Caliguira "ordered" Feder to remove the machine from his store unless he paid him a $500 bonus, the latter instituted this suit in the Municipal Court for damages for breach of contract, on the theory that the agreement had been automatically renewed for another three years.
The defendant interposed a general denial and then moved for summary judgment. It was his position that section 399 of the General Business Law rendered the automatic renewal provision of his contract with the plaintiff inoperative because the notice required by the statute, calling the "lessee's" attention to the existence of that provision, was not given and that, therefore, his contract terminated upon the expiration of the initial three-year period, on September 10, 1958. The plaintiff having made a cross motion for summary judgment, the Municipal Court granted the plaintiff's motion and denied the defendant's. Appeals followed to the Appellate Term and the Appellate Division; the Appellate Term reversed both orders, granting the defendant's motion for summary judgment and denying the plaintiff's, but the Appellate Division modified the Appellate Term's order to the extent of denying summary judgment to the defendant. Stated more simply, the Appellate Division decided that neither party was entitled to summary judgment and that there should be a trial. The defendant alone sought leave to appeal and, in granting his application, the Appellate Division certified for our consideration the question whether section 399 of the General Business Law is applicable to the agreement between the parties.
Section 399 reads: "No provision of a lease of any personal property which states that the term thereof shall be deemed renewed for a specified additional period unless the lessee gives notice to the lessor of his intention to release the property at the expiration of such term, shall be operative unless the lessor, at least fifteen days and not more than thirty days previous to the time specified for the furnishing of such notice to him, shall give to the lessee written notice, served personally or by mail, calling the attention of the lessee to the existence of such provision in the lease."
The answer to this question depends, of course, upon whether that agreement may be deemed a "lease" of personal property within the compass of section 399. We agree with the Appellate Division that it may not be so regarded. There are signposts here clearly indicating that the word "lease" as used in the statute was intended to denote solely and exclusively the usual and ordinary lease arrangement whereby one party gives up his control and possession of property to another in return for the latter's undertaking to pay rent for its use.
As to the meaning of the word "lease", it is of some consequence that, when the Legislature enacted section 399, the decided cases — dealing, of course, with different issues — were to the effect that agreements somewhat similar to the one before us, involving coin-operated washing machines, may not be considered or treated as leases. (Cf. Wash-O-Matic Laundry Co. v. 621 Lefferts Ave. Corp., 191 Misc. 884; Halpern v. Silver, 187 Misc. 1023; Kaypar Corp. v. Fosterport Realty Corp., 1 Misc.2d 469, affd. 272 App. Div. 878; Muller v. Concourse Investors, 201 Misc. 340.) It is a fair deduction that the Legislature did not intend a meaning for the term "lease" in section 399 different from that already given it by the courts. (McKinney's Cons. Laws of N.Y., Book 1, Statutes, § 75; see, also, People v. Richards, 108 N.Y. 137, 146-147; Matter of Arundel Corp. [ Corsi], 273 App. Div. 399, 405.)
It is the transfer of absolute control and possession of property at an agreed rental which differentiates a lease from other arrangements dealing with property rights. The mere fact that the agreement before us twice refers to the defendant as "lessee" does not, of course, transform it into a lease. (See, e.g., Matter of New York World-Tel. Corp. v. McGoldrick, 298 N.Y. 11, 18; Reynolds v. Van Beuren, 155 N.Y. 120, 123.) As this court said in the World-Telegram case (298 N.Y., at p. 18), "we must look to the rights it [the agreement] confers and the obligations it imposes" in order to determine the true nature of the transaction and the relationship of the parties.
Looking to the actual terms of the agreement in this case, it is plain that it is not a lease. Of high significance is the fact that the defendant proprietor pays no rent for the juke box, but rather shares in the gross receipts earned by the plaintiff company from its use. Were this a lease of the machine, the defendant would be required to pay rent for its use instead of deriving profit therefrom. The very fact that he shares with the owner of the juke box in the latter's receipts demonstrates that he is being paid by the owner for allowing him to place it in his store and negates the possibility that the juke box is being leased by the plaintiff to the defendant. In short, what serves to differentiate the agreement before us from a lease is not, as suggested, that percentage payments are involved — for, of course, rent may be based on a percentage of a tenant's gross receipts — but that no rent obligation whatsoever is imposed on the defendant. Indeed, in the present case, the defendant, who claims to be a lessee, is actually sharing in the receipts realized by the "lessor" from the latter's own machine!
The possibility that the agreement reflects a lease transaction is also negated by other terms contained in it. The contract provides that "the automatic coin operated phonograph and the contents thereof, are and shall continue to be the sole property of the Company" and that the "Proprietor agrees to keep the [machine] connected to an electric outlet in his premises and in readiness for operation during all business hours". The proprietor himself is given neither the use of the machine, the right to control its use nor any other form of dominion over it. A lease of property in which the lessee has no right either to use the property or to control its use is an unheard of legal conception.
It is clear, then, that the agreement between these parties is not a "lease" within any ordinary or usual sense of the term. It is equally plain that the automatic renewal provisions of the agreement are not anything like those which stimulated the Legislature to enact section 399. The evil aimed at was the infliction of continuing and, at times, heavy financial burdens upon unwary businessmen by means of automatic renewal clauses. (See Memorandum of Assemblyman Savarese, the bill's sponsor, N Y Legis. Annual, 1953, pp. 61-62; see, also, Peerless Towel Supply Co. v. Triton Press, 3 A.D.2d 249.) The situation which the Legislature must have had in mind was the typical lease of personal property, in which the owner of the articles transfers their use and possession in return for a stipulated rental that the lessee is under a continuing obligation to pay. (See, e.g., Peerless Towel Supply Co. v. Triton Press, 3 A.D.2d 249, supra.) The Legislature was concerned with the unfairness of binding the lessee to a "renewed" term and forcing him to pay the rental for such renewed term even though he may not have known about the automatic renewal clause or may have forgotten about it.
The agreement here under consideration imposes no such onerous financial burden or obligation upon the defendant. The plain fact is that he made no promise to pay any rental or any other sum and this factor alone differentiates the "lease" covered by section 399 from the business arrangement before us. (See, also, N Y Legis. Annual, 1953, supra, p. 62, in which Assemblyman Savarese instances a water cooler rented to a business office.) He and the plaintiff simply agreed to divide the gross proceeds between them and, if the juke box earned nothing, the defendant was under no duty to pay anything. True, as the defendant notes, he had to provide space for the machine and pay for the electric current used when it was in operation. But the imposition of such a minimal obligation, if it be an obligation at all, during the renewal term was not the evil which our law-making body sought to eliminate by enacting section 399 of the General Business Law.
The order of the Appellate Division denying the defendant summary judgment should be affirmed, with costs, and the certified question answered in the negative.
We dissent and vote to reverse. In our opinion, the agreement before us is tantamount to a lease of the juke box and comes within the scope of section 399 of the General Business Law. In the first place, the parties themselves unquestionably considered their relationship as one of lessor-lessee, since the agreement twice refers to defendant as the "lessee". Although we recognize that this fact does not automatically make the agreement a lease ( Matter of New York World-Tel. Corp. v. McGoldrick, 298 N.Y. 11, 18), the construction placed upon the language by the parties themselves is a consideration of great importance ( Insurance Co. v. Dutcher, 95 U.S. 269, 273; Woolsey v. Funke, 121 N.Y. 87, 92; 2 New York Law of Contracts, § 804). We "have no right, under the guise of construction, to excise from the * * * agreement the rights and obligations of the parties as defined by them, nor may we add thereto ( Friedman v. Handelman, 300 N.Y. 188, 194)." ( Delancey Kosher Restaurant Caterers Corp. v. Gluckstern, 305 N.Y. 250, 257.)
Here, the parties interpreted their own relationship, thus evidencing to us their intention and expressing their intention by what they wrote ( Raleigh Associates v. Henry, 302 N.Y. 467, 473). Moreover, the word "lessee", as expressly used in the contract when referring to defendant, was twice inserted in handwriting in the original agreement. Even though it were assumed that there is some doubt or uncertainty as to the printed portion, it is well settled that that which is written should control the interpretation of the instrument ( Heyn v. New York Life Ins. Co., 192 N.Y. 1, 6).
Secondly, an essential element of a lease is the transfer of control and possession of property real or personal at an agreed rental. Percentage rentals are extremely common today and are used for a variety of purposes (see Tuttle v. W.T. Grant Co., 6 N.Y.2d 754; Mutual Life Ins. Co. of N.Y. v. Tailored Woman, 309 N.Y. 248; McMichael O'Keefe, Leases, Percentage, Short and Long Term). Whether the percentage rental is based on the income from the use of real estate or personal property, it is nevertheless deemed rental. Here, defendant was required to pay the first $20 income from the juke box weekly plus a percentage of the remainder; but that was not all. Just as the lessee of real estate may be required to pay, in addition to a percentage rental, interest on mortgages, taxes and assessments and other charges as part of the total rental, so here defendant was required under the agreement to assume many other obligations.
These obligations, by no means inconsiderable, translated in value to the plaintiff, and equivalent to additional rental, at the tenant's direct cost, are as follows:
(1) to provide space for the juke box, a sizable instrument, for which space defendant had to pay rent;
(2) to pay for the electric current;
(3) to maintain the juke box in readiness for operation during all business hours;
(4) defendant was not permitted to install any other phonograph or device for the transmission of music in any part of the premises during the term of the agreement;
(5) he was also bound to arrange for assumption of the agreement by any purchaser of the business, which might well affect the selling price and, should he fail to procure such assumption, he would be in breach and liable for damages.
In Melodies, Inc., v. Mirabile ( 4 Misc.2d 1062, mod. 7 A.D.2d 783) defendant was held liable for substantial damages as a result of a breach of a four-year contract, said breach consisting of his sale of the business without securing the assumption of a similar agreement by the vendee.
These obligations are substantial considerations furnished by the defendant for the benefit of the plaintiff, so that the latter may receive his share in the nature of a percentage rental, and all taken together constitute the aggregate rental. The purpose of the statute is to protect a person such as defendant here from continuing responsible under these obligations involving payments of money and otherwise as hereinbefore mentioned.
Moreover, the nature of the arrangement entered into by the parties in the instant case, together with the language employed by them in describing their relationship, leaves no room for doubt that it is the type of "business contract" at which section 399 of the General Business Law was aimed. So Assemblyman Savarese, the sponsor of the statute in effect stated: "This bill seeks to protect all businessmen from fast talking sales organizations armed with booby traps which they plant in business contracts involving equipment rentals * * *. Undoubtedly, many unsuspecting small businessmen are taken in by such evil practices which — taken collectively — are costing those who cannot afford it many thousands of dollars yearly. The automatic renewal clause was eliminated from landlord leases (see Real Property Law, § 230). It should be outlawed in business contracts, too." (N.Y. Legis. Annual, 1953, pp. 61-62; emphasis supplied.) Since the section is remedial in nature, designed to protect the unwary, its construction should be liberal and "nice distinctions as to whether this is a `service' should not derogate from the fact that there was sufficient in the nature of the arrangement and the words of the agreement to bring these cases within the scope of section 399." ( Peerless Towel Supply Co. v. Triton Press, 3 A.D.2d 249, 251.)
In Melodies, Inc., v. La Pierre ( 4 A.D.2d 982), a case also involving an automatic music service contract, the court stated that section 399 "may properly be held applicable to a service contract of [this] type". However, since the automatic renewal clause became operative prior to the effective date of the statute, it could not there be given effect.
It is not correct to say that defendant has neither the use nor the right to control the use of the juke box nor any other form of dominion over it. Who else would use the juke box but he and his customers, and their use is his use. Moreover, by the express terms of the contract, he is required to maintain the juke box in readiness for operation during all business hours and to furnish it with electric current. Furthermore, plaintiff agreed "to supply records and replace parts that have been damaged as a result of ordinary wear and tear without any cost to the" defendant, thus clearly implying that defendant would be responsible for any other damage, since the machine was in his custody and control.
Finally, the cases cited in the forepart of the prevailing opinion are in nowise apt. They deal with entirely different issues, as that opinion concedes. The question involved in those cases was whether a lease of real property was created, and has no reference to situations embraced within what is now section 399 of the General Business Law. The issue of automatic renewal was in nowise involved. In the recommendation made by the sponsor of section 399, there was not the slightest reference to these cases. As already noted, the statute was aimed at "business contracts" costing those who cannot afford it — "taken collectively" — many thousands of dollars yearly. There is no suggestion that a particular individual must suffer a heavy financial burden.
Accordingly, the order of the Appellate Division denying defendant's motion for summary judgment should be reversed, the motion should be granted, and the certified question answered in the affirmative, with costs.
Chief Judge DESMOND and Judges DYE, BURKE and FOSTER concur with Judge FULD; Judge FROESSEL dissents in an opinion in which Judge VAN VOORHIS concurs.
Order affirmed, etc.