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11/15/88 Michigan Avenue National v. Evans

November 15, 1988






531 N.E.2d 872, 176 Ill. App. 3d 1047, 126 Ill. Dec. 245 1988.IL.1649

Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.


JUSTICE EGAN delivered the opinion of the court. SCARIANO, J., concurs. JUSTICE BILANDIC, Dissenting.


The plaintiffs filed a declaratory judgment action against the defendant, Evans, Incorporated, for construction of a lease executed in 1978 on a store located in the City of Chicago (the Store). In substance, the plaintiffs-lessors claimed that the lease provided that the defendant-lessee was to pay rent based, in part, on a percentage of gross sales which were to include wholesale sales. Those sales, the plaintiffs claimed, included ones where delivery was made not only at the Store but ones where delivery took place elsewhere. The plaintiffs also claimed that gross sales were to include layaway charges, credit and finance charges and insurance renewals which were attributable to stores other than the Store. The complaint sought an accounting of all sums received by the defendant for wholesale sales and the other charges for a period beginning with the inception of the 1978 lease.

The defendant's answer contended that the rent based on percentage was restricted to retail sales. In the alternative, the defendant counterclaimed for reformation of the lease.

The trial court entered judgment for the plaintiffs on one of the five counts of its complaint and judgment for the defendant on three of them. One count had been withdrawn by the plaintiffs during the trial. The court ruled that the percentage rent was to include wholesale sales but restricted the accounting of those sales to a period of two years before the suit was filed. It denied the defendant's counterclaim for reformation. The court allowed the plaintiffs attorney fees and other costs and denied attorney fees to the defendant for its successful defense on three of the counts. The court denied the plaintiffs' claim concerning layaway charges, credit and finance charges and insurance renewals.

The defendant appeals from the judgment in favor of the plaintiffs on the rent, from the judgment against it on its counterclaim for reformation and on its denial of attorney fees. The plaintiffs cross-appeal from the order limiting their damage award to a period of two years, from the order denying them prejudgment interest from the date when percentage rent was "due" and from the order reducing their claim for attorney and accountant fees and denying their claim for paralegal fees. They do not appeal from the order denying their claim as to other charges.

The parties entered into a 15-year lease in 1962 under which the defendant rented the first five floors of the Store. The term was August 1, 1964, to July 31, 1979. The first four floors were used for retail sales while the fifth contained offices. The 1962 lease (Primary Lease) required the defendant to pay, in addition to a fixed amount, a percentage of the gross sales "made in, at or from" the demised premises.

The lease also provided that the store was to be used for the "manufacturing, remodeling, storing, cleaning, sale and display of women's and misses' wearing apparel and women's and misses' wearing apparel accessories of every character and description and for the performance of incidental and related services." It added that, since the rental payable was in part based upon the volume of gross sales, the defendant would at all times conduct the premises as "primarily a store for the sale at retail of women's and misses' wearing apparel."

When the defendant needed more space in the building, it entered into additional leases for a particular area in the building. Those leases were called side or supplemental leases. Some of those leases were expressly for uses like display, storage of office supplies, photography, a computer room, storage of furs, executive offices, personnel and general offices. The rest of those leases provided that their purpose was the same as the purpose of the Primary Lease. Almost all of those leases were made subject to all of the terms of the Primary Lease.

In January 1977, the parties began negotiations for a new lease in anticipation of the July 31, 1979, expiration of the 1962 Primary Lease. The negotiations continued over a period of several months, producing several letters and drafts before the final agreement was executed on March 7, 1978. The lease included all of the demised premises which had previously been covered by 16 leases.

In 1979 or 1980 the defendant began selling furs to institutional or wholesale customers at markups of 20% to 25%. By fiscal year 1984 such sales had grown to about $4 million per year.

After the new lease had been in effect for several years, the plaintiffs' accounting firm examined the defendant's books and discovered that the defendant was making wholesale shipments from the Store but was not including them in the gross sales statements it was required to furnish. The plaintiffs notified the defendant of their claim, and the defendant responded, as it does here, that "gross sales" did not include furs sold at wholesale and shipped from the Store for delivery elsewhere. After a trial, the court held that they did.

We will first address the defendant's argument that the trial court's holding that the sales were made "in, at or from" the premises was clearly erroneous.

At the outset it is appropriate to respond to the defendant's arguments that the lease did not permit a wholesale operation, that by its terms the defendant was restricted to retail sales and that the nature of percentage rent contemplates a retail operation where customers come to the store to make purchases. All those arguments we reject. The lease itself states that the premises shall be used "primarily," not exclusively, as a retail store. Moreover, the lease expressly excludes from gross sales "[merchandise] sold at not more than gross cost to other retailers . . . or to wholesalers." Those sales meet the definition of "wholesale sales." (Stolze Lumber Co. v. Stratton (1944), 386 Ill. 334, 342, 54 N.E.2d 554.) It necessarily follows that the parties recognized that the defendant might engage in wholesale sales, and if the sale was for more than gross cost, it would be subject to the percentage rental provision, assuming it was made "in, at or from" the premises. We have found no testimony in the record concerning such sales, but in oral argument the attorney for the defendant informed us that in practice the provision covered overstocked and damaged goods. Regardless of how the defendant had restricted its operation, the fact remains that it did participate in wholesale sales on the premises.

The defendant has also cited a law review article written by Denz, Lease Provisions Designed to Meet Changing Economic Conditions, 1952 U. Ill. L.F. 344, in support of its argument that, in construing the lease, a court should remember that this lease was not designed for wholesale purposes but, like its predecessor, "required" a retail operation.

First, we repeat that we cannot say that the leases "required" a retail operation. Second, the article does not purport to be an expression of the law. It is designed to be a practical guide to drafters of leases. It contains not a single case citation. Moreover, the article does not contain any pronouncement that wholesale sales may never be included in percentage leases. Instead, it simply says that percentage leases are "not adapted . . . to most wholesale businesses." (Emphasis added.) See Denz, 1952 U. Ill. L.F. at 352.

Finally, the defendant's contention that the lease was meant to include only those transactions in which customers would come to the Store is rebutted by the fact that although the original and supplementary leases did not provide for mail-order sales, the defendant used the premises for mail-order sales for almost 15 years, implicitly recognizing that such sales were included in gross sales. This evidence is probative, since the court may consider the conduct of the parties indicating the construction of the agreement adopted by them. (Cedar Park Cemetery Association, Inc. v. Village of Calumet Park (1947), 398 Ill. 324, 75 N.E.2d 874.) The final lease provided expressly that mail-order sales were included in gross sales.

The wholesale operation began in 1979 or 1980. It was based on long-term contracts with institutional customers, requiring the customer to purchase a guaranteed amount of merchandise each year. Two locations were involved; one in New York City and the other at the Store. Customers could view a line of furs as presented in showrooms at the New York facility, at which wholesale buyers could meet with the defendant's representatives and have orders written up after making the selection.

At the same time the defendant established a wholesale division at the 13th floor of the Store. The furs for wholesale sales were kept in storage principally on the 13th floor. The long-term contracts were drafted and executed by the defendant's corporate counsel in offices at the Store. Customers did not execute those contracts at the Store but at some other location, such as their own stores. There was no showroom facility at the Store. Many of the customers selected the merchandise after viewing it in New York. Others made their selections from photographs or prior knowledge of the merchandise. About half of all such sales, imported furs, were shipped from the Store; the other half, domestic furs, were shipped from New York. The contract provided that title passed FOB when the goods were delivered to the carrier for shipment and that the defendant bore the risk of loss while the merchandise was on the dock prior to the carrier taking possession.

The New York facility employed 25 persons, 3 of whom worked part time on wholesale sales. The Chicago store had three full-time employees working on wholesale sales under the supervision of a wholesale manager who procured wholesale accounts and maintained existing ones. He identified several wholesale orders addressed to "Evans Wholesale Division" at 36 South State Street. An invoice was introduced in evidence which had printed on it "Evans Wholesale Division 36 South State Street." Whenever the Chicago office received a copy of an order, it sent the original to the New York office. Both New York and Chicago offices received copies of all the purchase orders. The personnel at the Store processed orders and verified that they were shipped as ordered.

The wholesale agreements provided for a twice-yearly caravan to be held at the Store. A caravan is a special promotion, and the defendant agreed to provide the furs. The customers would usually call the wholesale manager at the Store to tell him what goods they wanted delivered for those sales. The customers would often call the manager directly when they wanted to order imported furs. When a customer called with an order, the manager made a copy and shipped the order to New York, although the merchandise would be shipped from Chicago. The Store had in-stock merchandise that it could use to fill an order immediately. The 13th-floor vault was used as a warehouse for wholesale furs. Credit approval was made, and payments were received, at the Store.

It thus appears that with respect to furs shipped from the Store, New York's only function was to receive copies of the orders that were to be filled and to provide a facility for selection by some, but not all, purchasers. As between Chicago and New York, contrary to the defendant's argument, the evidence is overwhelming that Chicago was the dominant location for the sales in question.

Since the lease does not define the term "sale," it will be assumed that the word is intended to be used in its usual meaning. (32 Ill. L. & Prac. Sales § 2 (1957).) A "sale" consists in the passing of title from the seller to the buyer for a price. (Ill. Rev. Stat. 1985, ch. 26, par. 2-106(1); Burrus v. Itek Corp. (1977), 46 Ill. App. 3d 350, 354, 360 N.E.2d 1168.) Under the wholesale sale contract, the passing of title occurred when the goods were delivered to the carrier. Therefore, since the sale consists of passing of title, and title passed at the point of delivery to the carrier, the wholesale sales delivered to the carrier in Chicago occurred in Chicago, not New York, whether or not the purchase orders were "accepted" in New York, as the defendant urges.

The defendant's argument ignores the fact that the defendant's wholesale manager testified that it had no control where the wholesale accounts sent their purchase orders. In any event, a large number of orders were received in Chicago and the merchandise was then shipped ...

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