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Case Briefs

Howard K. Jeruchimowitz
Greenberg Traurig LLP
Chicago, IL

ASSIGNMENT AND CONTINUING LEASE OBLIGATIONS

The United States District Court for the Eastern District of Louisiana found that disputed issues of material fact existed as to whether Best Buy breached the lease by failing to provide notice of the ultimate assignment of the lease, failing to use reasonable efforts to find a subtenant or assignee to continue to operate the leased premises, purportedly selling the building as part of the assignment, and failing to provide notice for insurance requirements. Bayou Liberty Property, LLC v. Best Buy Stores, LP, Civil Action No. 14-1112, 2014 WL 6774197 (E.D. La. Dec. 2, 2014).

Best Buy Stores, LP, and its parent company, Best Buy Co. (collectively, "Best Buy") and its landlord, Bayou Liberty Property, LLC ("Bayou"), were parties to a breach of contract action arising out of a ground lease for real property located in Louisiana. At issue, Best Buy had a right to assign its lease, but only with prior notice to the landlord; the assignee agreed in writing to be bound by the terms of the lease; and Best Buy agreed to remain liable for full performance of all the terms, covenants and conditions of the lease. Best Buy did assign its leasehold interest to Slidell Development Company ("SDC") under an assignment agreement ("SDC Agreement"), and then SDC assigned the interest to Levis Partners, LLC ("Levis"). Bayou filed suit against Best Buy for declaratory judgment and breach of contract for (1) failing to provide Bayou with prior written notice of the assignment of the lease; (2) failing to have the assignee execute a specific assumption of the entire lease; (3) failing to use reasonable efforts to find a subtenant or assignee to continue to operate the leased premises; (4) purportedly selling the building when Best Buy had no legal interest in immovable property belonging to Bayou; and (5) failing to maintain insurance coverage. Bayou also sought money damages, including for lost rental opportunities, in the amount of $1,549,602.

Best Buy filed a counterclaim for declaratory relief, breach of contract and deceptive practices for failing to provide Best Buy with a timely estoppel certificate. Best Buy also filed a third-party complaint against Levis for declaratory judgment and breach of contract, claiming that Levis was in breach of the assignment from SDC and, therefore, the cause of any purported breach by Best Buy. Levis counterclaimed, seeking a declaration that Best Buy had breached its obligations and return of $1,654,000 paid into escrow.

Based on the language of the SDC Agreement, the district court granted summary judgment for Best Buy on the issue of notice of the SDC assignment, finding that the language in the SDC Agreement was an agreement to assign at a future date and not a present assignment of the lease. Assignment to SDC did occur at a later date, and prior written notice of the assignment was given before the transfer date. Even though the assignment to SDC was proper, the district court found that, based on the assignment, there were disputed issues of material fact as to whether (1) there was a sale of the building under the SDC Agreement in contravention to the terms of the Lease; (2) Best Buy adhered to the insurance notification provisions; and (3) because the assignment did not require SDC or Levis to operate the premises, Best Buy used "reasonable efforts" under the lease to find a subtenant or assignee to operate the leased premises. As to the ultimate assignment to Levis, although there was notice when the assignment to SDC occurred, the district court found that there was no prior notice of the Levis assignment required under the lease.

As to Best Buy’s claims against Bayou for failing to provide a timely estoppel certificate, the district court refused to enter summary judgment without Best Buy also establishing that Bayou’s breach resulted in damages. The district court granted Levis’ summary judgment for all claims asserted by Best Buy and release of the escrowed funds paid by Levis.

OWNER LIABILITY FOR INJURY

The Superior Court of Pennsylvania overruled the trial court regarding the owner’s potential for injury at the shopping center caused by a sidewalk defect, finding that the sidewalk defect was not trivial. Reinoso v. Heritage Warminster SPE LLC, No, 3714 EDA 2012, 2015 WL 161934 (Pa. Super. Jan. 14, 2015).

As a result of a fall outside a Kohl’s, located in a shopping center, Guadalupe and Edmundo Reinoso sued Heritage Warminster SPE LLC ("Heritage")—the owner of the center—for failing to maintain the defective sidewalk outside of Kohl’s department store. The plaintiff’s engineer/architect expert measured the site and found 5/8 of an inch height differential in the section of the sidewalk where the fall occurred. The trial court granted Heritage’s summary judgment motion, agreeing that the sidewalk defect was de minimis, stating: "The landowner is not required to maintain the sidewalk to perfection, but only to the extent that unreasonably unsafe conditions are removed."

The plaintiffs appealed and, at first, a divided panel affirmed the trial court’s grant of summary judgment. The case proceeded before the full appellate court en banc. First, the court recognized that Heritage owed a duty to the plaintiffs as business invitees. Second, the court disagreed with the court’s finding that the sidewalk defect was trivial. The court did agree with the trial court that there was no issue of material fact regarding the height difference between the sections of the sidewalk. The trial court, however, did not consider additional facts, including that the defect in the sidewalk was "seriously in excess of ¼ inch standard for a tripping danger and constituted a walkway safety hazard." The surrounding circumstances included: (1) the height differential between the sidewalk panels; (2) the heightened duty to an individual as an invitee; (3) expert testimony indicating that the height differential exceeds safety standards; and (4) testimony from the owner of the company charged with maintenance of the sidewalk that he considered the defect to be a tripping hazard and had reported it to the landowner.

There is a dissenting opinion, wherein the judge decided that he did not believe the trial court committed an error in granting summary judgment, by determining the 5/8-inch misalignment between sidewalk sections was, as a matter of law, a trivial defect.

SHOPPING CENTER DEVELOPMENT—DAMAGES FOR INJUNCTION

A landlord was entitled to terminate its lease with the tenant of an undeveloped shopping center, but was not entitled to liability on a bond once the injunction was dissolved for lost development opportunities. Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC, 2015 WL 140029 (Cal. App. Jan. 12, 2015) (discussing Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC, 185 Cal. App. 4th 1050 (2010)).

This case started almost eight years ago when the tenant, Thrifty Payless, Inc. ("Thrifty"), doing business as Rite Aid, brought an action for anticipatory breach of the lease against its landlord, Mariners Mile Gateway, LLC ("Mariners"), because of problems that arose with the development of the shopping center. Thrifty obtained a preliminary injunction, preventing Mariners from (1) leasing all or part of the leased property to any entity other than Rite Aid during the course of the litigation, or (2) developing, improving, altering or constructing the leased property in any way inconsistent or not in accordance with the lease. As a result of the injunction, Rite Aid was required to post a $5 million bond. The shopping center was never built; Mariners exercised the cancellation provision and notified Rite Aid it was terminating the lease. The trial court, as later affirmed by the court of appeal, found that the landlord validly exercised its termination right, which allowed it to terminate for any reason.

As a result of the decision, the court dissolved the injunction in 2008. In September 2011, Mariners attempted to collect on the full $5 million bond, arguing that if the injunction had not been in place, it would have begun developing a smaller version of the shopping center and would have obtained financing. The trial court denied Mariners’ request to collect on the bond, finding: (1) Mariners failed to prove that the injunction barred it from proceeding with planning and other pre-development steps for the shopping center; (2) the injunction was not so restrictive because it only prevented Mariners from developing the property previously leased to Rite Aid in a manner inconsistent with the lease between Mariners and Rite Aid; (3) the new site plans were not inconsistent with the lease because they did not change the size or location of the leased property, but rather only made design changes, including eliminating a traffic signal and underground parking, and reducing the overall size of the shopping center; and (4) the evidence demonstrated that Mariners did not submit site plans or obtain financing for reasons unrelated to the injunction. As part of the claim for damages resulting from the injunction, Mariners claimed that it lost profits; however, the trial court found that the claim was speculative and could not be the basis for collecting on the bond.

Based on the language in the injunction and Mariners’ conduct after the injunction was issued, the court of appeal affirmed, stating: "[W]e reject Mariners’ claim it was prevented from taking any steps whatsoever to proceed with a new development plan. All it was enjoined from was altering the approximately 13,000 square foot premises leased to Rite Aid." The court of appeal also affirmed that the trial court had substantial evidence to establish that the injunction did not prevent Mariners from obtaining leases, financing or entitlements; Mariners did try to obtain other leases, and external market factors caused Mariners not to obtain entitlements or financing. As to lost profits, because the injunction was not the proximate cause of any damages, the court of appeal did not address Mariners’ claim. Finally, Mariners argued—for the first time— that it was entitled to interest and carrying costs while the injunction was in effect. The court denied that claim for the same reason— i.e., the injunction did not prohibit Mariners from proceeding with the development of the shopping center.

Howard K. Jeruchimowitz is a Shareholder in Greenberg Traurig’s Litigation Group in Chicago, IL. He has extensive experience in all aspects of real estate litigation, including the representation of shopping center owners, developers, managers and tenants in lease disputes in state and federal courts, as well as arbitration and mediation. In addition, he is experienced in commercial landlord-tenant disputes, mechanics liens and foreclosures. He can be reached at (312) 476-5037 or Jeruchimowitzh@gtlaw.com.