Scott E. Mollen

Commercial Landlord-Tenant—Tenant May Terminate Its Lease Because Other Mall Store Failed To Continuously Operate For 12 Months

 A landlord sued Sears Roebuck & Co. (defendant) for breach of contract. The defendant moved to dismiss the complaint for failure to state a claim. The court granted the defendant's motion.

The lease involved a shopping mall which originally included three main stores, Hess, Kmart, and Sears. In 1995, the May Department Store Company (May) bought Hess in order to operate a Filene's store. In 1995, the defendant entered into a lease amendment which provided “After October 1, 1995, tenant may terminate this Lease, if at any time, for a continuous period of more than twelve (12) months, there (i) are not occupants occupying at least sixty percent (60 percent) of the leaseable floor space of the Shopping Center (not including the leaseable floor space of Department Stores)…; or (ii) if Filene's (or a retail store operating under the same name under which a majority of the stores formerly [prior to any name change] operated under the name Filene's in the state of New York are then being operated) is not open and operating and either (a) J.C. Penney (…) or (b) Kmart (…) or (c) a retail store (which generally operates other stores of approximately 60,000 square feet or more) occupying at least 60,000 square feet of floor area in the space shown on Exhibit B as 'Kmart' and/or 'Kmart Permissible Expansion Area' is not open and operating.”

In March 2015 Macy's closed its store. At that time, the defendant did not renegotiate the lease and continued to operate and pay rent. The defendant ultimately closed its store in August 2016. Kmart was still open and operating at that time. J.C. Penney never opened at the mall.

The landlord claimed that the defendant breached its contract by failing to continuously operate a Sears at the mall and failing to pay rent under the contract. The landlord also sought a declaratory judgment declaring that the lease is an executory contract pursuant to 11 U.S.C. §365 of the Bankruptcy Code (§365). The defendant countered that it properly terminated its lease and the lease was not an executory contract pursuant to §365.

Essentially, the defendant argued that the lease “unambiguously provides defendant with the right to terminate if Filene's and either J.C. Penney or Kmart (or another department store) is not open and operating for a continuous period of twelve months;” and that “extrinsic evidence may not be considered where the agreement is unambiguous.”

The plaintiff argued that the defendant could not terminate the lease “while Kmart was open and operating because (i) logic dictates that the termination provision precludes defendant from terminating the Lease unless all of the other department stores cease to be open and operating, (ii) defendant's interpretation of the termination provision is unreasonable and contrary to the parties' intent expressed in the Lease, and (iii) even if defendant's interpretation of the contract is plausible, the termination provision is ambiguous such that the motion to dismiss should be denied.”

The court found that the defendant had properly terminated its lease. The court read the relevant provision to mean: “Defendant may terminate the lease, if at any time, for a continuous period of more than twelve months, (1) Filene's is not open and operating, and (2) if any of the following conditions occur (a) J.C. Penney is not open and operating, or (b) Kmart is not open and operating, or (c) a retail store (which generally operates other stores of approximately 60,000 square feet or more) is not open and operating. To transform the word 'or' into an 'and' would 'render the contract provisions meaningless or superfluous.'”

The court explained that Filene's (Macy's after it changed its name) had not been open and operating for a continuous period of more than twelve months prior to the defendant's termination of the lease and J.C. Penney had never opened or operated at the mall. Accordingly, the court held that the defendant was permitted to terminate the lease.

The court reasoned, inter alia, that if plaintiff's interpretation reflected the intent of the parties, then the lease should have specified that “After October 1, 1995, tenant may terminate this Lease, if at any time, for a continuous period of more than twelve (12) months, there (i) are not occupants occupying at least sixty percent (60 percent) of the leaseable floor space of the shopping center (not including the leaseable floor space of department stores)…; or (ii) if Filene's (or a retail store operating under the same name under which a majority of the stores formerly [prior to any name change] operated under the name Filene's in the state of New York are then being operated) is not open and operating and neither (a) J.C. Penney …nor (b) Kmart…nor (c) a retail store (which generally operates other stores of approximately 60,000 square feet or more) occupying at least 60,000 square feet of floor area in the space shown on Exhibit B as “Kmart” and/or “Kmart Permissible Expansion Area” is not open and operating. (emphasis added)

Accordingly, the court dismissed the plaintiff's claim for breach of contract.

Comment: The court rejected the plaintiff's effort to introduce extrinsic evidence as to the intent of the parties. Generally, courts will exclude such evidence unless they find that the contract language is ambiguous. Additionally, courts generally enforce the terms of commercial contracts, even when with hindsight, the terms appear to be harsh or unfair. The reasoning is that sophisticated commercial parties, represented by counsel, should generally be held to the terms of their agreement. There are certain exceptions such as fraud or where the facts establish, e.g., waiver estoppel, or ratification.

With respect to continuous operation provisions, the closure of a major store in a shopping center could reduce customer traffic for other stores in the shopping center. Some cases have involved ambiguous continuous operating provisions. Thus, counsel should carefully consider the definition of “continuous operation.” Occasionally, a tenant may argue that it has continuously “occupied” the space even though it was not open to the public because it continued to pay rent and it maintained merchandise or equipment on premises. Parties should also consider the need to provide for closing a store for extensive remodeling and for interruption of business in connection with an assignment or subletting of the space.

Via Port New York v. Sears, Roebuck & Co., USDC, NDNY, Case No. 1:17-cv-1222, decided Sept. 4, 2018, Suddaby, J.

Condemnation—Value of Avigation Easement—$2,524,000 Claim Reduced To $297,000

This decision involved a condemnation proceeding pursuant to the Eminent Domain Procedure Law (EDPL). The claimant asserted a claim based on the county having used its eminent domain power to acquire 3.86 acres of the claimant's property and to impose an “avigation” easement upon an additional 80.72 acres.

The county had taken the property in order to “mitigate obstructions and to preserve and protect runway protection zones” at an airport. The county had paid the claimant $327,200 as compensation for the property acquired. The land acquired lacked road frontage and approximately 23% of the property consists of wetlands. Although between April 2011 and September 2012, the claimant had sought subdivision approval, as of the date of taking, the property lacked subdivision approval, which would have permitted the claimant to develop its property.

The town subdivision regulations barred “dead-end streets more than 1,000 feet in length.” The claimant had proposed a road that was “three times that length.” The court noted that “no ingress/egress easement or agreement for access with the county existed at the subject property” and the cost to build the roadway would be “borne solely by the Owner”. Moreover, the roadway construction costs “were reported to be uneconomic, i.e., those costs would cause the contemplated project to fail.”

The maximum building height permitted by the town zoning code was 60 feet. “Avigation easements do not preclude development, but provide the ability to prevent, remove or mark obstructions.” Approximately half of the easement “has an elevation of 80 feet from the ground.” The court noted that the part of the easement with the 80 foot elevation over the property did not “prohibit the ability to construct buildings under the town zoning code” and the avigation easement did not impact “trees or vegetation” since the claimant had proposed that he would “clear cut the 61.5 acres of the subject property that were not wetlands.” The “actual flight path ranges from 130' to 232'” above the subject property, “based on the highest ground elevation of 370'.” The court noted that much of the property is lower than 370', permitting even greater clearance.

The claimant sought approximately $2,524,000 in damages. The court awarded $297,000 in damages.

The court found that the claimant's land was “landlocked,” if adjoining properties to the South were not included. The claimant's appraiser had included 5 additional parcels. The court found such inclusion was “improper, as the properties are separated from the (subject parcel)… by a fee-owned transmission line, and are thus not continuous; the properties are zoned differently… and thus have different highest and uses…; no marketing proposal included the other five parcels; and the town's mandate for a connector road only affected the subject parcel.” The court stated that the claimant's appraiser had mischaracterized the “actual road frontage of the subject parcel (the subject had no road frontage),” had mischaracterized access, and had mischaracterized the location and zoning and had failed to consider the town's “requirement of a connector road….”

The claimant's appraisal had dismissed “the actual effect of the easement on the property.” Additionally, the claimant's appraiser testified that he “could not find sales that demonstrate the impact of avigation easements.”

In contrast, the county's appraiser cited “multiple sales with avigation easements, including sales subsequent to such taking, that provided market data that disproved (claimant's appraiser's) premise and supported the county's calculation of damages from the effect of the easement.”

The claimant's appraiser had “discounted information provided by property owners and brokers and instead relied solely on his interpretation of court rulings.” He had not considered the “height of the avigation easements” because he stated that “the courts have not accepted that.” The claimant's appraiser further asserted that courts have been “almost silent on the impact of these easements from the standpoint of the elevation of the avigation easement.”

Although the claimant's appraiser had conceded that “every easement is different” and easements are “dependent on the individual facts of ease case,” he had not included any easement agreements that were the subject of the trial decisions upon which he relied. Furthermore, the claimant's appraiser considered damages based on the county's right to “mark or light objects below the easement plane….” However, the court stated that such theory had been rejected by a prior court decision.

The claimant's appraiser had also asserted that “properties within an avigation easement cannot obtain mortgage financing, insurance and local government approvals”. However, an exhibit included “multiple sales of properties within avigation easements that had such financing.”

The court did not believe that properties subject to avigation easements “are so severely restricted that they do not transfer as arm's length market sales.” The court also disagreed with the suggestion that no “knowledgeable and reasonable developer, investor or business owner would construct a building in an area encumbered with an avigation easement.” The county had provided examples of projects that had been built despite the existence of avigation easements.

The court found that the county's appraiser had considered the “lack of road frontage, the parcel's location as a rear parcel, the applicable zoning and the status of approvals.” The county appraiser had also included a “detailed review of the avigation easement at the subject property” and opined that the area of avigation easement with 70 to 80 foot height had “minimal effect on the damage to the property, as it did not affect the development potential of that portion of the parcel…” He noted that “you certainly can build any zoning of 60 feet, so there's not even any—any issues or conflicts with a 70- or 80-foot or 100-foot avigation easement in terms of development.” He also noted, that by far, “rural/suburban developments, including those within office/light industrial parks near the subject, involved one or two-story buildings. As a practical matter, the ability to construct improvements above 35 feet is insignificant.” The county's appraiser asserted that avigation easements “are not written to preclude development.”

The court found that the county appraiser's report supported such fact with “multiple examples of buildings located within sub-35 foot avigation heights.” The court also noted that the county's appraiser had provided the court with “well-researched data and well-reasoned analysis” of comparable sales.

Additionally, the court stated that the claimant had been “fairly compensated for the acquisition of the fee interest and avigation easement, as the amount paid by the county… actually exceeded the damages to the property, as is indicated by the market value of the property prior to the taking minus the market value of the property after the taking….”

The court concluded that the claimant's valuation was “unpersuasive”, since it was based on “premises that are contradicted by the actual avigation easement documents and the market data of similar properties subject to avigation easements presented by the county….” Thus, the court found that the claimant's appraisal was not based on “sound hypothesis”, and it lacked “probative value” and it was therefore rejected. Moreover, the claimant's appraiser had not included a “detailed analysis of the zoning history of the subject parcel, and neglected significant developments and highly relevant statements before the town planning board. The status of zoning and approvals affects the market value of this property and, where a report ignores such factors, it should be rejected….”

In contrast, the county had “presented an experienced, knowledgeable expert with actual and more credible market data supporting his conclusions.” Accordingly, the court awarded the claimant damages in the amount of $297,000, rather than the $2,524,000 requested by the claimant.

Comment: This decision is of interest since many airports throughout the country have had to expand to accommodate the growth in air travel.

Forest Enter. Mgmt. Inc. v. The county of Warren, Sup. Ct., Warren Co., Index No. 61956, Aug. 16, 2018, Muller, J.

Scott E. Mollen is a partner at Herrick, Feinstein.