Monday, April 2, 2018

Lease Exclusive Provisions

Winn-Dixie owns and operates grocery stores across the county. Because of its size and positioning as an anchor tenant, WD is able to insist on using tenant-friendly leases that contain a provision allowing only WD to offer grocery products in its shopping centers.
The effect is to limit competitors to selling grocery items in 500 square feet or less of their retail space.

In 2011 WD filed lawsuits against Big Lots, Dollar General and Dollar Tree claiming they had violated WD’s exclusive rights in 97 stores in five States. The District Court denied WD’s claim in 43 stores, but allowed the litigation to proceed in the remaining 54 sites.

The Court reviewed the non-compete covenants and focused on the prohibition that precluded other stores from selling groceries. Lacking a definition of the term groceries in the leases, the District Court determined that groceries means “food items” and “beverages, including but not limited to bottled water, soda, and energy and coffee drinks, but excluding alcoholic beverages.”

Based on those definitions, the Court granted WD injunctive relief in 37 of the 54 stores. WD appealed.

The Circuit Court took a broader definition of the term groceries, and concluded that it includes not only food items but also “many household supplies” as well as fixtures and proportionate aisle space.

It took this federal court 35 pages to chastise the lower court and one lawyer – unnamed here – who represented Big Lots and Dollar General. Ultimately the Circuit Court determined that an expanded definition of groceries should apply. That definition would include “food (excluding prepared foods) and beverages (excluding alcoholic beverages) and many household supplies (as soap, matches, [and] paper napkins).”

And that “household supplies” means items “associated with the preparation and service of food, as well as the maintenance of a clean kitchen.”

The Judgment was remanded to the District Court with instructions to apply the broader definition. Winn-Dixie wins and will be allowed to exclusively sell groceries, using an expansive definition of that word.

See Winn-Dixie Stores, Inc. v. Dolgencorp, LLC, Big Lots Stores, Inc. and Dollar Tree Stores, Inc.; No 15-12990; United States Court of Appeals for the 11th Circuit, January 31, 2018:

Lessons Learned:

1.      I didn’t address this issue, but it’s relatively unusual that one tenant can lawfully sue another to enforce an exclusive restriction. Usually the offended tenant beats on the landlord, who then directs its ire towards the tenant attempting to compete.

2.      I have seen too many leases to count that contain imprecise language regarding an exclusive right. This case puts a spotlight on such provisions. If your lease doesn’t state with crystal-clear clarity the rights and duties of both parties, then keep drafting.

3.      In my experience, this is only one of the areas that typically lacks clarity. The others are ROFOs, ROFRs, knockout (early exit) clauses, percentage rental provisions, mid-term security deposit application language, tenant self-help remedies, Guaranty-limitation language, SNDAs, and Estoppel Certificate provisions.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Thursday, March 1, 2018

Can You Rely on Loan Payoff Statements?

In August 2013, William Robertson and Connie Robertson agreed to sell real property to Terry Williams. The Robertsons had previously financed their property with EvaBank, who held two mortgages on the property.

Terry Williams engaged Traditions Bank to finance his purchase of the real estate. All parties used TBX Title as the closing agent to process the title, handle the escrow, pay debts secured by the property, and remit the balance to the Robertsons.

In September 2013 EvaBank sent a payoff statement to Traditions Bank, indicating a loan balance of $22,222. That payoff statement, however, was for another EvaBank customer – Michael Roberson. Not William Robertson.

Five days after closing EvaBank contacted the Robertsons to report that their loan was past due. The Robertsons’ response was predictable: the loan was paid in full at closing.

It was at this juncture that EvaBank first learned of the issue. EvaBank ultimately sent Traditions Bank an email explaining the mistake. And, EvaBank refused to release the mortgages encumbering the Robertsons’ property until the loan balance was paid in full.

In December 2013 Traditions Bank sued EvaBank seeing a judgment that Traditions Bank held a first lien on the property and that EvaBank’s refusal to release its mortgage liens was a slander of title.

EvaBank promptly filed a counterclaim for the full payment of all debts owing to it.

In February 2017 the trial court entered Judgment for Traditions Bank, and ordered EvaBank to release its mortgages. EvaBank appealed.

EvaBank asserted in its appeal that Traditions Bank and TBX Title had a duty to inquire and verify that the payoff statement was correct. Traditions Bank and TBX replied that they were entitled to rely on the payoff statement. And that is, after all, the sole purpose of a payoff statement.

The Supreme Court determined, by reviewing previous cases, that the party relying on the payoff statement “must have in good faith been ignorant of the true facts at the time a representation is made to him, and must have acted with diligence to learn the truth.”

The “good faith” part of the test was satisfied. The “due diligence” portion generated a deeper dive into the facts.

The Court found that both Traditions Bank and TBX Title had access to numerous documents that contained each of the Robertsons’ full names, address of the property, dates of the two mortgages, and the amounts of each loan. And that it was clear, to anyone who reviewed it, that the payoff statement had the wrong name – Michael S. Roberson instead of William Michael Robertson.

From there, the Court pinned the loss on Traditions Bank and TBX Title since both overlooked various discrepancies and, in the Court’s opinion, unreasonably relied on the payoff statement. The Judgment was reversed and EvaBank is entitled to be paid in full.

See EvaBank v. Traditions Bank; No. 1160495; Supreme Court of Alabama; February 9, 2018:

Lessons Learned:

1.      How many of us have ignored a discrepancy regarding a name, initial, property address, loan number, notice address or equivalent? And yes I include yours truly in the royal “us.” I, for one, will no longer be ignoring those matters.

2.      Loan Payoff Statements are usually invisible to buyers and most sellers. They are prepared by mortgage lenders or servicing agents, and sent directly to the title agent. Buyers likely won’t have ready access to this intel, as it will be deemed confidential as between Seller and its lenders. Sellers, however, can demand to review the Statements for accuracy and it should be included in Seller’s Closing Checklist.

3.      One of my takeaways from this case is the relation to Estoppel Certificates. If lenders and title agents may not automatically rely on Payoff Statements, then it follows that none of us may assume that Estoppel Certificates are genuine and accurate without undertaking an added level of due diligence. Ouch. I did not see that coming.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Thursday, February 1, 2018

Something Big is Happening v2

Continuing from last month’s blast . . .

Bellevue Square, LLC leased 34,000 square feet to Whole Foods in July 2015. Other tenants in Bellevue Square include Macy’s and Nordstrom. The Whole Foods Lease obligated the Tenant – Whole Foods – to continuously operate its business for the first 10 years, keeping it open to the public during the days and hours designated by Landlord.

Whole Foods opened its 365 by Whole Foods store in September 2016. Sales did not meet projections.

Whole Foods informed its customers by email that it would be vacating Bellevue Square on October 14, 2017. This is how Bellevue Square learned of the pending closure.

The Lease between Bellevue Square and Whole Foods allowed the Landlord the right to specifically enforce the Tenant’s obligations through injunctive relief. So Bellevue sued Whole Foods, requesting an injunction requiring Whole Foods to continue business operations.

To support its request for an injunction, Bellevue Square cited an adverse impact on the leased premises and negotiations with other tenants, lenders and similar. Whole Foods established only that financial harm would result to Whole Foods if it was forced to continually operate an unprofitable store.

The Court found that Whole Foods’ closure has “given rise to a well-grounded fear of immediate invasion of Bellevue Square’s rights,” and that “Bellevue Square has demonstrated that Whole Foods’ premature closure is resulting in actual and substantial injury to it.”

For those of my readers living under a tree stump in Mogadishu – here’s a news flash: Amazon purchased Whole Foods last June for $13.7 billion. This fact was probably not lost on the Court, as the Court concluded that Whole Foods could easily withstand losses that would send other retailers into bankruptcy, or at least insolvency.

Injunction granted; Whole Foods must reopen for business within two weeks and “work in good faith with Bellevue Square to fulfill the purposes of the Lease.” The injunction is conditioned upon Bellevue Square’s deposit with the Court of a $2 million bond.

It remains unclear how Whole Foods is supposed to staff the store, what type of products must be offered, whether or not Whole Foods may increase or decrease pricing or add or subtract an inventory line, change its operating hours and its suppliers and manners of restocking shelves, and a myriad of other questions and issues.

So, first Starbucks (Teavana). Now Whole Foods. I don’t know who is next, but I sense a trend where Courts may not be so reluctant to require tenants to continue business operations, even though they may incur substantial losses.

 See Bellevue Square v. Whole Foods Market Pacific Northwest, Inc.; No. 17-2-27617-1-SEA; Superior Court of Washington for King County; December 7, 2017:

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Tuesday, January 2, 2018

Something Big Is Happening

Details so far are sketchy, but here is what I have learned.

Recently Starbucks announced that it was closing all 379 Teavana locations by the end of 2017. Simon Property Group – the nation’s largest shopping center owner / manager, was displeased.

Simon’s concern, besides the obvious loss of income, is the secondary effect that store closings have on other retailers who may also be struggling. Retailers in vibrant, energetic, busy shopping centers enjoy better revenues than vendors in malls with vacancies.

Happy customers yield happy retailers. Happy retailers yield happy mall owners and operators, which increase shopping center values proportionately.

Simon asserted litigation in Indianapolis against Teavana, to prevent the coffee company’s store closing. Simon claimed that Starbucks (Teavana’s parent) was not financially stressed, unlike other retailers who had departed before the lease term had officially ended. Simon concluded that Teavana could well afford to continue operating the 77 Teavana stores in malls owned or operated by Simon.

Starbucks offered testimony that it would cost Starbucks approximately $15 million to continue to operate 77 Teavana stores over a five-month period. And that Simon had adequately protected itself with lease covenants, requiring Starbucks to compensate Simon for its losses should Teavana close its stores.

Simon requested a temporary restraining order and injunction, to force Teavana to continue in operations. The court agreed, forcing Teavana to remain open – at least until the next hearing.

Understand this is a radical shift in legal thinking and judicial reasoning. TROs and injunctions are typically issued to show that the plaintiff will be irreparably harmed if the status quo isn’t frozen. And that a money award would not adequately compensate the plaintiff for its damages.

Courts are reluctant to issue TROs and injunctions that require continuous oversight. Judicial resources are scarce and it is impractical for courts to oversee a business. Judges, magistrates and other court functionaries do not have the time, nor the expertise, nor the bandwidth to inspect shopping centers and its tenants, or to receive these arguments at the next hearing:

Simon: Your Honor, Teavana is not following your instructions. Yes it’s true that they are open the required hours and days, but there’s only one employee inside. Not only could s/he not work the cash register, but s/he could not properly make my holiday skinny flat white with cinnamon, nutmeg and a hint of ginger.  

Teavana: Untrue. Our second employee was on break at the time, and although our barista-employee may have struggled with an unusual seasonal beverage, s/he was and remains capable of making CocoCaramel Sea Salt Tea and Caramel Chai, our best sellers.

Simon: We have photos.

Teavana: We brought lattes.

And on it goes when courts are involved in forcing businesses to stay open. Or forcing anyone to do, well, anything. Anything short of sign here. Attend this class within 120 days. Present yourself to the title agent (or jail, prison or penitentiary) tomorrow at 10 a.m.

Pay $84,392 plus court costs. Remove yourself from the building within five days.

Those orders are innately different than directing a business to continually operate. At what standard – what inventory – how many employees – what days and hours – what price points – what level of continuing marketing and advertising – what level of continuing employee training – which menus – using which suppliers - and all the minute daily decisions every business owner and manager makes every day.

Now to the legal component. Experts believed that parties to a contract (landlords and tenants, buyers and sellers, etc.) had the right to breach the contract and walk away. And that is why lawyers spend so much time drafting and negotiating default, notice and opportunity to cure defaults, and remedy provisions in contracts.

And particularly, “go dark” clauses in commercial leases.

It seems that this court may not be willing to allow the tenant to breach its contract and bail. Instead, if this court doesn’t reverse its course at the next hearing, Teavana may be required to remain open for business. Failure of Teavana to do so might result in contempt orders.

I’ll report back when I have more intel. But at this moment, all commercial tenants have cause to be nervous.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Reprinted with the permission of North Texas Association of Realtors®, Inc.