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: https://www.seattletimes.com/business/amazon/judge-orders-whole-foods-to-reopen-shuttered-bellevue-square-365-store/.

                                                                                    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.

Thursday, November 30, 2017

Liquidated Damages


In the Spring of 2008 Todd Phillips listed property for sale with a real estate agency. Richard Gomez submitted an offer to purchase the property, which was accepted in October 2008.

The purchase price was $660,000, and required a 10% earnest money deposit. If Gomez did not close, Phillips had the option of accepting the earnest money as liquidated damages, or pursuing a claim for damages or specific performance.

Later the Purchase and Sale Agreement was amended. One of the amendments provided that the $66,000 earnest money deposit became non-refundable following a due diligence inspection period and Gomez’s attorney’s approval of the deal.

Although not stated in the Court’s opinion, presumably all inspections were satisfactory and Gomez’s attorney approved, since the full $66,000 earnest money deposit was released to Phillips without restriction before closing.

In early December 2009 Gomez advised Phillips that Gomez would not be able to close on time. In February 2010 Phillips sent Gomez a letter demanding that Gomez perform under the Agreement (as amended), or Phillips would pursue Gomez for a deficiency after the property was re-sold.

Gomez did not respond.

In June 2010 Phillips sold the property for $527,500, creating a deficiency of $132,500. Phillips had already received the earnest money deposit of $66,000, and consequently Phillips applied the amounts already received from Gomez to the deficiency balance.

In November 2013 Phillips filed a lawsuit against Gomez for breach of contract and money damages. Gomez defended by claiming that Phillips had the right to receive the earnest money deposit or litigate for consequential damages, but not both. And, since Phillips had already received the earnest money deposit, Phillips had no right to claim anything more.

The district court agreed and entered judgment for Gomez.

Phillips appealed, claiming that he had the right to both receive the $66,000 earnest money deposit as liquidated damages, and then recover a judgment against Gomez for additional sums. Gomez’ defense, as accepted by the district court, was unchanged.

The Appellate Court reviewed the Purchase and Sale Agreement, as well as the Addenda, and determined that sellers and buyers are allowed to use liquidated damages provisions as a singular and exclusive remedy. And that contracting parties may pre-select a remedy in their contract.

By accepting the $66,000 earnest money deposit, Phillips waived his ability to pursue actual damages. The choice was his to make, but it had a lasting (and legally binding) effect. The earnest money payment Phillips received was not a ‘down-payment’ toward actual damages, but rather it was an exclusive remedy.

It may not have been what Phillips intended, but the Agreement and Addenda were clearly drafted on this point.

Judgment was affirmed for Gomez. See Todd J. Phillips v. Richard D. Gomez; Docket No. 44594; Idaho Supreme Court; November 8, 2017: http://caselaw.findlaw.com/id-supreme-court/1879295.html.

Lessons learned:

1.      Typically our Courts will uphold a properly drafted liquidated damages clause. Most of my contracts contain them, as they can be beneficial to both sellers and buyers. Do yours?

2.      This case is helpful to illustrate that liquidated damages provisions should be clearly written, and leave no doubt that it is an exclusive remedy if selected by the party entitled to it.

3.      We use liquidated damages provisions in commercial leasing too, particularly with regard to delayed occupancy and early termination options to be exercised by either Landlord or Tenant.

                                                                                    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 the North Texas Commercial Association of REALTORS®, Inc.

Tuesday, October 31, 2017

Arbitration in Commercial Leasing


In May 2012 Premium Plastics Supply, Inc signed a two-year lease for commercial space owned by Thomas and Laura Howell. The Lease contained an arbitration provision, providing that all disputes related to it must be arbitrated.

The Lease term ended in May 2014, but Premium continued to occupy the space. In October 2014 the Howells sent a notice of default to Premium seeking payment under the holdover clause of the Lease. When Premium did not pay, the Howells started an arbitration proceeding.

After initiating arbitration, the Howells then changed the door locks on the leased space. Premium responded by claiming wrongful lockout under the Texas Property Code and several other claims, but ultimately all were voluntarily dismissed by Premium before the commencement of the arbitration.

The Howells were awarded $33,000 in unpaid rental at the arbitration. So the Howells filed a lawsuit in Harris County to confirm the award.

Premium responded to the lawsuit by reasserting the counterclaims previously raised and withdrawn in the arbitration.

The Howells obtained a confirmation of the arbitration award from the Harris County court, now converted to a Judgment. In rendering the Judgment, the court found that Premium no longer had the right to assert its counterclaims, as those matters should have been asserted in the arbitration.

The failure of Premium to timely assert those counterclaims, the trial court held, is not so much a waiver of legal rights as res judicata – a legal theory that says judicial resources will not be used to rehash the same arguments over and over, that have already been heard and decided. 

Or, should have been heard. And decided.

So Premium appealed, claiming it had claims that needed to be heard in the litigation forum.

The Appellate Court started by evaluating our Texas Rules of Civil Procedure, requiring counterclaims to be litigated in an initial arbitration or lawsuit when it arises out of the same transaction or occurrence, and does not need the presence of third parties of whom the court cannot acquire jurisdiction.

Next, it was time to consider the impact of arbitration awards. Basically, the Court concluded that there is not much difference between an arbitration award and a Court-ordered judgment. And an arbitration award is treated as a prior final judgment for purposes of res judicata.

Based on this, the Appellate Court had little trouble ruling for the Howells. It appears that Premium made a decision not to assert its claims in the arbitration, perhaps thinking those claims could be held for a later date. The Appellate Court did not agree that Premium could postpone the assertion of those claims, and found that the failure to assert such claims in the arbitration proceeding fatally impaired the ability of Premium to later assert them in Court.

So, Judgment is affirmed for the Howells. See Premium Plastics Supply, Inc. v. Thomas Howell and Laura Howell; Case No. 01-16-00481-CV; Texas Court of Appeals 1st District-Houston; September 28, 2017: http://scholar.google.com/scholar_case?case=2032118509891223314&q=premium+plastics+v.+howell&hl=en&as_sdt=6,44.

Lessons learned:

1.      Arbitration is unusual in a commercial leasing context. Commercial landlords want the unrestrained right to claim a lease default and start court eviction proceedings in JP Court, as opposed to waiting for an arbitration award and then confirming it in a following lawsuit to convert the award into a Judgment. Typically JP Court eviction trials occur in only a few weeks after the eviction lawsuits are filed, but it can take years to obtain both an arbitration award and a Court-ordered confirmation and conversion to Judgment.

2.      This case is helpful to illustrate a sidebar point: Texas constables and sheriffs will not enforce an arbitration award. Only Judgments can be enforced. And Judgments only come from our courts – no arbitrator has the ability to issue a Judgment.

3.      Now you should be seeing how cumbersome arbitration proceedings can be in the context of a commercial lease. Most landlords won’t allow it; some power-tenants insist on it. In the latter situation, be sure to consider what happens when the tenant fails to pay rent or commits some other obvious lease default. An arbitration procedure followed by litigation might delay justice for a year or more.

                                                                                    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 the North Texas Commercial Association of REALTORS®, Inc.