Downtown Barre Development v. C & S Wholesale Grocers, Inc.

Downtown Barre Development v. C & S Wholesale Grocers, Inc. (2003-209); 
177 Vt. 70; 857 A.2d 263

2004 VT 47

[Filed 28-May-2004]
[Motion for Reargument Denied 28-Jul-2004]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 2004 VT 47

                                No. 2003-209


  Downtown Barre Development	                 Supreme Court

                                                 On Appeal from
       v.	                                 Washington Superior Court


  C & S Wholesale Grocers, Inc., 	         March Term, 2004
  GU Markets, LLC,
  GU Markets of Barre, LLC, and
  Maxi Drug, Inc., Intervenor


  Mary Miles Teachout, J.	

  Andrea L. Gallitano of Otterman and Allen, P.C., Barre, for
    Plaintiff-Appellee/Cross Appellant Downtown Barre Development.

  Leighton C. Detora of Valsangiacomo, Detora & McQuesten, P.C., Barre, for
    Appellees/Cross Defendants-Appellants C & S, et al.

  Robert S. DiPalma of Paul, Frank & Collins, P.C., Burlington, for
    Intervenor-Appellant Maxi   Drug, Inc.


  PRESENT:  Amestoy, C.J., Dooley, Johnson and Skoglund, JJ., and Allen, C.J.
            (Ret.),  Specially Assigned

        
       ¶  1.  SKOGLUND, J.   The principal issue in this case is whether
  the parties' commercial lease allows the current shopping plaza tenant to
  divide the subject premises and create two smaller retail establishments
  out of the space where the former tenant had operated a supermarket.  The
  owner of the shopping plaza, plaintiff Downtown Barre Development (DBD),
  filed suit in an attempt to stop intervenor Maxi Drug, Inc. from purchasing
  the former tenant's rights under the lease and commencing renovation work
  on its plan to divide the premises, set up a Brooks Pharmacy in part of the
  space where the former supermarket had stood, and sublet the remaining
  space to another retailer.  Based on its interpretation of the parties'
  lease, the superior court enjoined Maxi Drug and the former tenant from
  dividing the space and using it for any purpose other than as a supermarket
  or comparable store.  The court also assessed damages against Maxi Drug and
  the former tenant for violating the lease's implied covenant of good faith
  and fair dealing.  Maxi Drug, the former tenant, and DBD each appeal the
  court's decision.  We conclude that the lease does not preclude Maxi Drug
  from dividing the commercial space, establishing a Brooks Pharmacy in part
  of the space, and subletting the remaining space to another retail
  business.  Accordingly, we reverse the superior court's ruling and remand
  the matter for entry of judgment in favor of Maxi Drug with respect to
  DBD's complaint.
   
       ¶  2.  DBD is a limited partnership formed in 1973 for the purpose
  of developing and owning the shopping plaza that is at the center of this
  dispute.  DBD bought land, tore down old buildings, and began construction
  of the shopping center, which included a 26,000 square-foot store connected
  to smaller stores totaling about 16,000 square feet.  Before commencing
  construction, DBD lined up the commercial leases, including one with Grand
  Union, Inc. for the large store.  The Grand Union lease, which was signed
  on February 15, 1973, provided for a fixed-base rent, plus a percentage
  rent that was triggered at $10 million dollars in gross sales and capped at
  $14 million dollars in sales.  The lease was written for twenty years, with
  four five-year renewal periods.  A later amendment to the lease added two
  more five-year renewal periods.  The leases for the minor tenants provided
  for much shorter terms and regular consumer-price-index increases to the
  fixed rents.

       ¶  3.  Grand Union experienced significant financial difficulty during
  the 1990s, culminating in a bankruptcy liquidation proceeding in 2000.  DBD
  chose not to participate in that proceeding, in which C & S Wholesalers,
  Inc. purchased many of Grand Union's assets and created Grand Union Markets
  LLC (GUM) to hold them.  C & S then organized a separate limited liability
  corporation for each of the individual former Grand Union properties.  The
  corporation C & S established to operate the store at the center of this
  dispute was called Grand Union Markets of Barre LLC (GUMB).  In December
  2000, the bankruptcy court approved the transfer of the Grand Union lease
  to GUMB.  Throughout this period, the supermarket remained open for
  business.

       ¶  4.  Between the summer of 2001 and the summer of 2002, Maxi Drug
  separately contacted first DBD, and then C & S, about its interest in
  either purchasing the supermarket plaza or taking over the Grand Union
  lease.  On at least two different occasions, DBD declined Maxi Drug's offer
  to purchase the shopping plaza.  DBD expressed some interest in Maxi Drug's
  proposal to divide the Grand Union space and operate a Brooks Pharmacy in
  part of it, but DBD took the position that the existing lease could not be
  assigned, and that a new lease would have to be negotiated.  Ensuing
  negotiations between Maxi Drug and DBD broke down, but in August 2002 GUMB
  agreed to assign the Grand Union lease to Maxi Drug for $475,000, with a
  closing set for October 20, 2002.  Maxi Drug then resumed discussions with
  DBD concerning the terms of a replacement lease.  DBD reaffirmed its
  position that the existing lease could not be assigned and rejected Maxi
  Drug's proposal to divide the property.  On October 18, the Grand Union
  supermarket ceased operations.
   
       ¶  5.  On October 25, 2002, DBD filed a complaint against C & S,
  GUM, and GUMB, seeking declaratory and injunctive relief, as well as
  compensatory and punitive damages.  Four days later, on October 29, the
  closing was held on the assignment of the lease from GUMB to Maxi Drug. 
  That same day, a contractor acting on behalf of Maxi Drug obtained a
  building permit in DBD's name to commence renovation work on the Grand
  Union property.  Upon learning of the permit and proposed renovation, DBD
  sought a temporary restraining order.  Apparently, that request was denied
  on an ex parte basis because there was no indication that the work would
  begin before the parties had an opportunity for notice and a hearing.  At
  Maxi Drug's direction, renovation work began on November 6, 2002.  The
  inside of the supermarket was gutted.  The contractor intended to refit the
  space for two separate stores with separate electrical and heating systems,
  but the superior court temporarily halted the work on November 18.
   
       ¶  6.  On December 18, 2002, following two days of hearings, the
  superior court granted DBD's request for a preliminary injunction.  A final
  merits hearing was held over two days in February 2003, and the court
  issued its judgment on March 18, 2003.  The court concluded that the
  parties' lease entitled DBD to prohibit its tenant from dividing the Grand
  Union space and using it for purposes other than as a supermarket or other
  comparable anchor store.  While acknowledging that specific provisions of
  the lease unambiguously permitted any lawful use of the space, the court
  determined that the lease as a whole reasonably and necessarily implied a
  condition that the premises be operated as a single unified supermarket or
  comparable store.  The court also concluded that Maxi Drug and GUMB had
  violated the covenant of good faith and fair dealing implied in the lease
  by going ahead with renovation work without disclosing to DBD the extent of
  the work, even though they knew DBD was opposed to dividing the space.  The
  court assessed damages of only $1000 each against GUMB and Maxi Drug for
  this violation, however, stating that most of the litigation costs would
  have been incurred even absent the violation.  The court granted injunctive
  relief to DBD, but assessed no damages other than the $2000, concluding
  that DBD's request for damages was premature because Maxi Drug still had
  the opportunity to restore the premises to a condition that would not
  damage DBD.

       ¶  7.  On appeal, Maxi Drug argues that the superior court erred (1)
  by implying lease terms that are directly contradictory to the express
  terms contained in the unambiguous lease, and (2) by finding that Maxi Drug
  violated the covenant of good faith and fair dealing implied in the lease. 
  On cross-appeal, DBD argues that the court erred by not (1) requiring the
  tenants to restore the premises, (2) ruling that DBD was entitled to
  terminate the lease and eject Maxi Drug following GUMB's assignment of its
  interest in the property to Maxi Drug, and (3) awarding DBD compensatory
  damages for the cost of restoring the premises.  Also on cross-appeal, C &
  S , GUM, and GUMB argue that the court erred (1) by not dismissing C & S
  and GUM from the case, (2) by finding that GUMB was involved in the
  renovation of the premises, and (3) by concluding that GUMB breached the
  covenant of good faith and fair dealing implied in the lease.
   
       ¶  8.  The principal issue before us is whether the superior court
  erred by construing the lease to prohibit Maxi Drug from dividing the Grand
  Union space, setting up a Brooks Pharmacy in part of that space, and
  subletting the remaining space to another retailer.  We review de novo the
  trial court's determination as to whether the agreement is ambiguous, as
  well as its construction of the terms of the agreement.  See Creed v.
  Clogston, 2004 VT 34,  ¶ 6, 15 Vt. L. Wk. 138; Morrisseau v. Fayette, 164
  Vt. 358, 366, 670 A.2d 820, 826 (1995).  While we may consider the
  circumstances surrounding the making of the agreement in determining
  whether its provisions are ambiguous, those circumstances "may not be used
  to vary the terms of an unambiguous writing."  Kipp v. Chips Estate, 169
  Vt. 102, 107, 732 A.2d 127, 131 (1999).  "Where the terms of a lease are
  plain and unambiguous, they will be given effect and enforced in accordance
  with their language."  KPC Corp. v. Book Press, Inc., 161 Vt. 145, 150, 636 A.2d 325, 328 (1993); see Maglin v. Tschannerl, 174 Vt. 39, 45, 800 A.2d 486, 490 (2002) (when language in agreement is clear, parties' intention
  and understanding must be taken to be that which their agreement declares);
  Cross-Abbott Co. v. Howard's, Inc., 124 Vt. 439, 441, 207 A.2d 134, 137
  (1965) (same).
   
       ¶  9.  To be sure, we consider an agreement as a whole when
  examining its individual provisions, "but do not read terms into the
  contract unless they arise by necessary implication."  Morrisseau, 164 Vt.
  at 366-67, 670 A.2d  at 826; see John A. Russell Corp. v. Bohlig, 170 Vt.
  12, 17, 739 A.2d 1212, 1217 (1999).  Further, we may not insert terms into
  an agreement by implication unless the implication arises from the language
  employed or is indispensable to effectuate the intention of the parties. 
  Caverly-Gould Co. v. Springfield & Alexander, 83 Vt. 396, 402, 76 A. 39,
  41-42 (1910); see Walgreen Ariz. Drug Co. v. Plaza Ctr. Corp., 647 P.2d 643, 646 (Ariz. Ct. App. 1982) (factors in determining whether to imply
  restrictive use conditions in contract are (1) whether implication arises
  directly from contract language; (2) whether language of contract
  demonstrates that parties clearly contemplated use restriction; (3) whether
  condition is legally necessary; (4) whether condition would have been made
  explicit if brought to parties' attention; and (5) whether contract
  completely covers subject matter of agreement).  Vaguely implied conditions
  may not be inserted into an agreement, particularly when those conditions
  are inconsistent with the express language of the agreement, see Hill v.
  City of Burlington, 157 Vt. 241, 245, 597 A.2d 792, 794-95 (1991)
  (otherwise reasonable implication may not contradict clear and express
  language of contract), or when they impose a restraint on doing business,
  see Cross-Abbott, 124 Vt. at 444, 207 A.2d  at 139 (provisions restricting
  liberty of doing business must be written in clear and unambiguous language
  rather than left to inference or interpretation); E. Shore Mkts., Inc. v.
  J.D. Assocs., Ltd. P'ship, 213 F.3d 175, 184 (4th Cir. 2000) (generally,
  court is not free to insert by implication covenant of exclusive use when
  lease does not contain one; even when lease does contain express
  restrictive covenant, covenant is strictly construed to favor least
  restricted use of property); United Assocs. v. Wal-Mart Stores, 133 F.3d 1296, 1298 (10th Cir. 1997) ("As a general rule, implied covenants are
  disfavored."); Monmouth Real Estate Inv. Trust v. Manville Foodland, Inc.,
  482 A.2d 186, 189 (N.J. Super. Ct. App. Div. 1984) (where landlord claims
  that commercial lease imposes limitation on use of premises, all doubts are
  resolved in favor of construction that least restricts use).

       ¶  10.  Here, the superior court found, and the parties agree, that
  the terms of the lease are unambiguous.  The lease provides that the
  premises are

    to be used for the sale of goods and any other lawful use
    including without limitation, a use as supermarket for the
    preparation, storage, display and sale of groceries, meats, fish,
    delicatessen products, fruits, vegetables, bakery and dairy
    products, candy, tobacco products and beverages, and for the sale
    of such other goods and the rendition of such services as the
    Tenant may from time to time elect.

  (Emphasis added.)  The lease also provides as follows:

      The Tenant may assign this lease or sublet the demised premises, 
    or any part thereof, for the purpose herein permitted, or for any
    other lawful use which will not be extra hazardous on account of
    fire without relieving Tenant, however, from its obligations
    hereunder. . . .  [I]n the event of an assignment or subletting
    during a renewal term, the Tenant herein may, by notice to the
    Landlord, terminate any and all obligation and/or liability of the
    Tenant named herein accruing after the expiration of such renewal
    term.

      It is agreed, however, that the Landlord shall have the right to
    cancel and terminate this lease without further liability of
    either party to the other at such time as the Tenant's liability
    hereunder shall cease pursuant to the foregoing.

  (Emphasis added.)  Another provision relevant to Maxi Drug's argument is
  the following:

      The Tenant may from time to time at its expense paint and decorate
    the premises and make such changes, alterations, additions and
    improvements as will, in the judgment of the Tenant, better adapt
    the same for the purpose of its business.  The alterations and
    additions shall be of such a character as not to adversely affect
    the value or decrease the cubical contents of the building.

       ¶  11.  We conclude that these provisions plainly and unambiguously
  permitted Maxi Drug to purchase the rights and obligations of the tenant
  under the lease and to alter the premises for use as a pharmacy and other
  retail business.  First, the lease allows the tenant to assign or sublet
  the premises, or any part of it, "for any lawful use," and the landlord can
  terminate the lease based on any such assignment or subletting only if the
  tenant notifies the landlord that it intends to disclaim its liability
  under the lease.  Second, the lease allows the tenant to operate the
  premises "for the sale of goods or any other lawful use including without
  limitation, a use as [a] supermarket."  Thus, although the parties
  undoubtedly expected the tenant to use the premises, at least initially, as
  a supermarket, the lease explicitly allows other lawful uses.  See St. Paul
  Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202, 206-07 (5th Cir. 1996)
  (word "including" is generally given expansive reading, even without
  additional language of "without limitation").
   
       ¶  12.  The parties could have drafted this provision to restrict use
  of the premises to the operation of a supermarket, as evidenced by another
  provision in the lease prohibiting the landlord from using the premises as
  a supermarket for three years in the event it failed to deliver the
  premises to Grand Union.  See Ingannamorte v. Kings Super Mkts., Inc., 260 A.2d 841, 841 (N.J. 1970) (lease provision required that store "be used and
  occupied only for a supermarket").  But, for whatever reasons, the parties
  to the lease in this case chose to allow any lawful use of the premises. 
  We conclude that the lease's expansive use provision permits any
  reasonable, lawful use of the premises, including its use as a Brooks
  Pharmacy or other reputable retail establishment.  See Monmouth Real
  Estate, 482 A.2d  at 189 (provision in commercial lease that allowed
  "operation of a supermarket and drug store and any and all other lawful
  purposes" permitted any lawful use separate from and in lieu of supermarket
  rather than any lawful use incidental to supermarket, as claimed by
  landlord).

       ¶  13.  Finally, the lease allows the tenant to make alterations,
  additions, and improvements that better adapt the premises for the purpose
  of its chosen business, so long as those alterations do not adversely
  affect the value or decrease the cubical contents of the building.  DBD has
  made no showing that Maxi Drug's plans adversely affect the value or
  decrease the cubical contents of the building; rather, DBD cites an
  irrelevant lease provision concerning the parties' respective
  responsibilities for repairs in support of its argument that the lease does
  not allow Maxi Drug's planned alterations.  Moreover, neither the trial
  court's decision nor any other part of the record demonstrates that Maxi
  Drug's planned renovations will adversely affect the value or decrease the
  cubical contents of the building.  Accordingly, the lease did not prevent
  Maxi Drug from dividing and renovating the premises for the purpose of its
  business.
   
       ¶  14.  In support of its ruling that the lease precluded Maxi Drug
  from dividing the premises and operating any business other than a
  supermarket or comparable store, the superior court noted that DBD had set
  up a "community style" shopping center - the type that generally has a
  large "anchor store" to generate business surrounded by smaller satellite
  stores acting in a symbiotic relationship with the larger store. 
  Essentially, the court inserted into the parties' lease by implication the
  type of use restrictions that the parties could have written into the lease
  to maintain such an arrangement.  This the court could not do.  "[N]o court
  may rewrite unambiguous contractual terms to grant one party a better
  bargain than the one it made."  Rouse-Randhurst Shopping Ctr. v. J.C.
  Penney Co., 171 F. Supp. 2d 824, 827 (N.D. Ill. 2001).  The use provisions
  implied by the court did not arise from the language of the lease - in fact
  they were directly contrary to the language of the lease - and were not
  indispensable to effectuate the intention of the parties.  See Walgreen
  Ariz. Drug Co., 647 P.2d  at 646 (court may not imply use conditions based
  on findings that conditions are necessary to make contract fair, that
  parties should have included conditions in agreement, or that contract
  would be improvident or unwise without conditions).  The parties' intent
  can and must be discerned from the unambiguous terms of their agreement.
   
       ¶  15.  The court's reliance on the Hinsman cases is misplaced.  In
  those cases, the landlord sought damages and possession of its leased
  premises after the tenant bank sublet the premises to someone operating a
  vegetable and fruit stand.  In the first case, this Court noted that when a
  lease is silent as to the allowed use of the premises, the tenant has the
  right to put the premises to any use that is not materially different from
  the purpose for which the premises were constructed, adapted, and normally
  employed.  Hinsman v. Marble Sav. Bank, 100 Vt. 48, 50, 134 A. 635, 636
  (1926).  In the second case, we concluded that use of the premises to
  operate a vegetable and fruit market was for a purpose materially different
  from the purpose for which the premises had been constructed, adapted, and
  normally employed.  Hinsman v. Marble Sav. Bank, 102 Vt. 217, 220, 147 A. 270, 271 (1929).  Here, in contrast, the parties' lease was not silent as
  to what uses were permitted; rather, the lease explicitly allowed any
  lawful commercial use.  Nevertheless, the court inserted by implication use
  conditions that restricted the uses permitted under the lease.  Assuming
  that we may imply into the lease a condition that any use be reasonable,
  Maxi Drug's intended use of the premises by two established retail
  businesses is not unreasonable.

       ¶  16.  None of the seven factors cited by the trial court supports
  its decision to imply use provisions that are directly contrary to the
  terms of the parties' lease.  The unified space outlined in the original
  architectural floor plans and the detail in the lease referencing specific
  uses connected with a supermarket demonstrate only the parties' recognition
  that, at least initially, Grand Union would be operating a supermarket on
  the premises; those plans and references are not inconsistent with the
  expansive uses explicitly permitted under the lease.  Moreover, nothing in
  the parties' course of dealings over the years demonstrates that they
  intended to restrict the use of the premises to that of a supermarket or
  comparable store.  Nor do speculative and vague predictions about the
  possibility of reduced rental income overcome the explicit language of the
  lease.  Cf. Monmouth Real Estate, 482 A.2d  at 189 (rejecting argument that
  lease provision basing rent on gross receipts showed parties' intent to
  limit use to supermarket).  Nor does the lease require that the premises be
  occupied by a so-called "anchor store."  In short, the trial court erred by
  rewriting the lease to meet the expectations of the parties as perceived by
  the court instead of implementing the unambiguous terms of the lease.
   
       ¶  17.  Given our determination that the lease entitled Maxi Drug to
  divide the subject premises, we reject DBD's cross-appeal arguments. 
  Because the lease permits the tenant to sublet any part of the premises and
  to make alterations and improvements to better adapt the premises to the
  purpose of its business, Maxi Drug acted within its rights in renovating
  the premises so that it could use part of the space for its own business
  and sublet the other part for use by another business.  Therefore the court
  was not obligated, as DBD argues, to enjoin all renovation work, order Maxi
  Drug to restore the premises, and assess damages resulting from Maxi Drug's
  actions.  Nor was DBD entitled to terminate the lease and eject Maxi Drug. 
  The lease gives the tenant the option, following assignment or subletting,
  to disclaim liability under the contract, which would trigger the
  landlord's right to terminate the lease.  DBD has failed to demonstrate
  that the trial court erred in finding that GUMB had not engaged in any
  conduct that reduced its liability to DBD, and that in fact GUMB had
  repeatedly confirmed its continuing obligations and liabilities under the
  lease.  As the trial court noted, the indemnification agreement between
  GUMB and Maxi Drug allocated risk and responsibility between those two
  parties, but did not affect GUMB's contractual obligations to DBD.

       ¶  18.  Our resolution of the principal issue also requires reversal
  of the superior court's determination that Maxi Drug and GUM violated the
  lease's implied covenant of good faith and fair dealing.  "An underlying
  principle implied in every contract is that each party promises not to do
  anything to undermine or destroy the other's rights to receive the benefits
  of the agreement."  Carmichael v. Adirondack Bottled Gas Corp., 161 Vt.
  200, 208, 635 A.2d 1211, 1216 (1993).  Generally, an implied duty of good
  faith and fair dealing "is not understood to interpose new obligations
  about which the contract is silent, even if inclusion of the obligation is
  thought to be logical and wise."  E. Shore Mkts., 213 F.3d  at 182, 184
  (covenant of good faith and fair dealing does not obligate party to take
  affirmative actions that party is not required to take under contract).
   
       ¶  19.  Although there may be instances in which a contracting party
  exercises a retained contractual right in bad faith, Olympus Hills Shopping
  Ctr., Ltd. v. Smith's Food & Drug Ctrs., Inc., 889 P.2d 445, 451 (Utah Ct.
  App. 1994), that is not the case here.  Neither Maxi Drug nor GUMB violated
  the terms of the lease or prevented DBD from obtaining the benefits
  provided under the lease.  Cf. Forrest Drive Assocs. v. Wal-Mart Stores,
  Inc., 72 F. Supp. 2d 576, 585 (M.D. N.C. 1999) (where lease entitled tenant
  to operate discount store in leased premises, tenant cannot have breached
  implied covenant of good faith and fair dealing by doing so).  Although
  Maxi Drug did not disclose to DBD the extent and timing of its renovation
  plan, it entered into negotiations with DBD and informed DBD of its desire
  to divide the premises.  Under the circumstances, neither Maxi Drug nor
  GUMB acted in bad faith.

       ¶  20.  Finally, C & S and GUM briefly argue in their cross-appeal
  that the trial court erred by not dismissing them from the case.  The trial
  court dismissed all causes of action based on breach of contract with
  respect to C & S and GUM, but concluded that its injunctive relief should
  apply against those parties because all of GUMB's directors and employees
  also worked for GUM and C & S.  Given our resolution of the issues on
  appeal, C & S's argument is moot, for all practical purposes.  To the
  extent that it is not, however, we decline to disturb the trial court's
  decision not to dismiss C & S and GUM from the case.

       The superior court's March 18, 2003 decision is reversed insofar as it
  holds that the subject premises must be operated as a supermarket or
  comparable store in a unified space, and insofar as it finds a violation of
  the lease's implied covenant of good faith and fair dealing.  The
  injunction imposed by the superior court is vacated.  The case is remanded
  for the superior court to enter judgment in favor of intervenor and
  defendants with respect to plaintiff's complaint and to consider
  intervenor's claim for damages.


                                       FOR THE COURT:



                                       _______________________________________
                                       Associate Justice