Bishop's Corner Associates Ltd. Partnership v. Service Merchandise Co., Inc.

Page 531

720 A.2d 531

45 Conn.Supp. 443

BISHOP'S CORNER ASSOCIATES LIMITED PARTNERSHIP et al. v. SERVICE MERCHANDISE COMPANY, INC., et al. ^*

No. CVH5922.

Superior Court of Connecticut,

Judicial District of Hartford-New Britain

at Hartford.

Oct. 29, 1997.

Horton, Shields & Cormier and Rogin, Nassau, Caplan & Lassman, Hartford, for the plaintiffs.

Day, Berry & Howard, Hartford, for the named defendant.

Pepe & Hazard, Hartford, for the defendant Trigg Realty, LLC.

BEACH, Judge.

This is an action for a declaratory judgment. Through a series of transfers of interests ¹ the plaintiffs are the lessors and the defendant Service Merchandise Company, Inc. (Service) is the lessee of land at Bishop's Corner, roughly the intersection of North Main Street and Albany Avenue in the town of West Hartford. Although the business organization of the plaintiff partnerships is rather intricate, it was apparent from the evidence that the Konover family is the controlling interest; the landlord may be referred to as "the Konovers," except where more precision is necessary.

The lease in issue is a "ground lease" which was executed in 1965; a significant amendment was executed in 1966. Both the original lease and the amendment refer to neighboring land, also to be used for retail purposes. The term of the ground lease is sixty-five years. As contemplated in the lease, a building for retail purposes was constructed; the building contains approximately 69,000 square feet. In 1989, Service subleased to another retail business, The Casual Male, a portion of the premises consisting of approximately 2400 square feet.

Early in 1997, Service, which operates a number of retail locations in a number of states, made the business decision to close a number of its stores. By letter dated March 27, 1997, Service notified Konover that it intended to close the Bishop's Corner store; it stressed that it intended "to honor the terms of our lease" and that it hoped to find "a replacement user" as soon as possible. In the next several months Konover and Service discussed the logical option of Konover's purchasing Service's leasehold interest, but the negotiations terminated when the parties were too far apart on price.

Specific negotiations between Michael Konover and Simon Konover ² on one side and Ray Zimmerman, the chief executive officer of Service, and Floyd Dean, Service's vice president for real estate, on the other, took place at a convention in Las Vegas, Nevada, in May, 1997. It became clear that the parties were far apart, and Michael Konover mentioned that a provision in the lease might present some difficulty for Service. After the convention, Dean expressed some difficulty in finding what provision he was referring to; Michael Konover ended up faxing to Service a copy of § 21(b) of the original lease, which, among other things, indicated that "if Tenant shall vacate or abandon the demised premises, Landlord shall have the right to cancel and terminate this lease, as well as all of the right, title and interest of Tenant" in the ground lease. The fax was sent on June 4, 1997, and the language regarding vacating the premises was highlighted with an arrow.

About one week before Michael Konover's fax, on May 27, 1997, Service and the defendant Trigg Realty LLC. (Trigg) had entered into an agreement regarding the assignment of the lease from Service to Trigg. The agreement was an option agreement of sorts: subject to a review period and other conditions, Trigg agreed to purchase the lease for $3,500,000. This was considerably more money than Konover had offered. The closing date was to be within forty-five days. During the review period, Trigg began to conduct various feasibility studies, including Phase I and Phase II environmental studies. Almost from the day of signing the agreement, Trigg was engaged in marketing the premises to retailers, as Trigg had no intention of being the ultimate user of the premises.

On July 8, 1997, Trigg sent Service a letter that expressed some concern about possible environmental problems. On July 10, 1997, an amended agreement between Trigg and Service was executed. In this agreement, the review period was extended to August 10, 1997, with a contemplated closing by no later than September 12. There was no evidence that either Service or Trigg anticipated this declaratory judgment action, which was brought by Konover on July 14, 1997. Thus, as of July 11, 1997, the premises most likely would not be able to be occupied for several months.

In the meantime, Service, acting through its general counsel, Michael Brennan, wrote to Michael Konover on June 6, 1997, two days after receiving Konover's fax. He stated unequivocally that Service "had no plans to vacate or abandon the subject premises, and will continue to abide by the terms of its lease." He went on to state that Service would cease retail operations until a suitable replacement could be found. He said that a contract to assign the premises to Trigg had been signed, and he cautioned Konover not to interfere tortiously with that contractual arrangement. He enclosed with the June 6 letter an "estoppel letter" for Michael Konover to sign; the estoppel letter in effect represented that there were no known defaults or other defenses "now existing" against the enforcement of any provisions of the lease. Konover's counsel replied to Brennan's letter on June 12, 1997: he thanked Brennan for the "update" on Service's intentions as to the premises, and bristled somewhat at other portions of the letter. He indicated that recent communications "focused precisely on the need for strict compliance with the terms of the lease" and said that Konover would "continue to vigorously enforce the lease in strict accordance with its terms." The estoppel certificate was, with a modification not relevant here, signed on June 26 and returned on June 30, 1997. At about the same time, on June 23, 1997, Michael Konover wrote to Dean at Service and suggested that if Service's contract with Trigg fell through (though Trigg was not specifically referenced), Service might want to discuss a possible deal with Konover.

On July 11, 1997, Service discontinued its retail operation on the premises. ³ The undisputed testimony is that left inside the building were a rather formidable jewelry display structure, two conveyor belts that transported merchandise to and from the basement, considerable shelving, and a small amount of furniture. The first floor was empty except for the jewelry display, some shelving, some of which was disassembled, and other miscellaneous items. The basement was more full: metal shelving on which inventory had been placed was still in place, as were two conveyor belt apparats designed to move merchandise between floors. Some desks and chairs in offices were still there. Apparently all of the inventory was gone, and there were no longer any employees on the premises. Signs indicated to would-be customers that Service had closed at that location. Service was, however, current on its rent and all other financial obligations, and a security system remained in place. The Casual Male continued to be in operation in its portion of the premises.

July 11 was a Friday. Michael Konover viewed the premises as well as he could from the outside on that day. On Monday, July 14, 1997, this declaratory judgment action was instituted. The action seeks a declaration that Service has run afoul of the "vacate or abandon" clause and that Konover may pursue its remedies under the lease. Service has, in its answer, admitted many of the factual allegations, but denies that Service has vacated or abandoned the premises. It also claimed estoppel as a special defense, and in a counterclaim sought injunctive relief against interference with the assignment to Trigg. ⁴ Trigg was also named as a defendant, quite appropriately, as it quite clearly has an interest in the controversy. Trigg's answer was similar to that of Service, it added, however, defenses of waiver and "unclean hands" on the part of Konover.

Trial was held on various days in September and October, 1997, and the parties submitted two rounds of briefs. ⁵ The fundamental issue is whether, in the circumstances outlined previously and to be developed in somewhat more detail subsequently, Service vacated the premises as the term was used in the lease.

There does not appear to be any binding Connecticut authority applying a "vacating or abandoning" clause in a lease. It should be noted at the outset that Konover has expressly abandoned any claim that Service has abandoned the premises; the sole issue, for the purpose of this part, is whether Service has vacated the premises. Though the parties of course differ as to the conclusion, their arguments agree on many points. There is no clause prohibiting the cessation of retail operations, and it is agreed that the mere ceasing of operations does not in itself constitute a vacatur of the premises. Konover contends that the building was substantially emptied of inventory and fixtures, such that the premises were vacated. Service and Trigg argue that because items of some value were left behind, a portion of the premises was still being operated as a retail store by The Casual Male, rent and other payments were being made (or at least not discontinued), the security system was still operative, and every intention was expressed to replace the premises with a new retail operator with some expedition, the premises were not vacated. Additionally, the defendants argue that because the lease, as amended in 1966, also includes a clause providing that "the lessee interest shall be at all times freely transferrable" and that the tenant shall have the right to sublease any portion of the premises, the intention of the parties must have been to allow some period of transition between occupants.

The case perhaps most helpful to the defendant is In the Matter of Cheshire Molding Co., 9...