Walmart Real Estate Bus. Tr. v. Quarterfield Partners, LLC

WALMART REAL ESTATE BUSINESS TRUST, et al., Plaintiffs, v. QUARTERFIELD PARTNERS, LLC, et al., Defendants.

Case No.: DLB-18-3664

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Northern Division

July 10, 2020

MEMORANDUM OPINION

This case involves a dispute over the terms of a purchase option provision in a ground lease.¹ In 2005, Plaintiffs Walmart Real Estate Business Trust ("Walmart") and Sam's Real Estate Business Trust ("Sam's") each executed a ground lease ("Walmart Lease" and "Sam's Lease") with Defendants Quarterfield Partners LLC, BL Quarterfield Associates LLC, Q.O.P. Properties LLC, and Quarterfield Office Park LLC (collectively, "Quarterfield"). Walmart Lease, ECF No. 55-3; Sam's Lease, ECF No. 55-4.² Each lease pertains to a different parcel of real property that Quarterfield owns in Anne Arundel County, Maryland ("Walmart Parcel" and "Sam's Parcel"). The leases grant Walmart and Sam's the right to build and operate their stores on the properties. Am. Compl. ¶¶ 11, 31, ECF No. 34. The last section of the lease, Section 27, provides, in part,"Lessor hereby grants to Lessee an option to purchase the Premises from Lessor on the terms and conditions set forth herein (the 'Option')." Walmart Lease § 27, at 17. This purchase option provision is the crux of this lawsuit.

On November 29, 2018, Walmart filed suit seeking a declaratory judgment (Count I), breach of contract (specific performance) (Count II) and breach of contract (damages) (Count III). ECF No. 1. On February 14, 2019, an amended complaint was filed, adding Sam's as a plaintiff. Am. Compl., ECF No. 34. In the amended complaint, Walmart and Sam's claim they attempted to exercise their options to purchase the properties pursuant to Section 27 of the lease, but Quarterfield has refused to sell. Plaintiffs ask the Court to declare that the purchase option provision is valid and enforceable and that they "executed their options to purchase the Walmart and Sam's . . . Properties such that they possess the right to purchase Plaintiffs' Parcels at the defined prices pursuant to the Purchase Agreements." Id. at 11. Additionally, plaintiffs ask the Court to order Quarterfield "to convey the Walmart and Sam's . . . Parcels to Walmart and Sam's . . . pursuant to the terms of the Purchase Agreements." Id. at 12.

Before discovery began, Quarterfield moved to dismiss the amended complaint, arguing that under the unambiguous language of the lease's option provision, plaintiffs did not have the option to purchase the property unless and until Quarterfield provided them with notice of the option term, and that, in any event, plaintiffs had missed the window for the option term by several years. ECF Nos. 17, 39. The motion to dismiss was denied. ECF Nos. 42, 43. In her April 12, 2019 Memorandum Opinion, Judge Gallagher aptly observed that "[t]he option clauses at issue are not models of clarity." Walmart Real Estate Bus. Tr. v. Quarterfield Partners, LLC, No. 18-3664-SAG, 2019 WL 1585320, at *5 & n.3 (D. Md. Apr. 12, 2019). Because Judge Gallagher concluded thatthe leases were ambiguous, she denied Quarterfield's motion to dismiss so that the parties could engage in discovery. Id. at *6.

The parties now have completed discovery and filed cross-motions for summary judgment. ECF Nos. 55, 56.³ Walmart and Sam's ask the Court to enter judgment in their favor on their claims for a declaratory judgment and specific performance for breach of contract. Quarterfield seeks judgment in its favor on all counts.

Having reviewed the lease and the record, the Court finds that the plain and unambiguous language of Section 27 of the lease grants Walmart and Sam's an enforceable option to purchase the property during the option term. The Court further finds that the lease is ambiguous as to when the option term began, but after consideration of extrinsic evidence, the Court finds that the option term began at the end of the tenth year after the date the stores opened for business and plaintiffs began paying defendants significant annual rent. Additionally, the Court finds that based on the unambiguous language of the lease, Quarterfield was obligated to send plaintiffs notices of the commencement of the option term, but it failed to do so, in breach of the lease. Because plaintiffs timely attempted to exercise their right to purchase the properties, they have not waived their rights under the lease and are entitled to declaratory relief and specific performance. Accordingly, plaintiffs' motion for partial summary judgment is granted. Quarterfield's motion for summary judgment is denied.

Factual Background⁴

On April 6, 2005, Walmart and Sam's each entered into a ground lease with Quarterfield, in which Quarterfield granted them the right to build and operate stores on separate parcels of real property that Quarterfield owns in Anne Arundel County, Maryland. Walmart Lease; Sam's Lease. The lease states that the "initial term of this Lease shall be for a period commencing on the Effective Date and terminating on the date that is twenty (20) years after the Rent Commencement Date, unless sooner terminated or extended (the 'Initial Term')." Walmart Lease § 2(c), at 3. The Effective Date for both leases is April 6, 2005, the date the last party executed each lease. Id. at 1. The 120-day period after the Effective Date was the "Study Period," during which plaintiffs could terminate their leases "for any reason or for no reason." Id. § 19, at 10-11.

During the three years following the execution of the lease, Walmart and Quarterfield executed fourteen amendments to the Walmart Lease, each extending the Study Period. Fourteenth Am., ECF No. 55-7; Pls.' Mem. 5; Defs.' Mem. 5. The fourteenth amendment provided that Walmart "opened for business on March 5, 2008" and the "Rent Commencement Date is March 5, 2008." Fourteenth Am. Sam's and Quarterfield executed seventeen amendments to the Sam's Lease, each extending the Study Period. ECF No. 55-8; Pls.' Mem. 5; Defs.' Mem. 5, 8. The seventeenth amendment provided that Sam's "opened for business on February 21, 2008" and the "Rent Commencement Date is February 21, 2008." Seventeenth Am.

The lease provided that plaintiffs were required to pay a nominal monthly rent of $100.00 "from the Effective Date until the earlier of (i) the Rent Commencement Date or (ii) termination ofth[e] Agreement by Lessee." Walmart Lease § 3(a). Alternatively, plaintiffs could "elect to make a lump sum rent payment" of $1,000.00, instead of $100.00 per month, and the "lump sum payment [would] serve as the rent . . . for the period from the Effective Date until the earlier of the Rent Commencement Date or termination of th[e] Lease by Lessee." Id. The lease defines "Rent Commencement Date" as "the earlier of (i) the date on which regular business is first conducted from Lessee's building . . . on the Premises or (ii) the date that is twelve (12) months after the . . . 'Possession Date' . . . ." Id. § 2(b), at 2-3. The lease provides that after the Rent Commencement Date, "[d]uring the Initial Term," Walmart will pay annual rent of $772,021.34 ($619,524.00 for Sam's) "from and after the Rent Commencement Date . . . [d]uring the initial twenty (20) year term." Id. § 3(b). During the nearly three-year Study Period before the businesses opened on the Rent Commencement Date, Walmart and Sam's each paid Quarterfield monthly rent payments of $100.00. Guy Aff. ¶ 13, ECF No. 56-5; Pls.' Mem. 7. After the businesses opened, Walmart and Sam's paid Quarterfield annual rent payments of $772,021.34 and $619,524.00, respectively.

The final section of the lease, Section 27, gives rise to the dispute in this case. Section 27, titled "Option to Purchase," states:

From the end of the tenth (10th) year of this Lease until the end of the eleventh (11th) year of this Lease (the "Option Term"), Lessor hereby grants to Lessee an option to purchase the Premises from Lessor on the terms and conditions set forth herein (the "Option"). Notwithstanding the foregoing, the Option Term shall not commence until Lessor sends to Lessee two (2) thirty (30) day notices of the commencement of the Option (the "Option Notice"). In the event Lessor fails to send such notice at the end of the ninth (9th) year of this Lease, then the Option Term shall be moved such that it is for a one year period commencing thirty (30) days after the Second Option Notice has been received by Lessee. Lessee may exercise the option to purchase the Premises by providing thirty (30) days notice to Lessor of its election to exercise the Option (the "Option Notice"). In the event Lessee elects to exercise the Option, (i) the purchase price of the Premises (the "Purchase Price") shall be the product of the annual rent at the time of the Option Notice divided by .0825, for example, during the eleventh (11th) year of the Initial Term of the Lease, the Purchase Price shall be $772,021.34 divided by .0825 or Nine Million Three Hundred and Fifty Seven Thousand Eight Hundred Thirty Four and 43/100 Dollars($9,357,834.43), and (ii) the remainder of the terms and conditions of the purchase and sale of the Premises shall be as set forth in the purchase agreement attached hereto as Exhibit J and incorporated herein (the "Purchase Agreement"). Lessor and Lessee shall negotiate in good faith any additional terms or conditions required by any material changes of law (other than changes in the tax law) that may occur between the date hereof and the Closing, as defined in the Purchase Agreement. In the event that the parties cannot come to an agreement on any such additional terms or conditions within five (5) business days of a request by either party for the incorporation and modification of terms, either company may notify the other that the matter will be submitted for arbitration to a panel of three real estate experts, each of whom shall be experienced in negotiating agreements for the purchase and sale of the type of property

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