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Saul Subsidiary II Limited Partnership v. Venator Group Specialty

August 21, 2003

SAUL SUBSIDIARY II LIMITED PARTNERSHIP, APPELLANT,
v.
VENATOR GROUP SPECIALTY, INC. , APPELLEE.



Appeal from the Superior Court of the District of Columbia (CA1384-98) (Hon. William M. Jackson, Trial Judge)

Before Ruiz, Reid and Glickman, Associate Judges.

The opinion of the court was delivered by: Glickman, Associate Judge

Argued April 3, 2001

This appeal arises out of a commercial lease dispute between Saul Subsidiary II Limited Partnership ("Saul"), the landlord, and F.W. Woolworth Co. ("Woolworth"), now known as Venator Group Specialty, Inc., the tenant. We are called upon to construe a provision of the lease that obligated Woolworth to pay stipulated rent in the event it vacated the demised premises. The case turns primarily on the meaning of the term "vacate." The trial judge construed that term to mean the tenant's physical act of ceasing operations in the premises coupled with the expressed intention by the tenant to discontinue operations. We hold, to the contrary, that the term "vacate" means only the physical act of leaving the premises vacant, and that, regardless of its intentions, Woolworth "vacated" within the meaning of the lease when it ceased doing business, removed its employees and property, and left the premises empty. Our holding requires us to reverse the judgment on appeal and to remand for the trial court to award additional breach of contract damages to Saul. Although Woolworth argues that Saul's claim for those additional damages is barred by accord and satisfaction, the undisputed facts negate that contention.

I.

In 1949, Woolworth entered into a forty-year lease with Saul's predecessor in title for approximately 24,000 square feet of space in a shopping center located at Park Road and 14th Street in Northwest Washington, D.C. The lease was extended in 1989 for an additional ten years, until January 31, 2000. The lease allowed Woolworth to use the demised premises in whatever fashion it chose and to make structural and other alterations as it found "necessary or convenient for its purposes." For nearly fifty years Woolworth elected to operate a general merchandise "Woolworth" store at the Park Road site.

As spelled out in Article 4 of the lease, *fn1 the rent that Woolworth committed to pay had two components. Pursuant to Article 4 (a), Woolworth agreed to a minimum annual rent payable in equal monthly installments. By 1997, this minimum rent had risen to $77,500.00 per year, or $6,458.33 a month. Pursuant to Article 4 (b), Woolworth agreed to pay additional rent for any calendar year in which its sales from the demised premises exceeded $1,291,667, in the amount of six percent of the overage. The parties sometimes referred to this additional rent based on Woolworth's sales volume as "percentage rent." Woolworth further agreed in Article 4 (b) that its additional rent obligation would be computed differently if it vacated the premises. In that event Woolworth agreed to pay as additional rent in lieu of percentage rent an annual sum equal to one-third of the total additional rent (if any) that it had paid for the three calendar years immediately preceding the vacating of the premises. *fn2 The parties referred to this alternative additional rent as "One Third of Three" or "One of Three" rent.

In July of 1997, Woolworth announced that it would shut down its entire chain of general merchandise stores nationwide. Within a few months Woolworth closed its store at Park Road and 14th Street in the District of Columbia, removed its employees, inventory, and trade fixtures, and turned the key over to the landlord. For all intents and purposes the premises were vacant by mid-October, though remaining cleanup and repairs were completed in December. Woolworth delivered a key to the premises to Saul on October 23, 1997 and executed an agreement permitting Saul to enter the premises prior to the termination of the lease. On November 13, 1997, Saul formally notified Woolworth in writing that it had vacated the premises within the meaning of Article 4 (b) of the lease and would owe an annual One of Three rent payment of $168,174.64 for the period from January 1, 1997 through January 31, 2000, the end of the lease term.

Woolworth had originally hoped to replace its Park Road general merchandise store by opening a permanent FootLocker *fn3 store in a portion of the premises. When Woolworth decided to close its general merchandise stores, it identified between 100 and 150 of those stores as candidates for conversion to a FootLocker or other specialty merchandise retail establishment. Woolworth subsequently carried out two types of store conversions. A so-called "permanent conversion" of the sort that Woolworth envisioned for its Park Road store typically involved a substantial investment by Woolworth to renovate and reconfigure the space in order to reopen a brand new specialty merchandise store. In contrast, a "temporary conversion" typically entailed only minimal, cosmetic changes in existing store space to permit it to be used for a relatively brief period as an "outlet" store. Stores identified for temporary conversion commonly were unsuitable for permanent conversion, either because they had only a short amount of time remaining in their lease terms or for other business reasons. Unlike a permanent conversion, a temporary conversion to an outlet store could be implemented quickly and cheaply.

It was not economically feasible for Woolworth to open a permanent FootLocker store at the Park Road site under its existing lease with Saul. The lease had only two-and-a-half years left in its term, and Woolworth did not need nearly as much space for a FootLocker store as it had rented for its general merchandise store. To enable it to pursue a permanent conversion, Woolworth proposed that Saul take back two-thirds of the demised space, extend the lease to January 31, 2008, and adjust the minimum rent and additional rent obligations accordingly. The lease modification negotiations, which began in August 1997, appeared promising, and both parties took preparatory steps in anticipation that a deal would be struck along the lines Woolworth sought. Saul arranged for necessary inspections of the premises, obtained an estimate of construction costs from an independent contractor, and showed the space that Woolworth proposed to surrender to at least one potential tenant. Woolworth obtained architectural and design plans and an asbestos hazard survey, approved the design of a new FootLocker sign, hired an independent contractor to clean out the premises, and requested bids from construction contractors.

In late November 1997, however, the lease modification negotiations foundered. Following a change in its personnel, Saul concluded that the proposed deal was not to its liking. With a conversion to a permanent FootLocker store not a viable option under its existing lease, Woolworth considered its alternatives. "If there is no interest [in modifying the lease]," Woolworth advised Saul by letter dated November 24, 1997, "we will most likely open as an outlet and run out the term of the lease. Obviously, this is not our preferred method." Woolworth was ambivalent about reopening the Park Road store as a temporary FootLocker outlet. As Woolworth's Director of Construction reported on January 8, 1998, the proximity of two other FootLocker stores was "forcing [Woolworth's] operations people to further study the feasibility of this location." Nonetheless, after briefly examining the possibility of purchasing the Park Road property from Saul, Woolworth decided in January 1998 to convert the premises to a temporary FootLocker outlet store - by Woolworth's description, a "bare bones" conversion - which would operate only until the lease expired in January 2000.

By letter dated January 14, 1998, Woolworth informed Saul of its decision to open a FootLocker outlet store. The January 14 letter also contained Woolworth's first response to Saul's November 13, 1997 letter declaring that Woolworth had vacated the premises and would owe One of Three rent in the amount of $168,174.64 beginning with calendar year 1997. In view of its announced intention to open a temporary outlet store, Woolworth denied that it had vacated the premises and stated that it would continue to pay additional rent calculated on the basis of its annual sales volume.

The next day, Saul notified Woolworth that it was in default for failure to make its previously demanded One of Three rent payment for 1997.

Thereafter, Woolworth reported its Park Road store sales for the (truncated) calendar year 1997 to Saul and tendered a check for $88,866.48. The check stub stated that the payment was for "1/97 - 12/97 Percentage Rent" (i.e., six percent of Woolworth's calendar year 1997 sales at the Park Road store in excess of $1,291,667). Nothing else was said to suggest that the check was offered as payment in full of the disputed rent obligation. Saul accepted and cashed the check, notifying Woolworth in writing that it considered it to be "a payment on account and not full payment" of the additional rent due for calendar year 1997. Woolworth then sent Saul a second additional rent check in the amount of $62,387.32. *fn4 Woolworth advised Saul that it made this second payment under protest and reserving all rights, solely to avoid the consequences of being deemed ...


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