1010 Potomac Associates v. Grocery Manufacturers of America, Inc.

• Decision Date: 14 December 1984
• Docket Number: No. 81-1274.,81-1274.
• Citation: 485 A.2d 199
• Parties: 1010 POTOMAC ASSOCIATES and John H. Safer, Appellants, v. GROCERY MANUFACTURERS OF AMERICA, INC., and Seymour, Seefried & Hoffman, Chartered, Appellees.
• Court: D.C. Court of Appeals

485 A.2d 199

1010 POTOMAC ASSOCIATES and John H. Safer, Appellants, v. GROCERY MANUFACTURERS OF AMERICA, INC., and Seymour, Seefried & Hoffman, Chartered, Appellees.

No. 81-1274.

District of Columbia Court of Appeals.

Argued November 2, 1982.

Decided December 14, 1984.

As Amended December 20, 1984.

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J. Jonathan Schraub, Washington, D.C., for appellants.

Mark H. Tuohey, III, Washington, D.C., with whom Paula M. Connelly and Shelby D. Green, Washington, D.C., were on brief, for appellee Grocery Manufacturers of America, Inc.

Timothy J. Bloomfield, Washington, D.C., for appellee Seymour, Seefried & Hoffman, Chartered.

Before NEWMAN^* and TERRY, Associate Judges, and WERTHEIM, Associate Judge, Superior Court of the District of Columbia.^**

WERTHEIM, Associate Judge:

In this action between a commercial landlord and its trade association tenant, the landlord appeals from a mandatory injunction requiring specific performance of the landlord's obligation to consent to a sublease. The dispute centers on the tenant's right to exercise an option to lease additional space and then sublet all the additional space to a third party at a rate double that payable under the prime lease. Relying upon a clause in the lease permitting subletting only with the landlord's consent, which may not "unreasonably" be withheld, the landlord contends that the lease's option and subleasing provisions were not intended to permit the tenant to enter into the real estate business in competition with the landlord by "flipping" the option and subleasing for economic gain in this manner. It is undisputed that the subtenant was otherwise unobjectionable and that the landlord was itself prepared to offer the same space to the same subtenant at the higher rate. Errors are asserted in the trial court's construction of the lease, in its consideration of parol evidence of the parties' intentions, in the admission of evidence of a pre-litigation offer by the landlord to split the sublease profit with the tenant, and in the grant of equitable relief without an adequate showing of irreparable injury. We affirm.

I

In the fall of 1977, appellee Grocery Manufacturers of America, Inc. (GMA), a national trade association, was seeking new quarters for its District of Columbia offices. At that time GMA occupied 7,800 square feet at 1425 K Street, N.W., but desired about 10,000 square feet to meet both its current needs and the need for additional space for future growth and expansion. The local supply of available commercial space then exceeded demand, creating a "soft" real estate market. Among the buildings with substantial space available was the Waterfront Center at 1010 Wisconsin Avenue, N.W., in Georgetown, then owned by the predecessors in interest of appellants 1010 Potomac Associates (Potomac), a limited partnership, and its general partner John H. Safer. Only three of the eight floors of the Waterfront Center had then been leased; the landlord expressed a strong desire to lease an entire floor to a suitable corporate tenant such as GMA.

The eighth floor of the Waterfront Center contained about 16,000 square feet. GMA proposed to lease, for an initial term of ten years with a renewal term of an additional five years, 12,000 square feet of the eighth floor with options to take the remaining space on that floor in two segments of 2,000 square feet each at the end of the fourth and seventh years.¹ Although the additional 4,000 square feet exceeded GMA's anticipated needs, the options would permit GMA to utilize more space itself if needed and, through subleasing, to control the quality of its neighbors.² Cognizant that the half-empty building had been completed more than a year earlier and needing longer-term financing, the landlord insisted that GMA take a single option for the entire 4,000 square feet of additional space exercisable at the end of the third year, because the landlord "needed a full floor tenant, he needed to walk into his insurance meeting having something—a lease in hand that showed GMA was a full floor tenant."³

GMA agreed to this, and the lease was executed accordingly on November 29, 1977, providing for annual rental payments of $12 per square foot for the initial 12,000 square feet of space.⁴ The option for GMA to acquire the remainder of the eighth floor after three years, also at $12 per square foot, as drafted by the landlord, was subject only to the condition that GMA not be in default at the time the option was exercised.⁵

The subleasing clause, contained in a printed lease form furnished by the landlord, provided in Paragraph 5 that GMA could sublet or assign "the demised premises or any part thereof" only with the prior written consent of the landlord, "which consent shall not be unreasonably withheld." Paragraph 32 of the lease reflected GMA's concern for the quality not only of its immediate eighth floor neighbors but of all other tenants in the building:

. . . [T]he Landlord agrees he will not lease retail space in the building to businesses which would tend to impair the reputation of the building or its desirability as a building for offices or organizations such as Tenant, nor will Landlord lease retail space in the building to businesses which are or encourage disorderly or unlawful conduct, including, but not limited to, massage parlors, pornographic stores or stores selling items customarily used in conjunction with illegal activities.

There is no dispute that the option granted by Paragraph 30 of the lease was exercised by GMA in a timely manner in February 1981, and that proper notice was given to appellants Potomac and Safer, who by then had succeeded to the landlord's interest. Both before and after exercising its option, GMA sought unsuccessfully to find a subtenant for part of the option space for a two- to three-year period and for that purpose showed the additional space with Potomac's consent to several prospective subtenants, including appellee (intervenor below) Seymour, Seefried & Hoffman, Chartered (Seymour), a law firm specializing in antitrust litigation. Seymour concluded that it needed all of the option space for its business operations and that it desired a long-term lease for the entire remaining six and one-half years of GMA's initial lease term, due to the substantial investment required on Seymour's part in fixturing the premises.

GMA and Seymour then negotiated, and on June 11, 1981, GMA submitted to Potomac for its consent, a sublease of the entire 4,000 square feet of GMA's option space commencing November 1, 1981, for the balance of GMA's initial term at an annual sublease rental of $24 per square foot. In reliance upon the sublease, Seymour negotiated the termination of its current office lease effective October 31, 1981, and began steps to prepare the option space at the Waterfront Center for its occupancy.

Within a few weeks Potomac's attorney, at a meeting with GMA's general counsel, advised GMA that Potomac and Safer were willing to consent to the sublease only if GMA would split with them the differential in rent due under the prime lease and the sublease. When GMA declined this offer, Potomac and Safer by letter dated August 6, 1981, refused to consent to the proposed sublease and asserted that GMA's option under Paragraph 30 was limited to GMA itself "expanding" into, rather than subletting, the additional space. However, appellants then stated their intention to offer the same space to Seymour on the same terms and conditions as GMA had offered.

GMA thereupon commenced this action seeking a declaratory judgment, specific performance, and preliminary and permanent injunctive relief. Seymour was granted leave to intervene as a party plaintiff. After a hearing, the trial court denied GMA's application for a temporary restraining order, and thereafter it ordered the trial on the merits to be advanced and consolidated with the hearing on appellee's motion for preliminary injunction. The evidence at trial included testimony of GMA's officers and brokers who participated in the 1977 lease negotiations and that of appellant Safer, who freely acknowledged that the sole basis for appellants' withholding of consent to the sublease was "essentially economic in nature."

Judge Revercomb found the lease terms to be unambiguous and the phrase "option to expand" in Paragraph 30 to mean an option to expand the demised premises subject to the lease rather than, as Potomac and Safer contended, an option only to expand GMA's own business operations into the additional space. Reasoning that the sublease fully protected the landlord's bargain under the prime lease and that Potomac and Safer were not entitled to improve upon that bargain, Judge Revercomb concluded that unstated economic conditions cannot be used by the landlord as a basis for withholding consent to an otherwise valid sublease. The trial court therefore entered judgment in favor of GMA and Seymour and, upon finding that Seymour would suffer irreparable harm absent injunctive relief, enjoined appellants from withholding their consent to the sublease. The court further ordered appellants immediately to execute written consent to the sublease. This appeal followed.

II

Appellants (referred to jointly as "landlord") contend that the lease did not entitle GMA to exercise its option for additional space and then immediately to sublet the entire option space for the balance of GMA's initial lease term to a third party for profit, and that the landlord therefore did not act unreasonably in withholding consent to the sublease to Seymour. The landlord asserts that the trial court's contrary conclusion was based on an erroneous factual finding as to the intent of the parties to the lease. However, the trial court made no such factual finding; as the landlord concedes, the trial court found no ambiguity in the lease. It is clear that the landlord's disagreement is not with any...