Pantry Pride Enterprises, Inc. v. Stop & Shop Companies, Inc.

• Decision Date: 11 December 1986
• Docket Number: 86-3034,Nos. 86-3030,s. 86-3030
• Citation: 806 F.2d 1227
• Parties: PANTRY PRIDE ENTERPRISES, INC., a Pennsylvania Corporation, Appellant, v. The STOP & SHOP COMPANIES, INC., a Massachusetts Corporation, Appellee. PANTRY PRIDE ENTERPRISES, INC., a Pennsylvania Corporation, Appellee, v. The STOP & SHOP COMPANIES, INC., a Massachusetts Corporation, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1227

806 F.2d 1227

PANTRY PRIDE ENTERPRISES, INC., a Pennsylvania Corporation, Appellant, v. The STOP & SHOP COMPANIES, INC., a Massachusetts

Corporation, Appellee.

PANTRY PRIDE ENTERPRISES, INC., a Pennsylvania Corporation, Appellee, v. The STOP & SHOP COMPANIES, INC., a Massachusetts

Corporation, Appellant.

Nos. 86-3030, 86-3034.

United States Court of Appeals, Fourth Circuit.

Argued Oct. 8, 1986.

Decided Dec. 11, 1986.

Charles F. Witthoefft (Michael P. Falzone, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., on brief), for appellant.

William E. Rachels, Jr. (Robert L. Dewey, Peter G. Zemanian, Willcox & Savage P.C., Norfolk, Va., Ronald S. Balk, Boston, Mass., The Stop & Shop Companies, Inc., on brief), for appellee.

Before PHILLIPS and WILKINSON, Circuit Judges, and BUTZNER, Senior Circuit Judge.

WILKINSON, Circuit Judge:

This case presents the question of whether a lessor can exercise its first refusal option with respect to the lease alone when the lessee offers the lease and equipment as a package deal to a third party. The district court granted specific performance of the option, allowing the lessor to accept the lease for the price allocated to it in the package agreement. 630 F.Supp. 637. Finding no abuse of discretion, we affirm the grant of specific performance. We remand, however, for a redetermination of the price at which the lessor may exercise its first refusal right.

I.

In February 1980, Stop & Shop leased a Norfolk shopping center from American Property Investors IX (API). On the same day, Stop & Shop subleased a portion of the shopping center to Pantry Pride for use as a supermarket. Pantry Pride had to notify Stop & Shop of any proposed assignment of the sublease. Stop & Shop then had thirty days to accept "an assignment of the lessee interest in this Sublease ... upon the terms and conditions" of the third party offer.

In October 1984, Pantry Pride sold twenty Virginia supermarkets, including the Norfolk store, to Richmond, Inc. for the price of $9.8 million. At Richmond's request, the acquisition agreement divided the purchase price among the twenty individual stores and further allocated 75% of the purchase price to the equipment and 25% to the leases. The sum of $571,000 was allocated to the Norfolk store, with $428,250 assigned to the purchase of the equipment and $142,750 allocated to the assignment of the lease. Once the terms with Richmond were finalized, Pantry Pride mistakenly notified API, not Stop & Shop, of the proposed assignment. When API did not respond in 30 days, Pantry Pride assigned the lease to Richmond.

Stop & Shop discovered the attempted assignment in February 1985 and informed Pantry Pride that if it assigned the sublease without the required notification, the lease was terminated. Pantry Pride assured Stop & Shop that the attempted October 1984 assignment was invalid. Determined to close the deal with Richmond, however, Pantry Pride quickly notified Stop & Shop of its renewed intention to assign the lease and equipment to Richmond for the same $571,000 purchase price.

After reviewing the acquisition agreement accompanying Pantry Pride's notice, Stop & Shop attempted to take advantage of the modest price allocated to the lease, and notified Pantry Pride that it was exercising its right of first refusal for $142,750.

Pantry Pride rejected this request, arguing that Stop & Shop must buy the lease and equipment for $571,000 or forfeit its option. Shortly thereafter, Pantry Pride brought this declaratory judgment action. The district court ruled in favor of the option holder, Stop & Shop, and granted specific performance of the option at the allocated price of $142,750.

II.

We must determine at the outset the scope of Stop & Shop's right of first refusal. It is clear that the option applies solely to the leasehold interest. The right of first refusal runs solely to "the lessee interest in this sublease" and makes no mention of equipment. Stop & Shop obtained the option to retain some control over the assignment of the sublease, not to gain a right over Pantry Pride's equipment. The lease simply provides Pantry Pride with a building and some adjacent land; the lessee had to buy, install, and ultimately remove its own equipment. If the right of first refusal were to require Stop & Shop to buy both the lease and the equipment, it would be the only lease provision treating the lease and equipment as a single unit. When the entire lease carefully separates the two interests, it is incongruous to argue that Stop & Shop's option extends to the lease and equipment.

In attempting to expand this limited option, Pantry Pride confronted Stop & Shop with the choice of buying the lease and equipment or allowing assignment of the lease to Richmond. Every court to consider the matter has held that a seller cannot force an option holder to buy more property than that covered by the first refusal provision. See, e.g., C & B Wholesale Stationery v. DeBella, 43 A.D.2d 751, 349 N.Y.S.2d 751 (1973); Guaclides v. Kruse, 67 N.J.Super. 348, 170 A.2d 488 (1961). The reason for this line of authority is clear: if Pantry Pride could include the lease as part of a package and force Stop & Shop to accept the entire package or forfeit its right, then Pantry Pride could effectively nullify the right of first refusal by combining the lease with items that Stop & Shop may not want or cannot afford. We hold that Pantry Pride cannot force Stop & Shop into any such predicament. Pantry Pride, moreover, could have "forseen the commercial need to combine" the lease and equipment in a single sale and could have insisted that the equipment be included "in the right of first refusal." Radio WEBS, Inc. v. Tele-Media Corp., 249 Ga. 598, 292 S.E.2d 712, 715 (1982).

III.

Having found that Stop & Shop's right of first refusal applied only to the leasehold interest, the district court might have protected Stop & Shop's option either by terminating the lease, by enjoining the sale of the lease to Richmond, or by granting specific performance of the option. The district court concluded that specific performance was the most appropriate remedy. Such a decision is committed to the sound discretion of trial court. Haythe v. May, 223 Va. 359, 288 S.E.2d 487, 488 (1982). We hold that the grant of specific performance fell within the court's equitable discretion in this case.

We first reject Stop & Shop's claim that termination of the lease is an appropriate remedy. By its terms, the lease could be terminated if Pantry Pride breached any of its "covenants, terms, conditions, or provisions," and failed to cure such default within ten days of written notice from Stop & Shop. When Pantry Pride refused to assign the lease to Stop & Shop for $142,750, Stop & Shop sent a written notice of default. Stop & Shop now concludes that it may acquire the leasehold for nothing because Pantry Pride did not assign the lease within ten days of the notice.

Stop & Shop, however, could not terminate the lease simply by notifying Pantry Pride that it was in default of its obligations. Stop & Shop argues in effect that, when the parties disagreed over a lease provision, it had the unilateral power to interpret and terminate the lease. This argument cuts too broadly. The courts, not Stop & Shop, define Pantry Pride's obligations and determine when a breach occurs. Pierce v. Plogger, 223 Va. 116, 286 S.E.2d 207, 210 (1982). Pantry Pride took a proper approach by bringing this action for a declaratory judgment. The problem of contract interpretation and performance in this case is anything but clear and hardly lends itself to simplistic notions of default and termination.

We cannot accept, however, Pantry Pride's position that the sole remedy to which Stop & Shop is entitled is an injunction of the sale to Richmond. This argument has an initial appeal because a majority of courts faced with this general issue have granted only an injunction. See, e.g., Manella v. Brown Co., 537 F.Supp. 1226 (D.Mass.1982) (applying Maine law); Myers v. Lovetinsky, 189 N.W.2d 571 (Iowa 1971). Although an injunction may be the most appropriate remedy in many of these cases, a brief look at the typical case and its underlying rationales illustrates why the majority approach need not apply here.

In the typical case, a landowner leases a portion of his property to a lessee, who secures a right of first refusal. The landowner subsequently agrees to sell the leased portion and some adjacent property to a third party for a single price. When the lessee tries to purchase only the leased portion of the package, the lessor tries to force the lessee into accepting the package deal or allowing the sale. Most courts resolve this conflict by enjoining the sale of any property subject to the lessee's option. See, e.g., Gyurkey v. Babler, 103 Idaho 663, 651 P.2d 928 (1982); Guaclides v. Kruse, 67 N.J.Super. 348, 170 A.2d 488 (1961).

Several practical problems arise in granting specific performance in these contiguous property cases. The first problem is one of valuation. If a court allows the lessee to buy only the leasehold portion, the court must allocate the single purchase price between the leased portion and the remainder of the lessor's property. Some courts are reluctant to undertake this process, which may require the court to determine the value of each acre offered for sale. See Myers v. Lovetinsky, 189 N.W.2d 571, 576 (Iowa 1971); Guaclides, 170 A.2d at 494.

The second problem is that specific performance may be inequitable for three reasons. First, if the lessor sold the leased and nonleased portions together, he...