Pantry Pride Enterprises v. Stop & Shop Companies

• Decision Date: 10 February 1986
• Docket Number: Civ.A. No. 85-252-N.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: PANTRY PRIDE ENTERPRISES, INC., Plaintiff, v. The STOP & SHOP COMPANIES, INC., Defendant.

630 F. Supp. 637

PANTRY PRIDE ENTERPRISES, INC., Plaintiff, v. The STOP & SHOP COMPANIES, INC., Defendant.

Civ.A. No. 85-252-N.

United States District Court, E.D. Virginia, Norfolk Division.

February 10, 1986.

Charles F. Wittoefft, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for plaintiff.

William E. Rachels, Jr., Willcox & Savage, P.C., Norfolk, Va., for defendant.

ORDER

CLARKE, District Judge.

This matter has been submitted to the Court for final decision on stipulated facts, the parties agreeing that the case can be decided on the merits on the basis of the file as now constituted. Briefs have been submitted by both parties, and oral argument heard on December 30, 1985. Accordingly, this matter is ripe for disposition.

The relevant stipulated facts can be summarized as follows. The plaintiff, Pantry Pride Enterprises, Inc. ("Pantry Pride") is the subleasee of commercial property located at 201 East Little Creek Road in Norfolk, Virginia ("Little Creek premises"). The defendant, The Stop & Shop Companies, Inc. ("Stop & Shop"), is the sublessor of this property, and also occupies commercial premises adjoining the property that is the subject of the sublease. Under section 3.13(a) of the sublease, the subleasee is permitted to assign or further sublet its interest in the premises. The dispute involves section 3.13(b) of the sublease, under which the sublessor is given a right of first refusal with regard to any proposed sublease under section 3.13(a). Section 3.13(b) provides in pertinent part that:

prior to making any such assignment or sublease, SubLessee Pantry Pride shall first notify SubLessor Stop & Shop of the name of the proposed assignee or sublessee and all of the terms and conditions of the proposed assignment or sublease. Stop & Shop shall have the right, by written notice sent within thirty (30) days after its receipt of that notice from Pantry Pride, to accept an assignment of Pantry Pride's interest in this Sublease or to sublet from Pantry Pride the Demised Premises upon the terms and conditions set forth in Pantry Pride's said notice and, should Stop & Shop exercise its election to do so, within fifteen (15) days following the sending of such notice by Stop & Shop, Stop & Shop and Pantry Pride shall execute instruments containing those terms and effecting the assignment or sublease from Pantry Pride to Stop & Shop.

(Ex. 1 at 18-19) (emphasis added).

In October of 1984, Pantry Pride agreed to sell to Richmond, Inc. ("Richmond") its entire leasehold and property interests at twenty retail locations owned or leased by Pantry Pride in Virginia, including the premises covered by the sublease. Of the total purchase price of $9.8 million, $571,000 was allocated to the leasehold and equipment at the Little Creek premises. Richmond and Pantry Pride further agreed to allocate the purchase price assigned each retail location between equipment and leasehold. Seventy-five percent of the purchase price of each location was allocated to equipment, twenty-five percent to leasehold, resulting in allocations of $428,250 and $142,750 respectively for the equipment and leasehold at the Little Creek premises.

In February of 1985, Pantry Pride notified Stop & Shop of its intention to assign its interest in the sublease to Richmond in the manner described above. In March of 1985, and within the period allowed in section 3.13(b), Stop & Shop notified Pantry Pride of its intent to exercise its right to accept an assignment of Pantry Pride's interest in the sublease by agreeing to pay Pantry Pride $142,750, the amount allocated by Pantry Pride and Richmond for the value of the leasehold. Stop & Shop also notified Pantry Pride that Pantry Pride had the right to remove any machines or equipment which it had installed at the premises. (Ex. 9).

Pantry Pride then notified Stop & Shop that it rejected Stop & Shop's exercise of its right of first refusal because Stop & Shop had not accepted the "precise terms and conditions" on which Pantry Pride was prepared to assign its interest to Richmond. (Ex. 10). In response, Stop & Shop claimed that Pantry Pride was in default if it failed to honor the right of first refusal. (Ex. 12). Pantry Pride thereafter brought this action for declaratory judgment, seeking to resolve the rights of the parties as they relate to the proposed assignment. Although no one has occupied the premises since November of 1984, Pantry Pride has continued to pay Stop & Shop the rent due under the sublease.

Pantry Pride contends that Stop & Shop could only exercise its right of first refusal by accepting all the terms of the proposed sublease; in other words, by agreeing to purchase Pantry Pride's interest in both leasehold and equipment for $571,000. This position, however, is wholly unsupported by the language of the sublease and by the relevant case law. Under the terms of section 3.13(b) of the sublease, the right of first refusal relates to assignments of the lessee's (Pantry Pride) "interest in the sublease," (Ex. 1), not to equipment installed on the premises. See, e.g. Ex. 1 at § 3.14(b) (equipment and fixtures referred to as "Lessee's Equipment"). Pantry Pride knew when it signed the sublease that it would be putting equipment in the store, but chose not to involve fixtures in the scope of the first refusal clause.

It is universally recognized that the holder of a right of first refusal cannot be compelled to purchase more property than is subject to the right of first refusal, or else forfeit its first refusal rights. Gyurkey v. Babler, 103 Idaho 663, 667, 651 P.2d 928, 932 (1982) (and cases cited therein); Guaclides v. Kruse, 67 N.J.Super. 348, 359, 170 A.2d 488, 495 (1961); see also 34 A.L. R.4th 1217 (1984); 170 A.L.R. 1068 (1947). On the other hand, First National Exchange Bank v. Roanoke Oil Co., 169 Va. 99, 192 S.E. 764 (1937), cited by plaintiff in support of its position, is simply inapposite. There the holder of a right of first refusal accepted a package offer to purchase properties in addition to those covered by the lease. When the other party balked, the holder of the right of first refusal sought and received specific performance. Id. at 117, 192 S.E. at 771. The court there did not reach the question of whether the holder of first refusal rights loses those rights if it does not accept such a package.

The Court is not aware of any case law to the contrary. The rationale behind the rule is simple. To hold otherwise would allow the subleasee in this case to render the sublessors right of first refusal a "nullity" merely by adding additional property to the property covered by the agreement. Straley v. Osborne, 262 Md. 514, 523, 278 A.2d 64, 69 (1971). Thus, it is clear that Stop & Shop could not be required to purchase both Pantry Pride's leasehold interest and equipment or else lose its first refusal rights.

The only real issue before the Court, then, is the remedy available to Stop & Shop. Stop & Shop seeks an order of specific performance compelling Pantry Pride to convey its interest in the leasehold for $142,750. Pantry Pride, on the other hand, contends that the only relief Stop & Shop could be entitled to is an injunction preventing the sale or assignment of Pantry Pride's leasehold interest to Richmond.

This action is brought under the Court's diversity jurisdiction, 28 U.S.C. § 1332, and therefore requires the application of Virginia substantive law. Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The issue before the Court has not yet been addressed by the Virginia Supreme Court, and there is a clear split among the jurisdiction as to the appropriateness of specific performance where the holder of a right of first refusal seeks to exercise that right in relation to a piece of land that is being sold as part of a larger tract...