Spanish Oaks, Inc. v. Hy-Vee, Inc.

• Decision Date: 17 January 2003
• Docket Number: No. S-02-012.,S-02-012.
• Citation: 655 N.W.2d 390,265 Neb. 133
• Parties: SPANISH OAKS, INC., and Robert A. Weigel, Appellants, and Cross-Appellees, v. Hy-VEE, INC., et al., Appellees and Cross-Appellants.
• Court: Nebraska Supreme Court

655 N.W.2d 390

265 Neb. 133

SPANISH OAKS, INC., and Robert A. Weigel, Appellants, and Cross-Appellees, v. Hy-VEE, INC., et al., Appellees and Cross-Appellants.

No. S-02-012.

Supreme Court of Nebraska.

January 17, 2003.

Daniel E. Klaus and Carl J. Sjulin, of Rembolt, Ludtke & Berger, L.L.P., Lincoln, for appellants.

Robert T. Grimit and David D. Zwart, of Baylor, Evnen, Curtiss, Grimit & Witt, L.L.P., Lincoln, for appellees.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

GERRARD, J.

I. NATURE OF CASE

Spanish Oaks, Inc., is the owner in fee simple of a 7-acre parcel of real property located in Lincoln, Nebraska. Hy-Vee, Inc., is the current lessee of the property. Spanish Oaks, Inc., and its sole stockholder, Robert A. Weigel (collectively Spanish Oaks) seek a declaratory judgment regarding (1) the terms of the lease between Spanish Oaks and Hy-Vee and (2) the validity of a restrictive covenant contained in a sublease from Hy-Vee to Ocho Properties, L.L.C. (Ocho).

II. BACKGROUND

1. FACTUAL BACKGROUND

The original ground lease of this 7-acre property was executed in 1978. Briar West, Inc., leased the property to Commerce Development Associates. The ground lease provided for a 25-year term, with fixed annual rental payments during the base term. When the base term expires, the lessee may extend the ground lease for six periods of 5 years each, with the annual rent to be adjusted at the beginning of each option period, generally based on the assessed value of the property.

The original tenant, Commerce Development Associates, assigned its interest in the ground lease to Safeway, which, in 1982, assigned that interest to Hy-Vee. Hy-Vee took possession of the then-undeveloped property and commenced construction of a building to operate as a supermarket. The fee simple estate was later purchased by Spanish Oaks, after construction of Hy-Vee's supermarket building had commenced. Weigel testified that he reviewed the ground lease prior to the purchase of the property. The Hy-Vee store opened in 1985. In 1986, Hy-Vee sublet a portion of the premises to the Lerner Company (Lerner); Lerner, in turn, sub-sublet those premises and is the landlord for other retail tenants.

Spanish Oaks is a real estate holding development corporation, and Weigel is its sole stockholder and president. Weigel practiced law for several years specializing in commercial real estate and then became involved in commercial real estate development; Weigel (through different business entities) owns several shopping centers, and the tenants of these centers include grocery stores and other national stores.

Hy-Vee subsequently ceased to operate a supermarket on the premises, opening a new, larger supermarket nearby. In 1998, Hy-Vee subleased its former grocery store and parking lot to Ocho and sold its improvements on the property to Ocho. The Hy-Vee/Ocho sublease contains a use restriction that permits the sublet premises to be used for retail purposes so long as such purposes do not include a mass-merchandise or discount store operation similar to Wal-Mart, Kmart, Target, grocery stores, or stores engaged primarily in the consumer sale of pharmaceuticals. Ocho also sub-sublet its portion of the premises; at the time of trial, a World Gym was operated on the premises, as well as a Burger King.

2. PROCEDURAL BACKGROUND

Spanish Oaks sought a declaratory judgment in the district court regarding the use restriction in the Hy-Vee/Ocho sublease and the rent adjustment provision of the ground lease. Spanish Oaks alleged that the use restriction should be voided because it violates the duty of good faith and fair dealing owed by Hy-Vee to Spanish Oaks, it violates Hy-Vee's duty to develop the property for the mutual benefit of both the landlord and tenant, and it is a restraint on alienation and violates public policy. Spanish Oaks also alleged that the ground lease, which caps the annual rent on the premises at $90,000 or "thirty percent (30%) of Tenant's annual gross rental receipts from Tenant's subleases, which ever is greater," should be construed to refer not to Hy-Vee's subleases to Ocho and Lerner, but to Ocho and Lerner's sub-subleases to their sub-sublessees.

The district court rejected Spanish Oaks' arguments. The district court concluded that the ground lease was unambiguous, that Hy-Vee was the "[t]enant" of the ground lease, and that the plain language of the contract capped the rent adjustment based only on Hy-Vee's subleases. The district court also determined that the ground lease provided Hy-Vee broad discretion to use the premises as it saw fit and that the use restriction of the Hy-Vee/Ocho sublease was a valid exercise of Hy-Vee's authority.

The district court also noted, in dicta, that there appeared to be a dispute among the parties about when the rent adjustments for the option periods of the ground lease were to go into effect. The district court stated that "[t]he parties have not requested in the pleadings that the court determine when the original lease expires or when the rent adjustments take effect. Therefore, the court does not resolve this dispute." An examination of the pleadings, pretrial memoranda, and pretrial order reveals no indication that the issue of the expiration date of the base term of the ground lease was ever presented to the district court.

III. ASSIGNMENTS OF ERROR

Spanish Oaks assigns, summarized and restated, that the district court erred in finding (1) that the use restriction of the Hy-Vee/Ocho sublease is valid and enforceable and (2) that the rent adjustment provision of the ground lease was unambiguous and that the term "subleases" does not refer to the subtenants actually occupying the property.

On cross-appeal, Hy-Vee assigns, as restated, that the district court erred in not determining the date of the first rent adjustment and the termination date of the ground lease.

Ocho and Lerner, as appellees, did not file briefs, but have filed statements concurring with the brief filed by Hy-Vee.

IV. STANDARD OF REVIEW

An action for declaratory judgment is sui generis; whether such action is to be treated as one at law or one in equity is to be determined by the nature of the dispute. Lake Arrowhead, Inc. v. Jolliffe, 263 Neb. 354, 639 N.W.2d 905 (2002). When a dispute sounds in contract, the action is to be treated as one at law. Nebraska Pub. Emp. v. City of Omaha, 247 Neb. 468, 528 N.W.2d 297 (1995).

The question of a party's good faith in the performance of a contract is a question of fact. Strategic Staff Mgmt. v. Roseland, 260 Neb. 682, 619 N.W.2d 230 (2000). Determinations of factual issues in a declaratory judgment action treated as an action at law will not be disturbed on appeal unless they are clearly wrong. See Woodmen of the World Life Ins. Soc. v. Yelich, 250 Neb. 345, 549 N.W.2d 172 (1996).

The meaning of a contract, and whether a contract is ambiguous, are questions of law. See, Kosmicki v. State, 264 Neb. 887, 652 N.W.2d 883 (2002); Malone v. American Bus. Info., 264 Neb. 127, 647 N.W.2d 569 (2002). The determination of whether a contract violates public policy is a question of law. American Fam. Mut. Ins. Co. v. Hadley, 264 Neb. 435, 648 N.W.2d 769 (2002). In an appeal from a declaratory judgment, an appellate court, regarding questions of law, has an obligation to reach its conclusion independently of the conclusion reached by the trial court. DLH, Inc. v. Lancaster Cty. Bd. of Comrs., 264 Neb. 358, 648 N.W.2d 277 (2002).

V. ANALYSIS

1. EXCLUSION CLAUSE

(a) Standing

We first note that there is some question whether Spanish Oaks has standing to challenge the use restriction in the Hy-Vee/Ocho sublease. The general rule is that only a party (actual or alleged) to a contract can challenge its validity. In re Vic Supply Co., Inc., 227 F.3d 928 (7th Cir.2000). "Obviously, the fact that a third party would be better off if a contract were unenforceable does not give him standing to sue to void the contract." Id. at 931.

In this case, however, while Spanish Oaks is not a party to the Hy-Vee/Ocho sublease, Spanish Oaks has standing to challenge the use restriction in the sublease. Spanish Oaks argues that the use restriction constitutes a breach of the covenant of good faith and fair dealing implied by the ground lease; thus, Spanish Oaks is alleging a breach of the ground lease, to which it is a party. Spanish Oaks also claims that the sublease creates a restraint on alienation and that as the fee simple owner of the property, it has standing to raise this claim.

(b) Public Policy

Spanish Oaks argues that the use restriction is a restraint on alienation that is void because it violates public policy. However, it is a well-established general rule that the parties to a lease may, by express provisions, restrict the uses to which the demised premises may be put, so long as the restriction is reasonable and not contrary to public policy, and a covenant binding the lessee not to carry on a particular business on the leased premises is binding and enforceable. See, e.g., Vermont Nat. Bank v. Chittenden Trust Co., 143 Vt. 257, 465 A.2d 284 (1983); Brookings Mall, Inc. v. Cpt. Ahab's, Ltd., 300 N.W.2d 259 (S.D.1980); Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 390 N.E.2d 243 (1979); Elida, Inc. v. Harmor Realty Corporation, 177 Conn. 218, 413 A.2d 1226 (1979); Tullier v. Tanson Enterprises, Inc., 367 So.2d 773 (La.1979); Pitts v. Housing Auth., 160 Ohio St. 129, 113 N.E.2d 869 (1953); Neiman-Marcus Company v. Hexter, 412 S.W.2d 915 (Tex.Civ. App.1967). See, generally, 42 Am.Jur.2d Landlord and Tenant § 505 (1995 & Supp. 2002). This court so held in Herpolsheimer v. Funke, 1 Neb. (Unoff.) 304, 95 N.W. 687 (1901). Cf. Wittenberg v. Mollyneaux, 60 Neb. 583, 83 N.W. 842 (1900) (partial restraints upon exercise of business, trade, or profession are reasonable when ancillary to purchase of property, made in good faith, and...