Westside Center Associates v. Safeway Stores 23, Inc.

• Decision Date: 05 February 1996
• Docket Number: No. F019980,F019980
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 890, 96 Daily Journal D.A.R. 1306 WESTSIDE CENTER ASSOCIATES, Plaintiff and Appellant, v. SAFEWAY STORES 23, INC., et al., Defendants and Appellants.

Page 793

49 Cal.Rptr.2d 793

42 Cal.App.4th 507, 96 Cal. Daily Op. Serv. 890,

96 Daily Journal D.A.R. 1306

WESTSIDE CENTER ASSOCIATES, Plaintiff and Appellant, v. SAFEWAY STORES 23, INC., et al., Defendants and Appellants.

No. F019980.

Court of Appeal, Fifth District, California.

Feb. 5, 1996.

Certified for Partial Publication ^*

Klein, Wegis, DeNatale, Hall, Goldner & Muir, David J. Cooper and David L. Saine, for Plaintiff and Appellant.

Fenton & Keller and Larry E. Hayes, for Defendants and Appellants.

MARTIN, Acting Presiding Justice.

This appeal involves a neighborhood shopping center in the Kern County community of Taft. The anchor position at the center was occupied for many years by a Safeway supermarket in which the various defendants (identified collectively as Safeway) have held an interest at some point. Safeway leased the building from a series of owners, none of which is still a party to this action. Ownership of the remainder of the center, consisting of numerous smaller stores, also passed through several hands before being acquired by the plaintiff, a partnership known as Westside Center Associates (WCA). Thus the shopping center was "fragmented" in that parts of it were owned by different entities; significantly, WCA never owned the Safeway building. It was in this configuration that the present dispute arose.

Citing a loss of profitability, Safeway closed the supermarket in 1987 with about 15 months left on its 20-year lease. Business at the rest of the center suffered as a result. About a year later, Safeway removed all the store fixtures. Soon after that, although it had no plans to reopen the supermarket and the parties had been unable to find a suitable replacement tenant, Safeway executed its option to renew the lease for an additional five years.

The anchor position remained vacant. Faced with foreclosure, WCA sold its interest in the center in 1989 at what it claims was a loss of more than $2 million. It subsequently sued Safeway for damages alleging breach of an implied covenant to remain in operation throughout the lease period, and for tortious interference with prospective economic advantage. WCA contended the Safeway defendants had conspired to close the supermarket and keep the building vacant in order to drive down the value of the center. They then hoped, according to WCA, to buy the property at an artificially low price, bring in a new anchor tenant, and profit from the center's resulting recovery.

The trial court granted judgment in favor of Safeway on all causes of action following lengthy pretrial proceedings in which the court was called upon to decide various questions of law based upon stipulated facts and offers of proof. WCA challenges several of the court's rulings on appeal. We affirm the judgment.

I. FACTUAL BACKGROUND

The shopping center site was purchased in 1964 by Westside Center, a joint venture consisting of Ernest W. Hahn, Inc., a large shopping center developer, and Lester Causey and Don Rook, two commercial real estate brokers in Taft. Westside Center, in turn, agreed to construct and lease two adjacent buildings in the proposed development to Safeway Stores, Inc., for a Safeway supermarket and a Super S drug store. The two stores were to serve as the center's anchor tenants; together they would occupy nearly 50,000 square feet, or about 40 percent of the projected retail space. The rest of the property was to be occupied by local businesses and smaller chain stores.

The anchor tenant at a neighborhood shopping center is commonly regarded within the industry as an important if not crucial element in the center's success. It attracts shoppers who also can be expected to patronize the satellite stores which, if things go as planned, generate much of the owner's profit by filling the remaining space and paying rents based on the added business drawn by the anchor. Given its importance, the anchor tenant is typically able to acquire space in the center on more favorable terms than the other tenants. That was true at the Taft center.

Westside Center signed two 20-year leases with Safeway in 1964, to be effective when Safeway took possession of the completed buildings (in mid-1966). The leases required Safeway to pay a minimum base rent increasing to $75,588 per year by the fifth year and remaining constant thereafter, plus an additional amount based on a percentage of the stores' gross sales. ¹ Safeway also reserved the option of renewing the leases on the same terms for up to four additional five-year periods, ² effectively locking in the favorable rental rates for up to forty years. Moreover, unlike some other tenants, Safeway's leases did not expressly require it to remain in operation throughout the lease period nor restrict its use of the buildings to certain purposes.

Safeway's preeminent role as the anchor tenant was further reflected in a second related agreement signed the same day between it and Westside Center entitled a "Grant of Easements and Declaration of Restrictions" (CC & Rs). Anticipating the possibility that ownership of the center might be divided, the agreement generally set out the rights and obligations of the owners with respect to one another. In addition, it restricted their right to use the center to sell groceries or prescription drugs in competition with Safeway and Super S. The CC & Rs did not impose any comparable restrictions on Safeway's use of the leased buildings. ³

In 1971, Westside Center sold its interest in the Safeway and Super S buildings to the Alameda Amusement Company which, in turn, sold the property to the Osugi family some two years later for $966,000. In 1974, Safeway removed the common wall between the two stores and consolidated their operation into a single expanded supermarket. Safeway and the Osugis modified the lease accordingly and in the process also extended it to June 30, 1988. Safeway's base rent, $75,588 per year, stayed the same; Safeway also remained liable for percentage rent although the amount was determined by a somewhat different formula than before. Later that same year, the Osugis transferred the store property to a trust administered first by the Bank of America and later by Wells Fargo Bank.

In 1982, Ernest W. Hahn, Inc., which had since become the sole owner of Westside Center, sold its remaining interest in the center (i.e., that portion exclusive of the Safeway building) to Ralph Wegis and Wayne Stewart for $750,000. They transferred it in 1984 to the plaintiff, Westside Center Associates, a partnership made up of Wegis, Don Rook (who had been a partner in the original Westside Center), and Leonard Gentieu.

During the next two years, WCA remodeled the center (including the Safeway building) with a $3.1 million loan from the Torrey Pines Bank. Among other things, WCA added a Payless drug store in 1985, a change which required WCA, Safeway, and the Osugi trust to modify the CC & Rs to remove the restriction on sales in competition with Safeway. An appraisal done in 1986 in connection with the loan put the value of WCA's property at $5.25 million.

The remodeling was spurred in part by the anticipated development of a second shopping center nearby to be anchored by a Lucky's supermarket. The Lucky's center opened in 1986. Coincidentally the local economy declined in Taft, a community closely tied to the oil industry. Sales at the Safeway supermarket declined significantly over the rest of the year. Citing its losses, Safeway closed the Taft store in March of 1987 along with several others in its southern California region.

Closure of the supermarket, in turn, hurt business in WCA's portion of the shopping center. Some of the satellite stores closed; others sought and received rent concessions. As a result, WCA had trouble making its loan payments. In August 1987, it listed its property for sale for $4 million. It also made various unsuccessful attempts to locate a new anchor tenant. The most suitable prospect was thought to be a smaller regional grocery chain such as Save Mart rather than a national chain like Safeway. And there was apparent agreement the success of any effort to replace Safeway would depend to a large degree upon unifying ownership of the center. Accordingly, that possibility was explored in various discussions between WCA, Safeway, and the Osugi trust.

The role taken by Safeway in the search for a new anchor tenant was generally unremarkable in the first year following closure of the supermarket. Safeway transferred its leasehold interest to its nonoperating properties division, which listed the store with a commercial real estate broker. Safeway's primary options at that point were to sublet or assign its lease to another grocery chain ⁴ or simply to allow the lease to expire as scheduled on June 30, 1988. By the end of 1987, however, Safeway's actions took what WCA perceived to be a decidedly more sinister turn.

According to WCA, Safeway made the decision to close the supermarket shortly after Safeway was acquired in a leveraged corporate buyout in 1986. The new owner allegedly decided to shift the company's focus in part from operating retail grocery stores to speculating in real estate by exploiting the value of its long-term leaseholds. It took what WCA claims was a first step in that direction by creating a separate subsidiary, the defendant Property Development Associates (PDA), to manage its many vacant stores, including the one in Taft. And it hired Joseph Bryne as the president of PDA in February 1988.

Bryne previously had been the president of Glickman, Bryne & Associates, a firm which developed and managed shopping centers in the western United States. Upon his move to PDA, Bryne was replaced by Kris Hoffman who had been an executive with Save Mart. By WCA's reckoning, Bryne and Hoffman soon devised the following scheme to take over the Taft center: Bryne would use his control of the Safeway leasehold to frustrate any efforts by...