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Downtown Barre Development v. GU Markets of Barre, 2011 VT 45 (mem.).
Today’s case arises out of a long-term lease, a tenant’s series of corporate shell games, and a landlord attempting to end a lease with a shadowy corporation. Does that sound familiar Gov. Peter Shumlin? No, I am not talking about the state’s dispute over Vermont Yankee. Unlike the state’s relationship with its most infamous tenant, the landlord in this case (Downtown Barre Development) doesn’t seem to trust that its tenant (GU Markets of Barre) is even real enough to keep its end of the lease agreement.
Here is how the case of the phantom tenant came to be. In 1973 Downtown Barre Development and Grand Union Stores, Inc. agreed to terms on a 20-year lease on a commercial property in Barre. All was well, and in 1981 the lease was modified to allow options for renewal every five years, potentially lasting until 2023.
After exercising this option several times, Grand Union went bankrupt in 2000. At this time another corporation, C & S Wholesalers, purchased many of Grand Union’s assets (including the lease in question) and created Grand Union Markets, LLC to hold them. (Make sure you watch the shell closely now!)
C & S then went one step further and created separate LLCs for each of the former Grand Union properties. GU Markets of Barre (i.e. tenant) was born out of this process. GU Markets of Barre has no employees, no bank account, no income and no money. Its only function is to hold liability for the lease.
You may be asking yourself, “How does a company with no money and no income pay its rent?” Despite its lack of financial backing, the tenant has been able to fulfill its end of the lease because it has subleased the property to its current occupant, Rite Aid Drugs. Rite Aid pays the landlord directly, fulfilling the terms of the lease despite the intervening tenant’s lack of involvement. Nevertheless, this arrangement seems to make the folks at Downtown Barre Developers a little nervous and they want out of the lease agreement.
The Supreme Court of Vermont looks to the terms of the lease to see whether the landlord has any ground to terminate the agreement. When interpreting a contract, the Court will only stray from plain language when the terms of the agreement are unclear or ambiguous. This is not the case with the agreement here. Looking at the terms of the lease, the Supreme Court of Vermont find that the lease expressly provides for only two situations where the landlord is entitled to terminate the lease: (1) for unpaid rent and (2) if the tenant subleases the property and gives the landlord notice that they intend to “terminate any and all obligation or liability.”
There is no question of unpaid rent, so for the landlord to terminate the lease, it must show that the tenant gave notice of its intent to terminate its liability in regards to the lease.
Although the tenant never gave official notice of its intent to terminate its liability, the landlord argues that the nature of the corporation’s structure and financial status is enough notice to demonstrate the tenant’s intent to reduce its liability.
In its assessment of this argument, the Supreme Court of Vermont looks only to the specific language of the lease. Because the lease has no definition of the term “notice,” the Court concludes that only official legal notice can suffice under the current lease. The lease does not impose any financial requirements on the tenant; therefore notice of intent to reduce liability can not be inferred by the tenant’s financial status.
The Court explains, “Although it is true that tenant no longer maintains a bank account, financial statements, or profit and loss statements, has no employees, does not file a tax return, and generates no income, landlord’s argument fails because by its terms, the lease does not impose any financial requirements on the lessee.”
A technical result that nevertheless is likely leave existential philosophers and theologians scratching their heads.
The lesson for today: You can’t exorcise a ghost if it didn’t break the lease.
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C&S Wholesale Grocers is the same company that took $2 million in state tax credits and later moved most of their operation across the river to New Hampshire.
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This analysis seems a bit superficial to me. For one thing, however much one might dislike C&S Wholesale Grocers (and Doug Hoffer’s point about them is well taken) their relationship to the landlord here bears no real resemblance to the relationship the State of Vermont has with the owners of Vermont Yankee — beyond the superficial reality that the landlord here wants to get rid of a tenant just as Vermont would like to get rid of Vermont Yankee.
It seems to me that in most litigation that is subject to appellate proceedings there is a difference between the essential dispute between the parties and issues that manage to become grist for the appeal. Here one might reasonably ask: Given that it appears the tenant is current on its obligations to the landlord, why has the landlord been striving since the Grand Union bankruptcy to terminate the lease? I don’t know the answer — although the terms of the lease do seem favorable to the tenant. I suspect that if we could tease out the answer to that question we would have a much more interesting, and significant, story than what’s revealed in the SCOV’s opinion, which is a pretty dry affair about construing the plain language of the lease. The fact that it is a memorandum decision suggests that the Court itself concluded that the decision is not a significant one.
Meanwhile, the world is awash in so-called special purpose entities like GU Markets of Barre, presumably a wholly owned subsidiary of a wholly owned subsidiary of C&S. It is not so much a shell game as it is an aspect of corporate law that deserves some thoughtful public discussion. What social purpose is served by allowing corporations to own other corporations? The basic purpose of a corporation is to insulate its shareholders from personal liability for the errors and omissions of the corporation, something that makes sense when the shareholders in question are human beings. But why offer the same protections to corporations, except in specialized situations (e.g., utilities with regulated and unregulated subsidiaries, necessary so that ratepayers of the regulated company don’t subsidize other, unregulated lines of business).
In this sense the C&S dispute is very much like Vermont Yankee, which is owned by a subsidiary of a subsidiary of a subsidiary of the big Entergy Corporation in Louisiana.