Friday, May 27, 2011

The Case of the Phantom Tenant

By Jeffrey Thomson

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 Governor 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 twenty-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 Unions 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 it 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 SCOV 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 SCOV 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 SCOV 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.

1 comment:

  1. Another informative blog… Thank you for sharing it… Best of luck for further endeavor too.