Court: Court of Appeals for the D.C. Circuit; January 21, 2018; Federal Appellate Court
Whole Foods Market Group, Inc. filed a breach of contract case against its landlord, Wical Limited Partnership, seeking relief on four counts in its Amended Complaint. Wical's motion to dismiss all counts is under consideration. The court will review the relevant lease terms and well-pleaded facts, presuming them true and favorable to Whole Foods.
Key provisions from the lease include:
1. **Conduct of Business (Paragraph 4(F))**: Whole Foods is required to operate continuously at the leased premises, maintaining quality comparable to its other stores and ensuring cleanliness. The tenant must avoid causing injury or waste, except for reasonable wear and tear.
2. **Renovation (Paragraph 4(G))**: Whole Foods may close the premises for modernization or improvements, limited to 60 days total within any three-year period.
3. **Non-Structural Repairs and Maintenance (Paragraph 5(A))**: The tenant is responsible for all necessary structural and non-structural repairs, adhering to applicable governmental regulations.
4. **Alterations (Paragraph 7(A))**: Whole Foods needs prior written consent from Wical for any exterior or structural changes. Non-structural alterations can be made without consent, but plans must be provided beforehand. Landlord consent cannot be unreasonably withheld and may include reasonable conditions for lien-free completion.
The court will partially grant and deny Wical's motion to dismiss based on the evaluation of these lease terms and the facts presented.
Paragraph 18(A) establishes that for non-monetary defaults, a Tenant has up to sixty (60) additional days to cure the default, provided they are actively working to resolve the issue. This extension does not apply to the Tenant's obligation to continuously operate its business on the premises and does not limit the time for structural repairs, as long as the Tenant is diligently pursuing the repairs. Paragraph 21 ensures that if the Tenant adheres to the lease obligations, they will enjoy quiet and uninterrupted possession of the premises. Paragraph 27(J) stipulates that consent or approval required by either party under the lease shall not be unreasonably withheld or delayed. Paragraph 30(A) outlines that if either party is unable to perform required acts (excluding financial obligations) due to uncontrollable circumstances, the performance timeframe will be extended accordingly, provided that good faith efforts are made to resolve the delay.
The lease agreement between Whole Foods and Wical is valid until January 31, 2021, for the property located at 2321 Wisconsin Avenue, NW, where Whole Foods operates its Georgetown store. Whole Foods has consistently paid rent and maintained operations from 1996 until 2017, when it received two ordinance violations related to rodent issues, necessitating temporary store closures. Following the second notice on March 13, 2017, Whole Foods sought a comprehensive solution, consulting contractors and determining that extensive renovations—including demolition—were required to address the rodent problem. The Georgetown store has been closed for business since the demolition began in March 2017.
In late March 2017, Whole Foods and Wical representatives met to address a rodent infestation issue. Following a demolition to resolve the problem, Whole Foods informed Wical on April 5, 2017, that significant interior rebuilding was necessary, which would extend the store's closure beyond the 60 days stipulated in their lease. Whole Foods committed to updating Wical on the timeline for reconstruction, noting that permitting alone would take approximately four months. Whole Foods intended to modernize the store's layout and update various systems and fixtures, which would necessitate significant adjustments to plumbing and HVAC systems.
Whole Foods sought Wical's approval for the renovation on May 23, 2017, but Wical denied consent on May 26, 2017. That same day, Whole Foods finalized construction plans and estimated a six-month timeframe for completion, having already invested around $1 million in the project. Concurrently, on May 15, 2017, Wical issued a Notice of Default to Whole Foods, demanding it reopen within fifteen days to avoid lease termination, which Whole Foods interpreted as a tactic to increase rent. Whole Foods responded with its own Notice of Default on July 14, 2017, alleging Wical's refusal to consent to renovations breached their contract. Subsequently, Whole Foods filed a lawsuit on August 4, 2017.
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must present sufficient factual content, taken as true, to establish a plausible claim for relief. The court must assume all allegations are true and draw reasonable inferences in favor of the plaintiff. A claim is considered plausible when it contains factual details that support a reasonable inference of the defendant's liability, going beyond mere legal conclusions. The court may also consider relevant documents attached to the complaint or matters of judicial notice in its evaluation.
Whole Foods's Amended Complaint seeks a declaratory judgment on two points: (1) it did not breach the lease by remaining closed for over 60 days, and (2) Wical's Notice of Default is invalid. The Court's analysis will center on the lease agreement, which is interpreted under contract law principles. According to the Declaratory Judgment Act, a court can declare legal rights when there is an actual controversy, requiring a showing of imminent injury that judicial relief can address.
Wical argues that the lease's plain terms necessitate dismissal of this count, specifically citing Paragraph 4(G), which states Whole Foods can only close the store for periods necessary for modernization, not exceeding 60 days within any three-year period. Whole Foods acknowledges its closure since March 2017 exceeds this limit, implying a breach. Whole Foods claims its actions are justified under Paragraph 4(F), which mandates continuous operation and maintenance of store standards. However, this obligation is subject to other lease provisions, meaning it does not excuse exceeding the 60-day closure limit set by Paragraph 4(G).
Additionally, Paragraph 18(A) does not provide Whole Foods relief, as it defines an extended cure period not exceeding 60 days, contingent on maintaining business operations. However, the lease's force majeure clause in Paragraph 30(A) does allow for extended closure beyond 60 days due to uncontrollable events like acts of God or regulatory restrictions.
The clause under review mandates Whole Foods to re-open its store within 60 days but specifies that "payment of monies" is not excused. The Court will evaluate whether the facts presented justify an excuse for this requirement. Whole Foods asserts that its store closure was due to uncontrollable circumstances, specifically a persistent rodent issue, despite having a pest control program since April 2014. After receiving two violation notices from the District of Columbia, Whole Foods had to close the store, remove inventory and fixtures, and undertake extensive renovations due to "inferior building construction."
The Court acknowledges that Whole Foods' closure was necessary and beyond its control, thus excusing the delay in re-opening. Paragraph 30(A) of the contract allows for excused performance due to delays in plan approval, which is pertinent as Whole Foods needed permits from the District of Columbia, a process potentially delayed by a backlog. Additionally, the property owner's consent is required for the permitting process, and Whole Foods claims that Wical's refusal to consent caused further delays.
Wical disputes this by noting that Whole Foods did not seek consent until May 23, 2017, and only submitted plans on July 6, 2017, arguing that necessary documentation was not provided. However, Whole Foods contends it acted promptly in hiring an architect and expediting the remodeling project. The Court concludes that Whole Foods diligently pursued the necessary plans and that the delays are not attributable to their actions. Furthermore, while Wical requires complete documentation for structural changes, Whole Foods only needed this for structural alterations, implying that non-structural changes could proceed without full documentation.
Whole Foods, in its Amended Complaint, outlines several significant alterations planned for its store, including modernizing the layout, replacing food display cases, overhauling the elevator and conveyor system, and relocating major systems like plumbing and HVAC. While these changes are substantial, the Court determines they do not constitute "structural" alterations as defined by legal precedents and Black's Law Dictionary, which describes structural alterations as those creating a fundamentally different building. The Court notes that Whole Foods is not removing load-bearing walls or repurposing the store for a different function, and therefore, the changes will still allow the premises to function as a grocery store.
Wical argues that architectural plans provided by Whole Foods label some changes as "structural," but the Court finds this characterization inconclusive since it cannot ascertain the architect's intent or knowledge of the lease terms. Consequently, the Court concludes that Whole Foods's proposed alterations are non-structural, and therefore, its failure to provide complete documentation to Wical does not justify delaying the store's reopening. The primary reasons for the store's closure—rodent issues and permit acquisition delays—are beyond Whole Foods's control, excusing it from the lease's 60-day re-opening requirement. Thus, Whole Foods's request for a declaratory judgment regarding its non-breach of the lease and the invalidity of Wical's Notice of Default will not be dismissed, as it has presented adequate facts to survive a motion to dismiss. Additionally, in Count II, Whole Foods seeks damages for Wical's breach of the implied covenant of good faith and fair dealing.
Whole Foods claims Wical breached its duty by issuing a notice of default that contradicts the lease's spirit and impedes Whole Foods' contract benefits. Wical argues for dismissal, asserting Whole Foods' implied covenant claim is merely a rehash of its breach of contract claim, which is not permissible under D.C. law. However, Wical acknowledges that plaintiffs may plead alternative remedies at the pleading stage. Wical points out that Whole Foods' claims in Counts I and II differ: Count I seeks a declaratory judgment, while Count II seeks damages. Wical contends it acted within its contractual rights by issuing the notice due to Whole Foods remaining closed beyond 60 days, which Wical claims constitutes a lease breach. They assert that the implied covenant cannot contradict the contract's express terms and that Whole Foods' claim should fail if Wical acted according to the contract. However, the court previously determined that Whole Foods did not breach the lease, as its closure was excused under lease provisions. Whole Foods is required to demonstrate bad faith or arbitrary conduct to establish a breach of the implied covenant, and it has alleged that Wical's notice of default was intended to terminate the lease and increase rent. Consequently, the court denies Wical's motion to dismiss this claim. In Count III, Whole Foods seeks specific performance and injunctive relief, requesting the court compel Wical to extend the cure period and consent to a permit application, as well as to prevent Wical from terminating the lease or evicting them. Wical again argues this claim should be dismissed, asserting Whole Foods cannot establish a breach of the implied covenant.
Whole Foods successfully demonstrated that it did not breach the contract regarding the store's reopening timeline, as it was excused under Paragraph 30(A). Consequently, it has the right to seek specific performance to require Wical to excuse the store closure. The court referenced prior case law affirming that specific performance is an appropriate remedy for real estate contracts. Whole Foods also requested Wical's consent for a permit application under Paragraph 27(J) of the lease, claiming Wical was unreasonably withholding consent. However, the court clarified that Paragraph 27(J) applies only when consent is required, and since the proposed alterations were deemed non-structural, landlord consent was unnecessary. Therefore, Whole Foods lacked a legal basis for its request under Paragraph 27(J).
Regarding Whole Foods's request for injunctive relief, Wical argued that Whole Foods did not demonstrate irreparable harm. The court outlined the factors for assessing a permanent injunction, including success on the merits, potential irreparable harm, balancing hardships, and public interest. Whole Foods claimed it faced more than just economic harm, citing potential damage to its goodwill, reputation, and property rights. The court agreed that these allegations constituted sufficient grounds for claiming irreparable harm, particularly if Wical attempted to terminate the lease based on a notice of default, which could irreparably damage Whole Foods’s community reputation.
D.C. courts recognize that a tenant's right to possession is unique and irreparable. Whole Foods has sufficiently met the criteria for a permanent injunction, demonstrating success on its claim of breach of the covenant of good faith and fair dealing. Wical does not dispute the balancing of hardships or public policy factors, and the Court finds that Whole Foods risks losing its lease and the ability to operate its store without an injunction, while Wical would only need to comply with the contract. Public interest supports enforcing contracts when no breach has occurred, which Whole Foods claims applies here.
The Court will deny Wical's motion to dismiss Count III, except regarding Whole Foods's request for Wical to consent to the permit application as outlined in the lease. In Count IV, Whole Foods seeks a declaration that Wical breached the lease by (1) withholding consent for permit applications, (2) failing to acknowledge Whole Foods' right to excuse delays, and (3) disrupting Whole Foods' possession and enjoyment of the store. The Court has previously addressed the first two points and found that Wical did not breach the lease regarding the permits since consent was not required for non-structural alterations. However, Wical did breach the lease by not recognizing that Whole Foods was excused from reopening within 60 days.
Whole Foods claims Wical's refusal to consent to permit applications and threats of lease forfeiture have hindered its ability to exercise possession and enjoyment of the store. Wical argues that quiet enjoyment is contingent on Whole Foods fulfilling its lease obligations, which it claims Whole Foods violated by not reopening timely, failing to maintain operational standards, and submitting incomplete plans. The Court has already resolved the first and third issues in favor of Whole Foods. Regarding the second, Whole Foods submitted plans aimed at improving the store quality, which Wical rejected. The Court finds Wical's argument that it did not breach the covenant of quiet enjoyment to be disingenuous, noting that a breach requires actual disturbance of possession.
Whole Foods' possession of the property is disturbed due to Wical's refusal to consent to its architectural plans, preventing Whole Foods from obtaining a permit necessary for reopening the store, despite continuing to pay rent. The Court finds that Whole Foods has adequately supported a claim for breach of the covenant of quiet enjoyment, as Wical failed to engage with or respond to Whole Foods' proposed plans. Whole Foods seeks to terminate the lease based on a theory of constructive eviction, although the lease specifies termination conditions related to bankruptcy or default. The Court acknowledges that constructive eviction implies a breach of the covenant of quiet enjoyment, allowing Whole Foods to survive a motion to dismiss regarding this claim. The Court denies Wical's motion to dismiss Counts I, II, and IV of Whole Foods' Amended Complaint, except for the request related to Paragraph 27(J) of the lease, which is granted dismissal. The Court also notes that while Wical's consent may not be mandated by the lease, it could still violate the covenant of quiet enjoyment, a point the Court will explore further.
