Breach of Contract; Breach of Implied Covenant of Good Faith and Fair Dealing; and Specific Performance

Save Mart Supermarkets v. Orchard Supply Hardware
Superior Court of the State of California, County of Fresno, Case No. 09CECG01020

On September 4, 2007, Save Mart (Lessor) and Orchard Supply Hardware (OSH) (Lessee) executed a lease and construction rider for a 54,850 sq. ft. “to be built” building in an 88,275 sq. ft. “to be built” community shopping center planned to consist of four buildings on an 8.59 acre corner parcel in northwest Fresno, California. The term of the lease was 20 years at a fixed, annual, triple net rent. Rent was to begin after Lessor delivered to OSH the building and after all on/off site improvements were completed. A second major tenant was purported to be CVS but negotiations failed due to the economic climate. Save Mart was unable to find another pharmacy tenant or tenants for any of the other intended spaces in the proposed shopping center, aside from OSH.

At no time did OSH anticipate being the sole tenant; at all times, OSH intended to be one of multiple, economically interdependent tenants. The Lessor’s failure to identify and lease to other tenants denied OSH a material inducement in the execution of the lease and shifted substantial risks from the Lessor to OSH.

In November of 2008, Save Mart sends a proposed First Amendment to OSH which sought OSH’s approval to allow phased construction of the site due to the state of the economy, despite its subsequent contention that it did not need OSH’s approval to do so. Phased construction would violate, not just the intent of the lease agreement, but several of its provisions including i) the right to quiet enjoyment, ii) that the Center would be
operated and maintained in good condition and in a manner comparable to similar properties in Fresno, and iii) an explicit provision protecting the Tenant from activities by the Landlord that would limit Tenant’s access, impede traffic, or impede the flow of Tenant’s customers to and from the premises. Simply, OSH contended that the lease neither contemplated nor allowed phased construction.

In February of 2009, OSH responds in good faith to Save Mart’s proposed First Amendment indicating its willingness to agree to phasing in return for nominal rent concessions as consideration for a valuable concession. Save Mart declined OSH’s proposal and declined to negotiate. Save Mart commences grading on March 16, 2009 but does not pull permits which had been approved and available on December 19, 2008.
OSH informs Save Mart on March 18 that it intends to exercise its right to termination followed by its notice of termination.

As of the date of trial in March of 2011, neither the OSH building nor any other portion of the shopping center had been built. As of the trial date, Save Mart had found no tenant to replace OSH or tenants for any of the other planned buildings for its proposed shopping center.

Marc S. Margulis of Mammoth Advisors, Inc. was retained as the damages expert on behalf of Defendant, OSH to i) analyze and rebut, as appropriate, the analysis and opinion of Plaintiff’s damages expert and ii) determine Save Mart’s damages independently under a presumption of OSH’s liability. Mr. Margulis’ independent analysis confirmed the testimony of one of Plaintiff’s experts and another of Defendant’s experts that the OSH lease could be replaced with one with comparable economic value to the Plaintiff within 5 years. He, then, calculated alleged damages recoverable under California Civil Code Sec. 1951.2 and determined, consistent with benefit-of-the-bargain theory, that offsetting lost rents was the opportunity value, or earning power, of the more than $10,000,000 of on-site, off-site and building costs avoided by Save Mart until such
time as the current harsh economic climate improves and a tenant is found to replace OSH. Mr. Margulis testified at trial in Fresno, the home of Save Mart’s headquarters. A motion by Plaintiff’s counsel to exclude only that portion of Mr. Margulis’ testimony pertaining to offsets was sustained.

The jury found in favor of the Plaintiff. Subsequent motions were denied. An appeal was filed, but was settled on terms favorable to OSH.