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H.F.S. Properties v. Foot Locker Specialty, Inc.

United States District Court, D. Minnesota

February 2, 2017

H.F.S. PROPERTIES, a Minnesota Limited Partnership, Plaintiff,

          Scott G. Harris, David G. Parry, and Benjamin D. Eastburn, Stinson Leonard Street LLP, Counsel for Plaintiff.

          James J. Hartnett, IV, and Kyle R. Hardwick, Faegre Baker Daniels LLP, Counsel for Defendant.


          Michael J. Davis United States District Court Judge


         This matter is before the Court on the parties' cross-motions for partial summary judgment. [Docket Nos. 25, 30] The Court heard oral argument on September 30, 2016.


         A. Factual Background

         1. The Parties

         This is a landlord-tenant dispute regarding the Woolworth Building (“Building”), located at 81 7th Place East, St. Paul, Minnesota. Plaintiff H.F.S. Properties, a Minnesota Limited Partnership (“HFS”) is the owner and landlord of the Building. Defendant Foot Locker Specialty, Inc. (“Foot Locker”) was the tenant. (Foot Locker was formerly known as F.W. Woolworth Company, but will be referred to as Foot Locker throughout.) Generally, HFS claims that Foot Locker failed to keep the Building in good repair. Currently before the Court is the question of the measure of damages for HFS's claims.

         2. The 1920 Lease

         On July 1, 1920, lessor Henry Stein leased a parcel of land in St. Paul, Minnesota, to lessee The Golden Rule, a Minnesota corporation. (Parry Decl., Ex. A, 1920 Lease.) The 1920 Lease has a term of 95 years and expired on June 30, 2015. (Id. at 1.) The 1920 Lease defines the “premises” under the lease as the real property together with any building or buildings thereon, and any and all appurtenances thereto. (Id.)

Article 2 of the 1920 Lease provides that the lessee agrees:
To keep said premises and the appurtenances thereof in good order and repair during the said term, and faithfully to keep and observe all statutes and ordinances in force, relating to said leased premises, or the use thereof.
Article 4 provides that the lessee may remove, take down or alter any other building or buildings now or hereafter to be placed upon said demised premises, but in such event, or in the event of the destruction of any building or buildings, the lessee shall replace the same by a building or buildings of at least equal value, which shall be maintained in the same manner as herein stipulated as to the original buildings, and it shall become a part of the realty belonging to the lessor, the same as the original buildings, subject to the leasehold interest therein of the lessee herein, and lessee may retain as its own property any and all material of the building or buildings so taken down or removed, and not used in the construction of said new or completed building.

         3. The 1949 Lease

         On June 9, 1949, Tenant Foot Locker leased the lot adjoining the lot named in the 1920 Lease from six individuals, collectively referred to as “Landlord.” (Parry Decl., Ex. B, 1949 Lease.) The 1949 Lease expired on June 30, 2015. (Id., Art. 3.) The premises governed by the lease consisted of the real property plot “with the buildings now or hereafter constructed upon said premises . . . together with all alley rights, if any, easements, rights and appurtenances in connection therewith or thereunto belonging.” (Id., Art. 2.)

         Under Article 12 of the 1949 Lease, the Landlord procured an assignment of the lessee's interest in the 1920 Lease to Foot Locker so that Foot Locker became the successor-in-interest to the lessee's interest in the 1920 Lease.

Article 14 of the 1949 Lease provides:
The Tenant agrees to commence demolition of the existing building and to construct a new building of at least three (3) stories with basement to cover substantively the entire demised premises and adjoining premises [covered by the 1920 Lease] prior to August 1, 1958, with reasonable additional time thereafter in the event the Tenant is delayed by causes beyond the reasonable control of the Tenant. The Tenant shall be entitled to all salvage from demolition of the existing building.
Under Article 5:
The Tenant agrees to deliver to Landlord physical possession of the demised premises upon the termination of the term hereof or any extension thereof, in good condition, wear and tear, damage by fire, or damage from any other cause not directly attributable to the negligence of the Tenant excepted.

         Article 7 provides that the tenant can alter the premises, including by making structural changes and including that the Tenant “may from time to time during the term hereof remove walls.” However, “[a]ny such alteration, additions and changes, and any new building which shall remain on the demised premises at the end of the term of this lease . . . shall be considered as improvements to and become a part of the real estate of the Landlord, and the Tenant shall have neither the right nor the obligation to remove the same, nor change such structure or restore the premises to the condition in which they were originally.”

Article 8 provides, in relevant part:
Any trade fixtures, equipment and other personal property installed in or attached to the demised premises by and at the expense of the Tenant shall remain the property of the Tenant, and the Landlord agrees that the Tenant shall have the right at any time, and from time to time, to remove any and all of its trade fixtures, equipment, and other personal property which it may have stored or installed in the demised premises, including but not limiting the same to counters, shelving, show cases, mirrors, slides and air-conditioning, cooling and other moveable machinery.
Article 13 provides, in relevant part:
The Tenant further agrees that if the building on the demised premises is damaged or destroyed by fire or the elements . . . that the Tenant will repair or restore the same to substantially the same condition as existed before such damage or destruction, or may replace the same with a building of at least equal value to the one damaged or destroyed.

         4. Construction of the Woolworth Building

         In 1955, Foot Locker constructed the Woolworth Building on the two adjoining lots covered by the 1920 Lease and the 1949 Lease. (Compl. ¶ 18; Parry Decl., Ex. D, Foot Locker's Objections and Responses to Plaintiff's First Set of Interrogatories and Requests for Admission at 3-4.) Foot Locker operated a Woolworth's retail store in the Woolworth Building between 1956 and 1993 under the 1920 and 1949 Leases. (Id. at 7; Parry Decl., Ex. F, Yost Dep. 16-18.) The Woolworth Building has a basement and three above-ground floors, totaling approximately 50, 000 square feet. There are no windows on the second floor and minimal windows on the third floor. The third floor and basement are only accessible by stairs or a freight elevator. (Hartnett Decl., Ex. 2 at HFS4584-85; Hartnett Decl., Ex. 3.)

         Under the two leases, Foot Locker paid all costs associated with the Building, such as taxes and insurances, and paid $65, 000 per year in rent through June 30, 2015. (Hartnett Decl., Ex. 1 at HFS1715.)

         In 1988, the St. Paul Port Authority advised that, if a negotiated sale of the Building could not be made, it would acquire the Building by eminent domain in order to redevelop the property. (Hartnett Decl., Ex. 4.) In 1990, the previous landlord and Foot Locker executed an agreement to sell the Woolworth Building to a developer for $1.5 million, approximately $550, 000 of which would go to Foot Locker to buy out its leasehold interest. (Hartnett Decl., Ex. 5.) However, the sale fell through.

         5. The Woolworth Building's Initial Disuse

         Foot Locker ceased occupying the Woolworth Building on August 1, 1993, and the Building was unoccupied until April 2, 1998. (Parry Decl., Ex. D, Foot Locker's Objections and Responses to Plaintiff's First Set of Interrogatories and Requests for Admission at 7.) From April 2, 1998, through December 31, 2000, Foot Locker entered a sublease with McGough Construction Co., Inc. (“McGough”) to convert the Woolworth Building into construction offices. (Id.; Hardwick Decl., Ex. 1.) McGough built more than a dozen new rooms in the Woolworth Building, ran HVAC, electric and other services to these rooms, and installed a new roofing membrane on the building. (Hardwick Decl., Ex. 1 at ¶ 712; Hardwick Decl., Ex. 2 at ¶ 714, FL768-70.) The City of St. Paul (the “City”) approved McGough's work and issued a new Certificate of Occupancy after the work was completed, on July 16, 1998. (Hardwick Decl., Ex. 3 at HFS1593.)

         6. HFS's Purchase of the Property

         HFS owns the Golden Rule Building, which is adjacent to the Woolworth Building. (Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 74.) HFS first attempted to acquire the Woolworth Building in 1998 in order to demolish it and convert the property into a parking lot. (Id. 68-70.)

         In 1998, HFS obtained an appraisal valuing the Woolworth Building's land at $565, 000 and the leasehold and discounted future rents at $500, 000. (Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 72-73; Hartnett Decl., Ex. 2 at HFS4634.) The appraisal stated: “The property has substantial functional obsolescence and significant deferred maintenance;” and “[c]onsiderable market research has concluded that the Highest and Best Use of the building is to demolish the existing improvement and redevelop the land to its Highest and Best Use.” (Hartnett Decl., Ex. 2 at HFS4611, 4634.)

         In 1999, HFS bought the property that was the subject of the 1920 and 1949 Leases. (Parry Decl., Ex. E, HFS's Answers and Objections to Defendant's First Set of Interrogatories at 9-10.) For $1.2 million, HFS received the land and an assignment of both Leases and became the successor-in-interest to the lessor's interest in the 1920 Lease and the Landlord's interest in the 1949 Lease. (Id.; Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 87-88) HFS acknowledges that there is no clause in either lease that required Foot Locker to occupy the Woolworth Building. (Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 58-59.)

         In September 1999, HFS engaged an architect to develop plans that would require demolition of the existing Woolworth Building. (Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 91-92; Hartnett Decl., Ex. 12.) From 1996 through October 2014, Patricia Wolf, a limited partner in HFS and owner of the property management company that manages both the Golden Rule Building and the Woolworth Building, was the primary negotiator on behalf of HFS with respect to Foot Locker's leasehold interest in the Woolworth Building. (Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 13, 16; Hartnett Decl., Ex. 8, Wolf Dep. 16.)

         7. The Second Period of Vacancy

         Foot Locker left the Building unoccupied from January 1, 2001, until the surrender of the Building to HFS on June 30, 2015. (Parry Decl., Ex. D, Foot Locker's Objections and Responses to Plaintiff's First Set of Interrogatories and Requests for Admission at 7.)

         8. Deferred Maintenance

         When HFS or the City identified a maintenance issue with the Woolworth Building, Foot Locker resolved the issue. (Hardwick Decl., Ex. 4, Maletz Dep. 16, 52-53.; Hartnett Decl., Ex. 6, HFS 30(b)(6) Dep. 33-36.) Foot Locker arranged for a consultant, Mark Wange, to perform inspections of the Woolworth Building twice a month. (Hardwick Decl., Ex. 4, Maletz Dep. 19-20.) Foot Locker made a business decision to defer some repairs and maintenance on the Woolworth Building, with the aim of negotiating an end of ...

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