Truett-Hurst sues landlord in winery lease dispute

Publicly owned startup vintner Truett-Hurst has taken the owner of its Russian River Valley winery and tasting room to court, claiming the action is necessary to prevent eviction ahead of what the wine company speculates could be a move to position the property for sale.

H.D.D. LLC, parent company of Truett-Hurst (NASDAQ: THST), sued Hambrecht Wine Group LP in Sonoma County Superior Court on Nov. 9. Led by investment banker and vintner William R. Hambrecht, his eponymous partnership owns the property at 4035 Westside Rd., where Truett-Hurst’s VML winery and tasting room are located.

In U.S. Securities & Exchange Commission filings on Oct. 27, Nov. 10 and 13, Truett-Hurst said Hambrecht Wine Group sent H.D.D. a letter Oct. 21, alleging $33,000 in partly unpaid rent for several months in 2011, 2013 and 2014; unauthorized subletting of the property; and failure to submit annual production reports required for rent adjustments.

In its court complaint, H.D.D. added that the letter gave the wine company until Nov. 15 to move out. The holding company wants the court to find it didn’t materially breach the lease contract, did properly notify Hambrecht of plans to extend the lease for five years and still has contractual first dibs - first right of refusal - on matching any purchase offer for the property, according to the complaint.

If Truett-Hurst is evicted, the company “will suffer extreme disruption of its business,” the document said.

Further, the company claims in the lawsuit the eviction action has other motives.

Hambrecht “intends to sell the property and have sought to terminate the lease and tenancy for pretextual reasons so [the owner] will receive a higher sale price for the property,” the legal team asserted in the complaint.

“We filed the lawsuit to trigger arbitration,” said Lewis Warren, a partner with Abbey, Weitzenberg, Warren & Emery, the Santa Rosa-based law firm that filed the lawsuit for Truett-Hurst. Hambrect would have to take the vintner to court to throw it out of the winery. “Neither the Truett-Hurst attorney or I think there is any merit to the case, and we’re not looking for a new location.”

Hambrecht Wine Group has until early January to respond to the complaint. It is being represented by Schiff Hardin’s San Francisco office.

Hambrecht could not be reached for comment on the lawsuit. President and CEO Phil Hurst declined to comment on the lease issue during an investor conference call on quarterly financial results Nov. 10.

H.D.D. laid out its case that it had tried to solve the lease dispute. Truett-Hurst signed a five-year lease Feb. 8, 2011, for the cottage holding offices and the tasting room and for the winery and cellar building. That was just before H.D.D. key members Phil Hurst, Paul Dolan and Heath Dolan announced a partnership with Bill Hambrecht for the VML Winery and grapes from certain Hambrecht vineyards. The lease contract allowed for a five-year lease extension but required four to nine months’ notice ahead of the Feb. 29, 2016, expiration.

The tenant wine company claims it sent an intent-to-extend letter to Hambrecht on July 27 but received a reply Sept. 28 that the option hadn’t been properly exercised for a number of reasons and the lease would end at expiration, according to the complaint.

The reply “lacked the factual specificity necessary to permit [H.D.D.] to indentify or cure any defaults,” the legal team said in the filing.

The company said it sent Hambrecht a check for $45,000 to cover the rent dispute and an amended and restated notice of intent to exercise the extension option, all done to forestall the lease expiration and protect the right to first refusal.

That’s where the reported Oct. 21 letter from Hambrecht comes in, the court document said. The vintner’s holding company claims the check was returned, claiming the renter could not cure alleged breaches to the lease deal.

H.D.D. said it then sent Hambrecht production reports required by the lease contract to add extra rent - starting at $3 a case the first year and escalating at 3 percent annually - if Truett-Hurst exceeded production of 57,000 cases of wine a year, the expected level for 2011. The tenant vintner claimed in its legal complaint that actual production was “far below” that level.

On Nov. 10 Truett-Hurst reported net sales increased 5 percent to $6.8 million for the quarter ending Sept. 30, but the net loss was $212,000, or 5 cents a share, compared with a of $100,000 loss, or 3 cents, a year before.

It’s been a challenging year for Truett-Hurst. While net sales for the most recent quarter increased 24 percent for wholesale and 19 percent for direct-to-consumer, Internet sales dropped 65 percent. The company in September said it ended the Kroger grocery store exclusive wine spritzer brand California Winecraft and took a $400,000 writedown on The Wine Spies “flash” wine site because of falling sales. Early this calendar year, Truett-Hurst wrote down $800,000 related to pulling back inventory of the Paperboy paperboard bottled brand because of a retailer claim of spoilage, and the supplier of the packaging coincidentally filed for bankruptcy.

The lease dispute case is scheduled to be back in court for a status hearing before judge Gary Nadler on March 10.

Wine Industry Insight first reported the legal filing against Hambrecht Wine Group on Nov. 25.

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