<PAGE>

                                                                   EXHIBIT 10.42

                             MODIFICATION AGREEMENT

     This Modification Agreement ("Agreement") is dated as of January 5, 2002 by
                                   ---------
1999 LAWNDALE ASSOCIATES LLC, a California limited liability company
("Borrower"), and UNIFIED WESTERN GROCERS, INC., a California corporation
  --------
("Lender").
  ------

                                    RECITALS
                                    --------

     A.   Pursuant to that certain Term Loan Agreement (the "Loan Agreement")
                                                             --------------
dated as of July 5, 2000 and executed between Borrower and Lender, Lender has
made a $3,000,000 loan ("Loan") to Borrower for the purposes identified in the
                         ----
Loan Agreement and relating to the real property described in Exhibit B thereto
("Property").
  --------

     B.   The Loan is evidenced in part by a Promissory Note made as of July 5,
2000 by Borrower to the order of Lender in the original principal amount of
$3,000,000 (the "Note"), and all modifications, extensions, renewals and
                 ----
replacements thereof. The obligations of Borrower under the Loan Agreement and
the Note are secured by that certain Pledge Agreement dated as of July 5, 2000
made by and among Salomeh Khaledi and Khashayar Khaledi ("Khaledi Pledgors"), as
                                                          ----------------
pledgors, Lender, as pledgee, and Grocers Capital Company, a wholly-owned
subsidiary of Lender ("GCC"), as bailee (the "Khaledi Pledge Agreement").
                       ---                    ------------------------

     C.   Borrower's obligations under the Loan Documents have been guaranteed
by Darioush Khaledi and Shahpar Khaledi, husband and wife, Khaledi Family
Partnership II, a California general partnership, Darioush Khaledi, as trustee
of the Khaledi Family Trust under declaration of Trust dated May 17, 1995, K.V.
Property Company, a California general partnership, and Parviz Vazin and Vida
Vazin, husband and wife (collectively, the "Guarantors") pursuant to that
                                            ----------
certain Guaranty dated as of July 5, 2000 ("Guaranty") and made by Guarantors in
                                            --------
favor of Lender. The obligations of Guarantors under the Guaranty are secured by
that certain Pledge Agreement dated as of July 5, 2000 made by and among the
Khaledi Family Trust dated May 17, 1995, Parviz Vazin and Vida Vazin ("Guaranty
Pledgors", and together with the Khaledi Pledgors, the "Pledgors"), as pledgors,
                                                        --------
Lender, as pledgee, and GCC, as bailee ("Guaranty Pledge Agreement", and
                                         -------------------------
together with the Khaledi Pledge Agreement, the "Unified Pledge Agreements").
                                                 -------------------------

     D.   The collateral pledged pursuant to the Pledge Agreements is
additionally subject to a prior pledge made pursuant to that certain Pledge
Agreement dated March 26, 1999 made by and between Pledgors, as pledgors, in
favor of GCC, as pledgee ("GCC Pledge Agreement").
                           --------------------

     E.   In connection with the amendments contemplated hereby (i) Borrower, as
trustor, is executing a Deed of Trust, Assignment of Rents and Fixture Filing
for the benefit of Lender, as beneficiary, with respect to the Property
("Mortgage"), to further secure Borrower's obligations under the Loan Agreement
  --------
and the Note, and (ii) Lender will agree to the termination and release of the
Unified Pledge Agreements.

                                      -1-

<PAGE>

     F.   As used herein, the term "Loan Documents" means the Loan Agreement,
                                    --------------
the Note, the Unified Pledge Agreements, the Mortgage, the Guaranty, and any
other documents executed in connection with the Loan, including those which
evidence, guarantee, secure or modify the Loan, as any or all of them may have
been amended to date.

     G.   As of the date of this Agreement, the outstanding principal balance of
the Loan is $3,000,000.

     H.   Borrower and Lender now wish to modify the Loan as set forth below.

                                    AGREEMENT
                                    ---------

     Therefore, Borrower and Lender agree as follows:

     1.   Modification of Loan Documents. The Loan Documents are hereby amended
          ------------------------------
as follows:

          (a)  Promissory Note. The terms and provisions of the Note are hereby
               ---------------
amended and restated in their entirety by that certain Amended and Restated
Promissory Note attached as Exhibit A hereto.
                            ---------

          (b)  Loan Agreement. The phrase "be secured by the Khaledi Pledge
               --------------
Agreement" is hereby deleted from the last paragraph of Section 2.4 of the Loan
Agreement and replaced with "be secured by that certain Deed of Trust,
Assignment of Rents and Fixture Filing, executed as of January 5, 2002 by
Borrower, as trustor, naming Chicago Title Insurance Company, as trustee, for
the benefit of Lender, as beneficiary". The following language is hereby
inserted as Section 7.1(n) of the Loan Agreement:

               "(n) Any transfer of a controlling interest in the stock of KV
     Mart Co., or any sale of a substantial portion of the assets of KV Mart
     Co., in any transaction or series of related transactions, whether by sale
     of stock, sale of assets, merger, consolidation or other form of
     transaction. The phrase "controlling interest" means the direct or indirect
     beneficial ownership of, or the direct or indirect right to dispose of,
     capital stock of KV Mart Co. possessing at least 50% of the total combined
     voting power of all classes of the capital stock of KV Mart Co. The phrase
     a "substantial portion of the assets" of KV Mart Co. means 50% or more of
     the assets of KV Mart Co."

          (c)  Unified Pledge Agreements. Lender hereby releases the lien or
               -------------------------
charge of each of the Unified Pledge Agreements and agrees that the Pledge
Agreements shall be of no further force or effect whatsoever. Nothing contained
in this Agreement shall terminate, release or otherwise amend the GCC Pledge
Agreement.

     2.   Conditions Precedent. Before this Agreement becomes effective and any
          --------------------
party becomes obligated under it, all of the following conditions shall have
been satisfied at

                                      -2-

<PAGE>

Borrower's sole cost and expense in a manner acceptable to Lender in the
exercise of Lender's sole judgment:

          (a)  Lender shall have received fully executed and, where appropriate,
acknowledged originals of this Agreement and any other documents which Lender
may require or request in accordance with this Agreement or the other Loan
Documents, including without limitation, that certain Modification of Guaranty,
Consent to Modification of Loan Documents and Reaffirmation of Guaranty in the
form attached as Exhibit B hereto.
                 ---------

          (b)  Borrower shall have executed the Mortgage in the form attached as
Exhibit C hereto and the same shall have been recorded as a lien against the
---------
Property in the Official Records of Los Angeles County, California.

          (c)  A title insurance company acceptable to Lender must have issued
or committed to issue a mortgagee's policy or policies of title insurance issued
with respect to the Property which complies with the requirements set forth in
an instruction letter from Lender, insuring the lien of the Mortgage as a valid
lien on the Property, subject only to the matters approved in writing by Lender.

          (d)  Lender shall have received reimbursement, in immediately
available funds, of all costs and expenses incurred by Lender in connection with
this Agreement.

          (e)  Borrower shall deliver to Lender (i) an internally-prepared
balance sheet for Borrower as of the end of Borrower's Fiscal Year and a
statement of profit and loss for Borrower's operations, together with all
supporting schedules and (ii) certificates of Borrower's chief financial officer
that such documents (w) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis, (x) fairly present
Borrower's financial condition, (y) show all material liabilities, direct and
contingent, and (z) fairly present the results of Borrower's operations.

     3.   Borrower's Representations and Warranties. Borrower represents and
          -----------------------------------------
warrants to Lender as follows:

          (a)  Recitals. The Recitals set forth above are true, accurate and
               --------
correct.

          (b)  Loan Documents. All representations and warranties made and given
               --------------
by Borrower in the Loan Documents are true, accurate and correct.

          (c)  No Default. No Event of Default has occurred and is continuing,
               ----------
and no event has occurred and is continuing which, with notice or the
passage of time or both, would be an Event of Default.

          (d)  Property. Borrower lawfully possesses and holds fee simple title
               --------
to all of the Property which is real property. Borrower owns all of the Property
which is personal property free and clear of any reservations of title and
conditional sales contracts.

                                      -3-

<PAGE>

          (e)  Borrowing Entity. Borrower is a limited liability company having
               ----------------
its chief executive office in the State of California. Borrower's state of
organization is California and Borrower is validly existing under the laws of
that State. There have been no changes in the organization, composition,
ownership structure or formation documents of Borrower since the inception of
the Loan. Borrower's exact legal name is set forth in the first paragraph of
this Agreement.

          (f)  Managing Member. The Khaledi Family Partnership II, a California
               ---------------
general partnership ("Managing Member"), is the sole Manager of Borrower. The
                      ---------------
Managing Member is duly organized and validly existing under the laws of the
State of California. There have been no changes in the organization,
composition, ownership structure or formation documents of Managing Member since
the inception of the Loan.

          (g)  Financial Information. All financial information which has been
               ---------------------
and will be delivered to Lender, including all information relating to the
financial condition of Borrower shareholders, partners or joint venturers, or
the Property, fairly and accurately represents the financial condition being
reported on, including all material contingent liabilities. Since the dates of
the financial information specified in Section 2(e), above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of Borrower or any other subject thereof.

     4.   Notices. Borrower shall promptly notify Lender in writing of:
          -------

          (a)  Any litigation affecting Borrower or any general partner of
Borrower where the amount claimed is Fifty Thousand Dollars ($50,000) or more;

          (b)  Any material adverse change in the physical condition of the
Property (including any damage suffered as a result of earthquakes or floods),
or in Borrower's business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the Loan; and

          (c)  Any change in Borrower's legal name or chief executive office.

     5.   Incorporation. This Agreement shall form a part of each Loan Document,
          -------------
and all references to a given Loan Document shall mean that document as hereby
modified.

     6.   No Prejudice; Reservation of Rights. This Agreement shall not
          -----------------------------------
prejudice any rights or remedies of Lender under the Loan Documents. Lender
reserves, without limitation, all rights which it has against any indemnitor,
guarantor, or endorser of the Note.

     7.   Reaffirmation; No Impairment; No Novation. Borrower hereby reaffirms
          -----------------------------------------
all of its obligations under the Loan Documents. Except as specifically hereby
amended, the Loan Documents shall each remain unaffected by this Agreement and
all such documents shall remain in full force and effect. The execution and
delivery of this Agreement shall not constitute a novation of the Loan.

                                      -4-

<PAGE>

     8.  Purpose and Effect of Lender's Approval. Lender's approval of any
         ---------------------------------------
matter in connection with the Loan shall be for the sole purpose of protecting
Lender's security and rights. No such approval shall result in a waiver of any
default of Borrower. In no event shall Lender's approval be a representation of
any kind with regard to the matter being approved.

     9.  Disclosure to Title Company. Without notice to or the consent of
         ---------------------------
Borrower, Lender may disclose to any title insurance company which insures any
interest of Lender under the Mortgage (whether as primary insurer, coinsurer or
reinsurer) any information, data or material in Lender's possession relating to
Borrower, the Loan, the Improvements or the Property.

     10. Further Assurances. Borrower hereby agrees that immediately upon
         ------------------
Lender's demand, Borrower shall execute and deliver to Lender, and shall cause
any necessary third parties to execute and deliver to Lender, all documents and
filings (including "account control agreements"), and shall otherwise take all
other actions that may be requested by Lender in order to maintain and provide
to Lender a perfected security interest in all collateral, and Borrower hereby
agrees to pay all fees and costs associated therewith, including the reasonable
fees and costs of Lender's outside counsel. Borrower hereby authorizes Lender to
execute and file any financing statements or other documents necessary to
provide or maintain such perfected security interests, without notice to, or the
consent of, Borrower.

     11. Integration. The Loan Documents, including this Agreement: (a)
         -----------
integrate all the terms and conditions mentioned in or incidental to the Loan
Documents; (b) supersede all oral negotiations and prior and other writings with
respect to their subject matter; and (c) are intended by the parties as the
final expression of the agreement with respect to the terms and conditions set
forth in those documents and as the complete and exclusive statement of the
terms agreed to by the parties. If there is any conflict between the terms,
conditions and provisions of this Agreement and those of any other agreement or
instrument, including any of the other Loan Documents, the terms, conditions and
provisions of this Agreement shall prevail.

     12. Miscellaneous. This Agreement and any attached consents or exhibits
         -------------
requiring signatures may be executed in counterparts, and all counterparts shall
constitute but one and the same document. If any court of competent jurisdiction
determines any provision of this Agreement or any of the other Loan Documents to
be invalid, illegal or unenforceable, that portion shall be deemed severed from
the rest, which shall remain in full force and effect as though the invalid,
illegal or unenforceable portion had never been a part of the Loan Documents.
This Agreement shall be governed by the laws of the State of California, without
regard to the choice of law rules of that State. As used herein, the word
"include(s)" means
 ----------

                                       -5-

<PAGE>

"includes(s), without limitation," and the word "including" means "including,
                                                 ---------
but not limited to."

Dated:   January 5, 2002

                                     BORROWER:

                                     1999 LAWNDALE ASSOCIATES LLC,
                                     a California limited liability company

                                     By:      Khaledi Family Partnership II,
                                              a California general partnership,
                                              Manager

                                              By:      _________________________

                                              Its:     _________________________
                                                       [Printed Name and Title]





                                     Lender:

                                     UNIFIED WESTERN GROCERS, INC.,
                                     a California corporation

                                     By:      _______________________________

                                     Its:     _______________________________
                                              [Printed Name and Title]

<PAGE>

                                    Exhibit A
                                    ---------

                      AMENDED AND RESTATED PROMISSORY NOTE

<PAGE>

                      AMENDED AND RESTATED PROMISSORY NOTE

$3,000,000                                                    Carson, California
                                                                 January 5, 2002

           This promissory note ("Note") evidences the indebtedness of 1999
Lawndale Associates LLC, a California limited liability company ("Borrower"),
under the loan (the "Loan") described in that certain Term Loan Agreement dated
July 5, 2000 (as modified from time to time, the "Loan Agreement") between
Borrower and Unified Western Grocers, Inc., a California corporation ("Lender").
This Note completely amends and restates the terms and conditions of that
certain promissory note dated as of July 5, 2000 made by Borrower in favor of
Lender in connection with the Loan. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth for them in the Loan Agreement.
This Note is subject to the Loan Agreement.

     1. Promise to Pay. For value received, Borrower promises to pay to the
        --------------
order of Lender, at its office at Commerce, California, or at such other offices
as the holder of this Note may designate in writing from time to time, the
principal amount of $3,000,000, or so much thereof as may be advanced from time
to time, together with all other amounts now or hereafter owing by Borrower
under the Loan Documents, and together with interest thereon as provided herein.

     2. Interest. Interest shall accrue on all outstanding amounts at a variable
        --------
rate that is 2% per annum above the floating commercial prime rate published in
the Wall Street Journal, as of the 15th day of the month immediately preceding
each Payment Date but in no event in excess of 10.0% per annum. Interest shall
be due and payable in arrears monthly on the first day of each month
(collectively, the "Payment Dates"). Interest shall be calculated on an actual
day basis using a 365-day year. Borrower's reimbursement obligations shall be
due and payable on demand.

     3. Principal Payments. Commencing on February 1, 2002, and continuing
        ------------------
monthly thereafter on or before the first day of each calendar month until all
sums owing under this Note are paid in full, Borrower shall pay to Lender forty
(40) consecutive equal monthly installments of principal of this Note in the
amount of $73,170.74. The final monthly payment shall be in the amount of
$73,170.40.

     4. Maturity. The entire unpaid principal balance of the Loan, together with
        --------
all accrued and unpaid interest and any other accrued and unpaid obligations
then

                                      -8-

<PAGE>

outstanding under the Loan Documents, shall be due and payable on June 5, 2005
(the "Maturity Date").

     5. Prepayment. The principal of this Note may be voluntarily prepaid on any
        ----------
Payment Date(s), in its entirety or in any integral multiple of $5,000. After
any partial prepayment of principal, the amount of subsequent payments under
this Note shall be determined as if no such prepayment had been made until the
Loan (including all accrued interest) is paid in full.

     6. Timing of Payments. Each payment under this Note shall be made in
        ------------------
immediately available funds before noon, Los Angeles, California time, on the
date that such payment is due. If the due date for any payment is not a Business
Day, such due date shall be deemed for all purposes to fall on the next Business
Day, and any such extension shall be included in the computation of interest
payments.

     7. Acceleration and Other Remedies. Upon the occurrence of any Event of
        -------------------------------
Default, the holder of this Note may, at its option, declare the outstanding
principal balance of this Note, together with all accrued interest and related
charges, to be immediately due and payable. All rights and remedies provided to
the holder in this Note are cumulative and shall be in addition to all other
rights and remedies of the holder under other documents, at law or in equity,
and all such rights and remedies may be exercised singly, successively and/or
concurrently. Failure to exercise any right or remedy shall not be deemed a
waiver of such right or remedy.

     8. Application of Payments. While no Event of Default remains uncured, (a)
        -----------------------
all payments made hereunder shall be applied first to interest due and then in
reduction of the principal balance, and (b) if more than one monthly payment
remains unpaid, amounts received shall be applied to such payments in reverse
chronological order. While any Event of Default remains uncured, payments made
hereunder shall be applied against amounts due as Lender chooses, application as
to particular obligations or against principal or interest to be in Lender's
absolute discretion.

     9. Waivers. Borrower and all co-makers, guarantors, accommodation parties,
        -------
endorsers and other persons and entities liable for amounts owing hereunder
hereby waive presentment, demand, protest, notice of dishonor, notice of protest
and all other notices and demands of every kind, and all suretyship defenses of
every kind that would otherwise be available in connection with this Note,
including without limitation any right (whether now or hereafter existing) to
require the holder hereof to first proceed against Borrower, any other person or
entity, or any security.

                                      -9-

<PAGE>

         10. Costs of Enforcement. If any amount owing hereunder is not paid
             --------------------
when due, Borrower shall pay, on demand, all costs of collection, including
foreclosure fees and attorneys' fees incurred by Lender, whether or not suit is
filed or a foreclosure sale occurs.

         11. Maximum Interest. In no event shall the amount paid or agreed to be
             ----------------
paid to the Lender as interest under this Note exceed the highest lawful rate
allowed to be received by the Lender in the State of California. If, from any
circumstance whatsoever, fulfillment of any provision in this Note or of any
other agreement between the Borrower and the Lender related to this Note shall,
at the time of such fulfillment, involve payment of interest in excess of that
authorized to be received by the Lender under the law of the State of
California, then the obligation to be fulfilled shall be reduced to the limits
so authorized by law, and if from any circumstance the Lender shall ever receive
a sum as interest in excess of that authorized to be received by the Lender
under the law of the State of California, it shall not be deemed interest but
shall be applied to reduce the principal amount of this Note.

         12. Miscellaneous. Time is of the essence hereof. Interest not paid
             -------------
when due shall earn interest as principal. All payments hereunder shall be made
in lawful money of the United States of America. This Note shall be governed by
the laws of the State of California. .

         13. Secured Obligations. This Note is secured by a Deed of Trust,
             -------------------
Assignment of Rents and Fixture Filing executed as of January 5, 2002 by
Borrower, as trustor, naming Chicago Title Insurance Company, as trustee, for
the benefit of Lender, as beneficiary, covering certain real and personal
property, as therein described. This Note may also be secured by other
collateral.

                                      -10-

<PAGE>


                                        "Borrower":

                                        1999 LAWNDALE ASSOCIATES LLC



                                        By:  Khaledi Family Partnership II,
                                        a California general partnership,
                                        its Manager



                                        By: _____________________________

                                        Its: ____________________________
                                             [Printed Name and Title]

                                      -11-

<PAGE>

                                    Exhibit B
                                    ---------

                            REAFFIRMATION OF GUARANTY

                                      -12-

<PAGE>

              MODIFICATION OF GUARANTY, CONSENT TO MODIFICATION OF
                  LOAN DOCUMENTS AND REAFFIRMATION OF GUARANTY

The undersigned (collectively, the "Guarantors") hereby consent to the terms and
conditions of that certain Modification Agreement ("Modification Agreement")
dated as of January 5, 2002 by and between 1999 Lawndale Associates LLC, a
California limited liability company ("Borrower") and Unified Western Grocers,
Inc., a California corporation ("Lender"), any other documents evidencing
modifications to the Loan Documents (as defined in the Modification Agreement)
executed in connection therewith, and the transactions contemplated thereby and
collectively reaffirm their obligations under the Guaranty (as modified below,
the "Guaranty") dated July 5, 2000, and each of their waivers, as set forth in
the Guaranty, of each and every one of the possible defenses to such
obligations. Each Guarantor further reaffirms that each of its obligations under
the Guaranty are separate and distinct from Borrower's obligations.

The undersigned Guarantors further agree that the following terms and conditions
are hereby added as subsections (h) and (i) of Section 4 of the Guaranty:

"(h)     Guarantor waives all rights and defenses that Guarantor may have in the
event that the Indebtedness is secured by real property. This means among other
things:

         (i)     Lender may collect from Guarantor without first foreclosing on
any real or personal property collateral pledged by Borrower.

         (ii)    If Lender forecloses on any real property collateral pledged by
Borrower:

                 (a) The amount of the Indebtedness may be reduced only by the
price for which the collateral is sold at the foreclosure sale, even if the
collateral is worth more than the sale price.

                 (b) Lender may collect from Guarantor even if Lender, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower.

This subsection 4(h) is an unconditional and irrevocable waiver of the rights
and defenses Guarantor may have in the event that the Indebtedness is secured by
real

                                      -13-

<PAGE>

property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil
Procedure.

(i)           The Guarantor waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor's rights of subrogation and
reimbursement against the principal by the operation of Section 580d of the Code
of Civil Procedure or otherwise."

         IN WITNESS WHEREOF, each Guarantor has caused this Modification of
Guaranty, Consent to Modification of Loan Documents and Reaffirmation of
Guaranty to be duly executed as of the date written below:

Dated as of: January 5, 2002

                                                          "GUARANTOR"



                                            ___________________________________
                                            DARIOUSH KHALEDI



                                            ___________________________________
                                            SHAHPAR KHALEDI



                                            ___________________________________
                                            DARIOUSH KHALEDI, as trustee of the
                                            Khaledi Family Trust under
                                            declaration of Trust dated May 17,
                                            1995

                                            K.V. PROPERTY COMPANY


                                            By:   ___________________________
                                                  Darioush Khaledi
                                                  [Title]

                                      -14-

<PAGE>

                                             ________________________________
                                             PARVIZ VAZIN



                                             ________________________________
                                             VIDA VAZIN






                                             KHALEDI FAMILY PARTNERSHIP II

                                             By:   ____________________________
                                                   Darioush Khaledi
                                                   Manager

                                                   KHALEDI FAMILY PARTNERSHIP II


                                                   Its

                                      -15-

<PAGE>

                                    Exhibit C
                                    ---------

                                    MORTGAGE

                                      -16-