January 9, 1997
Appeal of
DIAMOND PLAZA, INC.
Under Lease Agreement
PSBCA No. 3846
APPEARANCE FOR APPELLANT:
Reba M. Wingfield, Esq.
APPEARANCE FOR RESPONDENT:
Patrice R. Dickey, Esq.
OPINION OF THE BOARD
Appellant, Diamond Plaza, Inc., has appealed from the denial of its claim for damages allegedly incurred due to the failure of Respondent, United States Postal Service, to properly restore premises leased from Appellant by the close of the lease term. The damages sought by Appellant in this appeal are for rental income allegedly lost because of the delay occasioned by Respondent's failure to make necessary repairs. This appeal is being decided on the record in accordance with 39 C.F.R. §955.12.
FINDINGS OF FACT
1. On July 21, 1986, Respondent entered into a lease with Winrock Development Company, Inc., under which Winrock leased to Respondent a property located in North Little Rock, Arkansas. The original term of the lease was from August 1, 1986, through July 31, 1991, and called for annual rental payments rising from $120,869.15 in the first year to $141,399.79 in the fifth year. Rent was payable in equal installments at the end of each calendar month. The lease also provided a single five-year renewal option, exercisable by the Postal Service, with rental amounts beginning at $147,055.78 in the first option year and rising to $165,417.75 in the fourth year (beginning August 1, 1994) and $172,034.46 in the fifth year. (Appeal File Tab (AF) E).
2. Paragraph 9 of the lease provided as follows:
"The Postal Service shall have the right to make alterations, attach fixtures and erect additions, structures or signs in or upon the premises hereby leased . . . . Prior to expiration or termination of this lease the Postal Service shall restore the premises to as good condition as that existing at the time of entering upon the same under this lease, reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the Postal Service has no control, excepted." (Id.). [Emphasis added].
3. The Postal Service apparently did not exercise the five-year renewal option, but the lease was renewed through an amendment for a three-year period, ending July 31, 1994. The period of the lease was extended further by two lease amendments covering the period from August 1, 1994, through October 31, 1994. For the period of August 1, 1994, through September 30, 1994, Respondent paid rent based on an annual rate of $120,732. For the month of October 1994, Respondent paid rent in the amount of $9,500. (AF C, D).
4. Respondent vacated the premises at some time prior to the end of the lease term, although the record does not indicate exactly when. On or about October 28, 1994, Respondent's real estate specialist received a letter from the then owner's attorney indicating that the owner, Charles Edwards Investments,[1] had authorized Howard Atkins, a real estate broker, to receive the keys from the Postal Service at the end of the lease term and perform an inspection on the owner's behalf. The real estate specialist forwarded the letter to Respondent's architect/engineer, who accompanied Mr. Atkins on the inspection. At the close of the inspection, the architect/engineer asked Mr. Atkins how the building looked. Mr. Atkins replied that it looked "OK." Respondent received no request from the owner for any restoration work. (Affidavit of Larry Brooks; Affidavit of David Taliaferro). Nevertheless, Respondent had failed to restore the building to the condition required by paragraph 9 of the lease (Affidavits of Paul Yates, Floyd Herring, and T. Adam Green).
5. Through a warranty deed dated December 27, 1994, Charles Edwards Investments, Inc., transferred the property to Diamond Plaza, Inc. ("Diamond Plaza"). On December 30, 1994, Charles Edwards Investments ("Assignor") and Paul Yates, as president of Diamond Plaza ("Assignee") executed an "Assignment of Rights Under Lease" that assigned "all of the rights of Assignor that survive the term of [the lease between Charles Edwards Investments and Respondent] . . . ." to Diamond State Properties, Inc. ("Diamond State"). (AF C).
6. By letter dated February 9, 1995, to the real estate specialist, Diamond State[2] demanded the payment of $164,002.00, representing what were alleged to be the costs of restoring the property to its original condition. The letter made no mention of lost rental income and the $164,002 claimed did not include any amount under that category. All of the costs claimed were for construction activities. (AF J).
7. Apparently in answer to a request from the real estate specialist, the president of Diamond State sent a letter dated February 13, 1995, providing documents to demonstrate that it had purchased the property. The letter also stated:
"We appreciate any help you may offer in expediting this claim. Due to its present condition, the building is not suitable for leasing. Please be advised that Diamond State will be looking to the USPS for payment of the monthly lease amount should there be any unnecessary delay in the processing of this claim under the lease provisions." (AF B).
8. Diamond State provided additional information to Respondent on March 8, 1995, and, on March 13, 1995, the parties jointly inspected the building. As of that date, Appellant intended to move its trucking brokerage firm (Maxxon Corporation) into the building once the restoration work was complete. (AF I; Brooks affidavit; Taliaferro affidavit; Affidavit of Larry Andrews).
9. By letter to Diamond State dated April 11, 1995, Respondent offered to settle the claim for the payment of $61,086. Respondent's offer was based on its own estimate of the costs to remove walls, doors and windows installed by the Postal Service, to replace paneling and gypboard damaged by the installation of receptacles/outlets and to remove cabling installed by Respondent. (AF H).
10. In a letter dated April 19, 1995, addressed to Diamond State, Respondent's real estate specialist wrote:
"This letter is to confirm our verbal agreement for restoration of the subject property pursuant to Paragraph 9 of the Lease between the Winrock Development Company and the United States Postal Service, dated July 21, 1986.
In consideration for $61,086, Diamond States Properties and the U.S. Postal Service shall acknowledge below as acceptance and release of all liabilities concerning the damages to the referenced property. A check will be issued to Diamond States Properties in the amount of $61,086, as final payment for claim. . . ."
Below the signature of the real estate specialist, the letter contained the word "ACKNOWLEDGMENT:" followed by spaces for signatures on behalf of both parties. The letter in the record bears the signatures of the president of Diamond State (dated April 26, 1995) and of the Contracting Officer (dated May 1, 1995). (AF G). The Contracting Officer understood the letter to represent a release of all liabilities under the lease (Andrews affidavit). Respondent issued a check in payment of the settlement amount on May 12, 1995. Once funds were received from Respondent, interior repairs began. (Yates affidavit).
11. By letter dated June 21, 1995, Appellant, through its counsel, filed a claim in the amount of $130,955.70 for nine and one-half months of lost rental payments (from October 1, 1994, through July 15, 1995). Appellant alleged that the property was not in "habitable" condition when it was abandoned by Respondent and estimated that repairs would not be completed until July 15, 1995. In calculating its claim, Appellant utilized the annual rental amount specified in the lease for the fourth year of the option period (August 1, 1994, through July 31, 1995), which was $165,417.75, or $13,784.81 per month. (AF F; Findings 1, 3).
12. In a final decision dated June 29, 1995, the Contracting Officer denied Appellant's claim in its entirety. Appellant filed a timely appeal with this Board. (AF A).
13. Repairs to the building were not actually completed until August 15, 1995 (Yates affidavit).
DECISION
Appellant argues that under the language of the lease, Respondent was required to have the premises restored prior to expiration of the lease term and that a demand from the lessor for such work was not a precondition to Respondent's obligation. Appellant contends that Respondent's failure constituted a breach of the lease provision and that it is entitled to damages, including lost rental income, resulting from that breach.
Respondent argues that Appellant is barred from recovery of lost rent by an accord and satisfaction, relying on release language in the letter signed by both parties (Finding 10). Respondent contends that the release was intended to be a complete release of all liabilities, and that Appellant may not recover on its claim for lost rent because it did not reserve that claim at the time it executed the release. Respondent emphasizes the language in the February 13, 1995 letter from Appellant indicating that it would seek "payment of the monthly lease amount should there be any unnecessary delay in the processing of this claim...." Respondent argues that there was no unnecessary delay and that, accordingly, Appellant was obligated to reserve the claim from the operation of the release in order to preserve it. Appellant responds that the language of the release was expressly limited to damage to the property and did not include within its scope a claim for lost rent. Therefore, Appellant contends that executing the release did not cut off its right to seek lost rent. Further, Appellant argues that to the extent that the Board may find the release language to be ambiguous, such ambiguity should be construed against Respondent, as drafter of the language.
Respondent argues further that even if the claim is not barred by accord and satisfaction, Appellant has failed to demonstrate entitlement to lost rent. Respondent argues that Appellant has failed to show that the loss of rent was foreseeable at the time the parties entered into the lease or that Respondent's failure to restore the premises was the proximate cause of Appellant's inability to rent the building. Respondent argues specifically that Appellant may not recover since it was not an original party to the lease and, therefore, may not show that loss of rent was foreseeable when the lease was entered into. Respondent also argues that Appellant has failed to offer evidence of an unsuccessful attempt to rent the building and has failed to show that the building could have been rented for the amount on which Appellant bases its claim.
Having considered the evidence and arguments of the parties, we conclude first that the release executed by both parties constituted an accord and satisfaction only as to the claim that had actually been filed by Appellant -- i.e., the claim for the cost of repairing physical damage to the building -- but not as to the claim for lost rent. In reaching this conclusion we examine the language used in the release, in the light of the circumstances surrounding its execution. Southeastern, Inc., ASBCA Nos. 7677, 8614, 1963 BCA ¶ 3904 and cases cited. The principal operative language of the release -- "...release of all liabilities concerning the damages to the referenced property" -- is susceptible to more than one reasonable interpretation. The "all liabilities concerning" phrase tends toward the interpretation argued for by Respondent. However, the latter part of the language -- "damages to the referenced property" -- can reasonably be interpreted, as argued by Appellant, to restrict the release to payment for physical damage to the building. Appellant's position is further bolstered by the statement in the agreement that a check was to be issued "as final payment for claim." Appellant correctly argues that the only "claim" then in existence was the one for repairs to the building.
Where, as here, the language of the release is susceptible to two reasonable interpretations, the language is to be construed against the drafter -- in this case, Respondent. Production Corp., DOTBCA No. 2424, 92-2 BCA ¶ 24,796 at 123,693; see also Community Heating & Plumbing Co., Inc. v. Kelso, 987 F.2d 1575 (Fed. Cir. 1993); Edward R. Marden Corp. v. United States, 803 F.2d 701, 705 (Fed. Cir. 1986). Therefore, we conclude that the release did not constitute an accord and satisfaction with respect to the claim for lost rent. The fact that the Contracting Officer may have understood the release to cover all liabilities under the lease does not change this conclusion, as there is no evidence that he conveyed his understanding to Appellant or that his understanding was based on statements or actions by Appellant. See e.g., 3 Corbin on Contracts § 538 (2d ed. 1960), pp. 57‑69. In particular, the record does not reflect that the Contracting Officer relied on or attached any particular significance to the language of Appellant's February 13, 1995 letter regarding "unnecessary delay" (Finding 7), or that the topic of lost rents came up in any discussions between the parties prior to the execution of the settlement agreement. Further, both the claim filed by Appellant and the offer of settlement made by Respondent (and accepted by Appellant) were based entirely on the costs of physical restoration of the building.
We do not agree with Respondent's argument that Appellant's failure to specifically exclude its potential claim for lost rent from the operation of the release bars it from pursuing that claim here. Had Respondent intended to foreclose any liability for lost rents, it could have specifically addressed that topic in the release it drafted or, at a minimum, used language that reflected a general release of all claims. Under those circumstances, Appellant's failure to reserve its claim for lost rent could have served to prevent it from prosecuting that claim now. Inland Empire Builders, Inc. v. United States, 191 Ct. Cl. 742, 424 F.2d 1370, 1376 (1970); Garza Corporation v. Department of Commerce, GSBCA No. 13332‑COM, 96‑1 BCA ¶ 28,120; Beardsley, Beardsley, Cowden & Glass, VABCA Nos. 4545, 4546, 95‑2 BCA ¶ 27,694; Barling Company, ASBCA No. 45,812, 95‑1 BCA ¶ 27,542. However, as we have found, the release language was ambiguous at best and, therefore, applied only to the claim for physical damage to the building. Therefore, Appellant was not required to reserve its claim for lost rent.
We also do not agree with Respondent's lack-of-foreseeability argument. The parties to this lease specifically provided that Respondent was to restore the premises to the required condition prior to expiration or termination of the lease. Further, the lease provision did not require a demand by the lessor as a precondition of this obligation. Compliance with this provision would leave the property in a condition that would allow it to be re-rented promptly, after only the reconditioning necessary to correct those conditions constituting ordinary wear and tear. Since the property at issue here was rental property, the "natural and probable consequence," of Respondent's failure to restore the premises by the end of the lease term would likely be a delay in the owner's ability to re-rent the premises and the corresponding loss of rental income. Therefore, this type of damage was foreseeable by the parties upon entering into the lease and, if proven, may form the basis for recovery by the lessor. Olin Jones Sand Co. v. United States, 225 Ct. Cl. 741 (1980); Ramsey v. United States, 121 Ct. Cl. 426, 433, 101 F. Supp. 353, 357 (1951), cert. den. 343 U.S. 977 (1952); See also Hoover v. United States, 3 Ct. Cl. 308 (1867)(Lost rent as a measure of damages for lessee's failure to repair property by the close of the lease term); E.L. Hamm & Associates, Inc., ASBCA No. 43972, 94-2 BCA ¶ 26,724 at 132,939 ("Rental value" of property as a measure of damages for improperly holding over); Annot. Measure and items of damages for lessee's breach of covenant as to repairs, 80 ALR2d 983, 1031. Contrary to Respondent's argument, the fact that Appellant was not an original party to the lease does not bar recovery, as the standard of "foreseeability" is an objective one, based on the language of the lease and the circumstances under which it was entered into, and does not require proof that either party to the lease actually contemplated the loss in question. See Salsbury Industries v. United States, 17 Cl. Ct. 47, 58 (1989), aff'd 905 F.2d 1518 (Fed. Cir. 1990), cert. den. 498 U.S. 1024 (1991); Environmental Growth Chambers, Inc., ASBCA No. 25845, 83‑2 BCA ¶ 16,609 at 82,598.
The final issue to be addressed is whether Appellant, which has the burden of proof, has shown that Respondent's breach of the lease provision caused an actual loss of rental income. Roger H. Elliott, PSBCA No. 3285, 1993 WL 73426 (Feb. 12, 1993); F&B Realty, PSBCA No. 2529, 91‑2 BCA ¶ 23,788. With one exception, we conclude that Appellant has not met its burden. Appellant has failed to offer any evidence that would show that it or its predecessor attempted to rent the premises after Respondent vacated but was unable to do so. In its brief, Appellant states that it had six tenants committed to lease space in the building prior to its purchase in December 1994. However, there is no evidence whatsoever in the record to support that statement. None of the affidavits submitted by Appellant contain any such statements and none of the letters Appellant wrote to Respondent in the course of negotiating the settlement of the damages contained any such statement or suggestion.
The only evidence offered by Appellant in this area was a number of pages that were represented by counsel to be excerpts from an appraisal of the building allegedly conducted on October 16, 1995, two months after repairs were completed and approximately one year after the premises became vacant.[3] The excerpts did not include a signature from the appraiser attesting to the appraisal's accuracy and were not accompanied by an affidavit or any other document that might have served the same purpose. Also included with its brief was a document entitled "Tenant List" which the brief represented to be a list of tenants that had leased space in the building. The Tenant List contained the names of nine "Leasees," including Maxxon Corporation (see Finding 8) that, according to Appellant's brief, entered into leases beginning on several dates between August 21, 1995, and November 1, 1995. It was unclear from its brief whether Appellant was representing that the Tenant List was part of the appraisal. In any event, the Tenant List also was not accompanied by an affidavit or other sworn statement explaining its contents or attesting to its accuracy.
In addition, the appraisal and the Tenant List contain inconsistent information. While the Tenant List includes eight leases allegedly beginning August 21, October 1, or October 3, 1995, the appraisal (which is allegedly based on data "as of" October 16, 1995) does not mention any of the leases or refer to the Tenant List, does not include the amounts of the leases in its calculation of expected operating income for the building, and refers to the property as "currently vacant." Based on these facts, we conclude that the appraisal and Tenant List that accompanied Appellant's brief are to be given no evidentiary weight in this appeal. Accordingly, except as discussed below, Appellant has failed to meet its burden of proof and may not recover for lost rental income.
The sole exception to this conclusion relates to Maxxon Corporation. The three affidavits submitted by Respondent all refer to statements made by Appellant's representatives on or about March 13, 1995, to the effect that they intended to move the offices of Maxxon Corporation (whose president was Floyd Herring, the president of Diamond State) into the building, but could not do so because of the need to remove partitions that had been erected and left by Respondent. Based on this evidence we conclude that at least as to Maxxon, the evidence shows that Appellant lost rental income that it would otherwise have received or, alternatively, paid rent at Maxxon's then current location that it could have avoided paying had Respondent restored the building as it was required to do. In the absence of any other evidence as to the amount of that rent, we look to the "Tenant List" that accompanied Appellant's brief. The amount listed for the Maxxon Corporation lease is $1,500 per month and we accept that amount as a rough measure of Appellant's damages.
In its claim, Appellant sought damages for lost rents beginning in November 1994, immediately after Respondent vacated the premises. Although, as we have held, Respondent breached the provisions of the lease, Appellant failed in its duty to mitigate the damages caused by that breach and its recovery is to be limited accordingly. See e.g., Seaway Shipping Lines, PSBCA No. 2840, 91-2 BCA ¶ 23,731 at 118,862. Appellant correctly argued that Respondent was obligated to restore the premises by the end of the lease term without any prior notice from the lessor. Nevertheless, three days before the end of the term Respondent was led by the lessor's agent to believe, albeit incorrectly, that it had no restoration work to perform. Under these circumstances, Respondent cannot be held liable for its breach until it subsequently received notice that, notwithstanding the advice it had received, there was some restoration work for which it was responsible. Respondent did not receive that notice until it received the February 9, 1995 letter from Diamond State (Finding 6). Accordingly, Appellant may not recover any lost rent for the period from the end of the lease term through February 11, 1995 (allowing two days for delivery of the letter). Therefore, Appellant may recover $1,500 per month from February 11, 1995, until August 15, 1995 (when the work was completed), or $9,200,[4] plus Contract Disputes Act interest.
As explained above, the appeal is sustained in the amount of $9,200 plus Contract Disputes Act interest from June 21, 1995, but is otherwise denied.
David I. Brochstein
Administrative Judge
Vice Chairman
I concur:
James A. Cohen
Administrative Judge
Chairman
I concur:
Norman D. Menegat
Administrative Judge
Board Member
[1] There were at least two title transfers during the initial five-year term of the lease. Although the record does not indicate exactly when the property was transferred to Charles Edwards Investments, the transfer occurred no later than August 1, 1991. (AF C, D).
[2] Diamond State functioned as a management agent for Diamond Plaza in negotiations over damage to the property (Herring affidavit; Yates affidavit).
[3] The appraisal excerpts were submitted as an attachment to Appellant's brief, after the time for receipt of evidence into the record had passed. The Board allowed the excerpt into evidence, to be given "appropriate evidentiary weight," and allowed Respondent to offer evidence or arguments in response. Respondent submitted additional argument challenging the authenticity of the document and urging that it be given no weight in deciding the appeal.
[4] Six months at $1,500 per month, plus ((4 days/30 days) x $1,500) = $9,200.