November 16, 2004
Appeal of
JAMES HOVANEC
LEASE AGREEMENT
PSBCA No. 4767
APPEARANCE
FOR APPELLANT:
Edward E. Kopko, Esq.
APPEARANCE
FOR RESPONDENT:
Margaret E. Harper, Esq.
OPINION OF THE BOARD
Appellant,
James Hovanec,[1]
built and leased to Respondent, United States Postal Service, a post office in
At the parties’ election, the appeal is being decided on the record without an oral hearing. The parties submitted additional evidence, including deposition transcripts and declarations of witnesses, and briefs in support of their positions. The Board reserved ruling on the parties’ motions for summary judgment previously filed, but the arguments made in the motion papers have been considered in deciding this appeal. Entitlement only is at issue (Order dated September 10, 2003).
FINDINGS
OF FACT
1. In 1989, Respondent began a search for a
replacement for the post office in
2. Appellant was initially reluctant to consider the project because he preferred to build the post office but not own it. Over the summer of 1989, the postmaster, the real estate specialist and the contracting officer had a number of discussions with Appellant, attempting to interest him in the project. (Appeal File, Tab (“AF”) 9; Appx. 180-182, 330-331, 466; Resp. Exhs. 19 (pp. 4-6), 24; see Resp. Exhs. 1-7).
3. Respondent’s officials orally advised Appellant in the course of these discussions that the Willseyville Post Office project would make a great investment for Appellant and that it would be a good source of retirement income. They advised that the only way Appellant could lose money on the project was if Respondent determined to close the Willseyville Post Office, an event they considered unlikely under existing Postal Service policy. They told Appellant that Respondent generally occupied leased facilities longer than the base term by exercising the options to extend the term or purchasing the post office under purchase options. In these early discussions, Appellant believed the lease would be for a 20-year base term with an option to purchase after ten years. (AF 9; Appx. 330-331; Resp. Exhs. 19 (pp. 4-5, 9), 24).
4. After many discussions over several months, Appellant offered to acquire the postmaster’s site, construct the building in accordance with Respondent’s detailed plans and lease it to Respondent at a rental of $16,344 per year. That figure was deemed too high by Respondent, but through further negotiations between Appellant and the real estate specialist the parties reduced the scope of work—changing to a less expensive heating system and having a gravel instead of paved parking lot—and reduced the initial annual rental rate to $14,298. (Appx. 180-182; Resp. Exhs. 1, 2).
5. On
6. Appellant, his attorney and his lender had all questioned the ten-year base term desired by Respondent. Appellant had asked Respondent for a longer—20-year—base term, but Respondent insisted on the ten-year term (March 17 and 29, 2001 Letters to Mr. Umscheid attached to Complaint), and the ten-year term was stated in the Agreement to Lease/offer. The offer included purchase options exercisable at Respondent’s discretion at stated prices after the first five years, at the conclusion of the base term, and at the conclusion of every renewal option term. (AF 1; Resp. Exh. 19 (p. 9); Stipulation (“Stip.”) 1).
7. A ten-year base term followed by a series of
five-year renewal options was typical for Respondent’s new construction leases
at that period of time, and the then-applicable Postal Service leasing
guidelines recommended a ten- or fifteen-year term (Resp. Exhs. 22 (pp. 49, 56,
74), 23 (Handbook RE-1, Realty
Acquisition and Management (1988), §321.2), 26 (p. 18)).
8. The contracting officer executed the
Agreement to Lease/offer on
9. Appellant constructed the building, and the
parties entered into the lease for the premises. The lease specifically incorporated the terms
of the Agreement to Lease and reflected the same terms regarding duration,
renewals and purchase options that were included in the Agreement to
Lease/offer. The lease was for a ten-year
base term from
10. In September 1997, the Albany District of the Postal Service, which was the user of the Willseyville facility, sent to the Windsor FSO a Facilities Service Request form noting that the Willseyville lease was due to expire in January 2000, and asking the FSO to “exercise next five (5) year renewal option.” (Appx. 035, 172; Resp. Exhs. 18, 20 (pp. 51-53), 21 (p. 11), 25 (¶2)).
11. The real estate market in Willseyville had
substantially deteriorated over the base term of the lease, and the rental rate
stated in the lease’s first renewal option period was well above fair market
rent for the building by 1997 (AF 7, 9; Appx. 108, 469; Resp. Exh. 25 (¶¶
3, 4);
12. Postal Service guidelines addressing exercise
of lease renewal options direct Respondent’s officials to conduct a market
survey to assess the reasonableness of the option rental rates in the
lease. The real estate specialist in the
FSO to whom the Willseyville Service Request was assigned conducted a market
survey and determined that exercise of the renewal option at the rent stated in
the lease was not in the interest of Respondent. The guidelines direct that the survey be
fully documented in the file, but the real estate specialist made no written
record of his evaluation. (Appx. 325
(Handbook RE-1, Realty Acquisition and
Management, August 1996, §316.12); Resp. Exhs. 20 (pp. 8-9, 11-13, 18-19),
21 (pp. 9-12), 25 (¶¶ 3, 4)).
13. If the option rent in the lease was determined to exceed market rent, the Postal Service leasing guidelines instructed Respondent’s officials to attempt to negotiate the renewal option rent to correspond to market rent (Resp. Exh. 21 (p. 2), 22 (pp. 51, 90); Appx. 325 (Handbook RE-1, Realty Acquisition and Management, August 1996, §316.122)).
14. Sometime after September 1997 and before
15. The real estate specialist made no written record of the conversation with the person he believed to be Appellant’s wife and did not confirm in writing or orally directly with Appellant his understanding that the option rent was non-negotiable. (AF 20; Appx. 107-110; Resp. Exh. 25 (¶¶7-10)). Nevertheless, based on that single telephone conversation, the real estate specialist notified the Albany District Office that the option rent exceeded market rent and that the lessor refused to negotiate a lower rent. He then began the process of finding other space for the Willseyville Post Office. Eventually, he located a vacant site, which Respondent leased. Respondent obtained necessary approvals and installed a modular building on the new site for a total long-term cost substantially less than would have been experienced had Respondent exercised the options in the lease at the rates stated therein. (Appx. 071, 097, 103-104, 108-110, 149-150, 153-156; Resp. Exhs. 8-14, 17, 20 (pp. 15, 22, 25, 38, 46), 21 (pp. 2-4, 18)).
16. The postmaster knew of the search for new
space no later than
17. About a year or so before expiration of the lease, Appellant called the Windsor FSO, intending to ask about the renewal option. His call was not returned, and he did not call again. (Resp. Exh. 19 (p. 11); see Appx. 370).
18. On
19. On December 21, 1999, the parties entered into a six-month extension of the lease at the annual rental rate stated in the lease for the first renewal option period, and Respondent vacated by the end of the extension period (AF 3, 13, 14; Appx. 333; Stip. 4).
20. The sole reason Respondent relocated was economic. Appellant’s building was adequate for Respondent’s purposes, and if a sufficient reduction in the rent for the option period could have been negotiated, Respondent would not have relocated. However, by December 1999, when the real estate specialist contacted Appellant about the six-month extension, the new site had been leased, site improvements made and the modular building was being manufactured. By this time, Respondent considered the new project to be too far advanced to reverse. (Appx. 098,116, 229; Resp. Exhs. 20 (pp. 9-10, 20, 32, 35), 21 (pp. 6-7, 14)).
21. Respondent’s real estate guidelines direct Respondent to monitor leases with purchase options to determine the benefits of acquiring the facility and to consider any proposals made by an owner of an existing postal-leased facility (Appx. 030 (Handbook RE-1, Realty Acquisition and Management, August 1996, Section 482)). Throughout 1998 and 1999, Respondent gave no consideration to purchasing Appellant’s building (Appx. 006-007).
22. By letter dated
23. By final decision dated
DECISION
Term
of the Lease
Appellant argues that Respondent’s officials, through their representations when the lease was entered into in 1989, established a 20-year term for the lease or an obligation on Respondent’s part to exercise the renewal options to produce a 20-year occupancy. Because, according to Appellant, he based his rental proposal on that expected 20-year occupancy, Respondent’s departure shortly after expiration of the ten-year base term left him unable to recover his investment in the Willseyville Post Office project, and he seeks in this proceeding to recover the portion of his investment that he did not recover from the rents paid by Respondent during its occupancy of the post office.
Respondent argues that the lease, which incorporates the terms of the Agreement to Lease, is an integrated document, representing all agreements of the parties. Accordingly, Respondent argues, evidence regarding representations or negotiations leading up to the parties’ agreement should not be permitted to vary or contradict the lease’s plain language regarding its duration and the discretion afforded Respondent regarding exercise of the renewal options. Respondent further argues that even considering the parties' negotiations, Appellant has not shown he is entitled to relief.
The parties
contemplated that the formal offer and acceptance would occur through
Appellant’s submission and Respondent’s acceptance of a written Agreement to
Lease (Findings 5, 9). The Agreement to
Lease and the resulting lease executed by the parties were comprehensive and
addressed in detail the duration of the lease:
a ten-year base term followed
by four, five-year renewal terms, exercisable at the option of Respondent
(Findings 6, 10). Not only did the
language of the Agreement to Lease unambiguously establish a ten-year base term,
but Appellant knew it and had unsuccessfully attempted to persuade
Respondent to change the arrangement to reflect the 20-year term he desired
(Finding 6).
Various statements of Respondent’s officials
to the effect that the project was a good investment for Appellant (Finding 3)
were statements of opinion, and we are not persuaded that Appellant would have
been reasonable in relying on such statements to conclude that the lease
duration and other terms were anything other than as written in the Agreement
to Lease and the lease. See Brenda
R. Ronhaar, AGBCA No. 98-147-1, 99-1 BCA ¶ 30,591 at 151,075; Aspen
Helicopters, Inc. v. Department of Commerce, GSBCA No. 13258-COM, 00-2 BCA
¶ 30,581 at 151,025, aff’d, 243 F.3d 561 (Fed. Cir. 2000) (Table).
Finally, the statements attributed to
Respondent’s officials have not been shown to be intended to mislead Appellant. As far as this record reflects, Respondent’s
officials believed their representations accurately stated the general
experience with Postal Service leases.
Certainly none expected the developments in 1998 that led to non-renewal
of the lease. That the representations
were not intentionally misleading or otherwise reflective of affirmative
misconduct by Respondent’s officials prevents assertion of estoppel against
Respondent under the circumstances of this appeal. See Rumsfeld v. United Technologies
Corp., 315 F.3d 1361, 1377 (Fed. Cir.), cert. denied, 124 S.Ct. 532
(2003); DeMarco Durzo Development Co. v.
Thus, Appellant has not shown that the
parties through their lease negotiations varied the plain language of the lease
regarding duration and renewal options.
Failure of Respondent to Exercise Renewal
Option
Appellant argues that the conduct of
Respondent’s officials when considering whether to exercise the renewal options
at the end of the base term violated the duty of fair dealing and good faith inherent
in the contract between the parties. However,
as we have found no limitations in the Agreement to Lease or in the lease on
Respondent’s exercise or nonexercise of the renewal option and have held that
the conduct of Respondent’s officials prior to entering into the Agreement to
Lease did not commit Respondent to exercise the renewal option, Respondent had
broad discretion in this regard. See
Government Systems Advisors, Inc. v.
For the Board to find bad faith on the part
of Respondent’s employees, Appellant must show by clear and convincing evidence
some specific intent to harm him, see Am-Pro Protective Agency, Inc.
v.
Appellant’s suspicion that the postmaster
might have had personal gain as a reason to end the lease and to fail to inform
him that plans for a new facility were underway (Finding 18) is not sufficient
to demonstrate bad faith. See CACI,
Inc. – Federal v.
The elements of abuse of discretion have
also not been demonstrated. As discussed
above, there was no subjective bad faith shown.
Additionally, Respondent’s discretion to determine whether to exercise
the renewal option was not restricted in the contract, and, finally, there was
a clearly reasonable basis for not exercising the renewal option contained in
the lease: the renewal rental was no longer justifiable on an economic basis,
given the decline in the Willseyville real estate market (Findings 8, 13). See Kirk/Marsland Advertising, Inc.,
ASBCA No. 51075, 99-2 BCA ¶ 30,439 at 150,408-409; Pennyrile Plumbing,
Inc., ASBCA Nos. 44555, 47086, 96-1 BCA ¶ 28,044 at 140,029.
Appellant points to failures of the
The appeal is denied.
Norman D. Menegat
Administrative Judge
Board Member
I concur:
James A. Cohen
Administrative Judge
Chairman
I concur:
David I. Brochstein
Administrative Judge
Vice Chairman
[1] Although both Marge Hovanec and James Hovanec are
listed as appellants in this appeal, only James Hovanec is the lessor/contractor
and, therefore, is the appellant in the appeal.
The caption of the appeal has been changed accordingly.