PSBCA No. 3817
June 18, 1997
Appeal of
MASSAPEQUA PARTNERS LIMITED PARTNERSHIP
MPL GROUP, INC.
Under Lease Agreement
PSBCA No. 3817
APPEARANCE FOR APPELLANT:
Alvin S. Nathanson, Esq.
APPEARANCE FOR RESPONDENT:
Ruth L. Gottlieb, Esq.
OPINION OF THE BOARD
Appellant, Massapequa Partners Limited Partnership, MPL Group, Inc., has appealed from the decision of the Contracting Officer assessing Appellant costs associated with replacing the roof at the Main Post Office, Massapequa, New York, which was leased by Respondent, United States Postal Service. Only entitlement is at issue in this proceeding.
FINDINGS OF FACT
1. In November 1960, Respondent[1] and Appellant's predecessors-in-interest[2] entered into a lease for a building in Massapequa, New York, for a base term of 20 years, and with two options, the first for ten years and the second for five years. The lease provided for annual rent in the amount of $26,210 during the base term and annual rent of $22,750 and $20,000 during the ten- and five-year option periods, respectively. The original lease generally required the lessors to maintain the premises in good repair and tenantable condition, except for damage caused by the act or negligence of the Postal Service. The original lease also provided,
"If any building or any part of it on the leased property becomes unfit for use for the purposes leased, the lessor shall put the same in a satisfactory condition . . . . If the lessor does not do so with reasonable diligence, the [Postal Service] in its discretion may cancel the lease. For any period said building . . . is unfit for the purposes leased, the rent shall be abated in proportion to the area determined . . . to have been rendered unavailable to the [Postal Service] by reason of such condition." (Appeal File, Tab (AF) 1).
2. In March 1981, the parties entered into a lease amendment that effected a partial transfer of maintenance responsibility to the Postal Service in return for a reduction in rent[3] and an option to purchase the property. In relevant part, the amendment provided:
"1.The Lessor and the Postal Service hereby amend the lease by substitution of the following riders in lieu of all prior agreements regarding responsibility for the items covered by the riders:
Maintenance Rider
***
5. . . . [T]he Lessor hereby grants the Postal Service an option to purchase the fee simple title to the leased premises at any time during the remaining term of this lease, including the term of any lease renewal options subsequently exercised, by providing written notice of the exercise of the option to purchase to the Lessor. The purchase price will be at the fair market value of the premises at the date of the exercise of this option . . . as determined by Postal Service appraisal . . . ." (emphasis added).
The amendment provided a specific procedure to be used to determine the fair market value if the lessor disagreed with the Postal Service appraisal. (AF 1).
3. The Maintenance Rider, incorporated into the lease by the amendment, provided that the Postal Service was to keep the premises in good repair and tenantable condition, except for repairs specifically designated the responsibility of the lessor. The lessor's obligations under the Rider were, in relevant part, as follows:
"The Lessor will be responsible for all structural repairs to the demised premises; . . . and for any repairs in postal maintained areas made necessary by any failure of a facility element for which the Lessor is responsible. Structural repairs as used in this paragraph shall be limited to the . . . roof system, including but not limited to roof covering, flashing, and insulation." (AF 1).
4. The facility was constructed in 1960. The original roofing system consisted of a "bituminous impregnated felt type built up ply membrane with a slag ballast, with tar saturated asbestos finishing felt and 1 ½ inch fiber insulation board." The roof structure consisted of steel joists with corrugated steel decking. (Stip. 5).
5. In 1980, Appellant contracted with Triple M Roofing for the installation of a second built-up ply roof over the existing roof. The second roof was guaranteed for five years. (Stip. 6; Respondent's Exhibit (RExh.) 22).
6. Beginning in 1984 and extending at least through February 1990, the building experienced periodic roof leaks. During the period ending February 1990, upon being informed of the existence of a leak, Appellant would dispatch its roofing contractor, Triple M, to correct the leak. (RExh. 17-20, 23-31). Beginning in 1987, the leaks began to get progressively worse. At first the roof leaked only after a substantial rainfall. Later, the roof leaked after a moderate rainfall and, eventually, after any rainfall. At various times, leaks occurred in the lobby area, the delivery area (where the carriers worked), the clerk operations area, the lunchroom, and the postmaster's office. Although the building remained usable, when it rained Postal Service personnel roped off parts of the lobby because of wet floors and were required to move some equipment to avoid getting the mail wet. (Transcript pages (Tr.) 21, 22, 58, 59, 61, 64-65, 88, 96, 425; AF 51). During this period, the postmaster received frequent complaints from customers and employees regarding the leaks (Tr. 23, 66).
7. By letter dated February 15, 1990, shortly after a repair visit by Triple M, the postmaster informed Appellant that leaks had increased in both frequency and number of areas affected and stated that the roof was leaking even in areas that had been patched by Triple M. The postmaster demanded that the situation be rectified in the next 60 days. (AF 72C; RExh. 19). Appellant did not respond to the letter in writing, although a representative of Appellant (Robert Schlager) may have had a brief conversation with the postmaster in March (AF 70 (paragraphs 3 & 4), 72B; Tr. 27). At that time, Appellant also secured three price quotes, ranging from $59,500 to $68,703, for replacing the roof. Two of the three quotes proposed removing the existing roof as part of the work. (RExh. 35-37; Tr. 554).
8. By letter dated April 4, 1990, the postmaster again wrote to Appellant, noting that he had received no reply to his February 15 letter and informing Appellant that since that time ceiling tiles had broken and fallen, just missing some employees. The postmaster demanded that Appellant respond to the letter within five days, or he would turn the matter over to "Postal Real Estate" for action. (AF 72B). The postmaster received no reply to this letter (Tr. 26).
9. By letter dated May 7, 1990, the Manager, Support Services, for Respondent's Long Island Division, Alfred Fassler, wrote to a representative of Appellant, Lawrence Schlager. Mr. Fassler cited the previous correspondence from the postmaster and asked that Mr. Schlager or a representative contact him by telephone within 10 days of receipt of the letter. He also advised Mr. Schlager that if he did not hear from him within 10 days, the Postal Service would proceed to have repairs made and deduct the cost of repairs from future rental payments. (AF 72A). Mr. Fassler did not receive a reply to his letter (Tr. 112).[4]
10. At some point in May or June 1990, an employee in Mr. Fassler's office asked the postmaster to get a number of quotes from contractors to repair the roof leaks. In June 1990, an employee at Massapequa secured three quotes from local contractors. The quotes secured by Massapequa post office personnel included both roof replacement and roof repair. The two quotes for roof repair were $3,480 and $4,000. All of the quotes were forwarded to Mr. Fassler's office. (AF 72D-F; Tr. 72).
11. In June or July 1990, Respondent hired one of the roofing contractors to perform repair work at a cost of $3,480. The proposal submitted by that contractor guaranteed the roof work to be leak free for a period of one year. The work, which consisted largely of patching the roof at the front of the building and in the southwest corner, was completed by, and payment was made by, August 1990. (Stip. 7; AF 72D, H-J).
12. By letter dated August 9, 1990, the Contracting Officer wrote to Appellant, indicating that the roof repairs had been completed and requesting reimbursement of the $3,480 expended by Respondent. The Contracting Officer stated that if payment was not forthcoming, the amount would be deducted from rental payments otherwise due Appellant. (AF 71). Appellant refused to pay (Stip. 8; Tr. 371). Nevertheless, the Contracting Officer never issued a final decision or deducted the disputed amount from the rent (Tr. 406).
13. At some time prior to November 6, 1990, Respondent exercised the final option under the lease, thereby extending the term of the lease to November 6, 1995 (AF 1; Tr. 426). In January 1991, Appellant was notified that the roof was again leaking. At that time and thereafter, Appellant took the position that it was no longer responsible for roof repairs at the facility because of the repairs that had been performed by Respondent's contractor the previous summer. (Stip. 9; AF 53, 55, 61, 66; Tr. 374, 383).
14. In March or April 1991, Respondent hired a professional engineer to inspect, evaluate and report on the condition of the roof. The inspection revealed the roof generally to be in very poor condition, beyond its useful life expectancy, and in need of replacement. In his report, dated May 10, 1991, the engineer's overall conclusion was that the roof should be replaced in its entirety.[5] His estimate of the cost to replace the roof was $50,000 to $80,000. (AF 54A).
15. The roof membrane was found to be brittle and to contain numerous blisters throughout. The engineer observed the two large patches that had been installed by Respondent's roofing contractor in July 1990 (AF 54A, 72D). These patches were constructed of modified bitumen, a material that was compatible with the existing roof (Tr. 168). However, the patches were uneven and were trapping and holding large amounts of water on the roof. The metal flashing around the perimeter of the roof was in good condition, but the "base flashings" around roof penetrations and the walls were in poor condition. (AF 54A). However, there was no evidence of damage to the metal deck underlying the roof (Tr. 186, 294).
16. The design of the roof was flat, with roof drains located around the perimeter. However, there were depressions throughout the roof which tended to hold and pond water and, therefore, the drains were not collecting much water. In connection with these observations, the engineer opined that future renovations of the roof should include tapered insulation to improve drainage. (AF 54A).
17. Based on interviews with employees at the post office,[6] the engineer concluded that the roof had been leaking for a long time. He also observed a number of ceiling tiles either stained or missing throughout the facility, a condition that suggested to him numerous roof leaks. (Tr. 187; AF 54A; see Finding 6).
18. As part of the examination, the engineer had a separate test performed to determine the extent of moisture penetration. The results of the test indicated that moisture was present in the insulation in approximately 22 percent of the roof area. (AF 54A). Moisture in the insulation is an indication of leaks in the membrane. It also has the effect of reducing the structural value of the insulation and reducing the thermal resistance of the roof, thereby causing an increase in heating and cooling costs. (Id.; Tr. 194). Replacement of a roof is generally indicated where 25 percent or more of the insulation is saturated (Tr. 229, 535).
19. When the engineer was given the assignment by Respondent to evaluate and make recommendations concerning the roof, he was not informed that only about four years remained in the lease term. He was also not asked specifically to address whether it was feasible to repair the roof, to allow it to last for the remaining lease term, instead of replacing it. (Tr. 128, 129, 264). Had he been given the information about the remaining lease term and directions to specifically consider repairing the roof, he would have concluded that if there was some tolerance for leaks -- i.e., if it was permissible to continue to patch the roof as leaks occurred -- he would have recommended trying to continue with repairs for the remaining term of the lease rather than replacing the roof. If, however, there was no tolerance for leaks, he believed the only course was to replace the roof. (Tr. 266-272).
20. The Contracting Officer provided Appellant a copy of the engineer's report by letter dated May 28, 1991. Appellant was asked to contact the Contracting Officer to arrange for a meeting at the facility to discuss how to remedy the conditions disclosed in the report. In response, Appellant wrote to the Contracting Officer and reaffirmed its position that it was no longer responsible for maintenance of the roof. However, Appellant offered to meet with the Contracting Officer to discuss replacing the roof in connection with negotiating an extension to the lease. (AF 53, 54).
21. During and before this time period, there was considerable uncertainty as to what Respondent's plans were with respect to continued occupancy of the facility after the end of the lease term. That decision was to be based primarily on operational considerations -- e.g., whether the facility was adequate as is, whether it needed to be expanded, or whether a new facility would be built at another site. The Contracting Officer let Appellant's representatives know, through a number of conversations, about this uncertainty as to Respondent's future use of the facility. (Tr. 101-102, 114-117, 376, 379, 427-428; AF 50, 53).
22. No later than September 12, 1991, Respondent had made a decision that it would acquire the facility by exercising its option to purchase the building. By letter dated September 13, 1991, the Contracting Officer advised Appellant,
"This Letter is notice from the United States Postal Service that it is exercising its option to purchase the fee simple title to the leased premises . . . as indicated in Paragraph 5 of the Lease Amendment Dated March 10, 1981 . . . . As indicated in the terms of the Lease Amendment, the purchase price will be at fair market value of the premises at the date of the exercise of this option, unencumbered by the Postal Service lease . . . .
As you are aware from our most recent conversations, the roof is still leaking in numerous places . . . . Therefore, in light of the ongoing condition, the Postal Service will proceed with the replacement of the roof as per the attached roofing study . . . . It is our position . . . that roof maintenance is the Lessor's responsibility as per the Lease Amendment . . . . As such we propose reimbursement for the new roof in the form of a reduced purchase price to offset our expenditure. As soon as the roofing contractors [sic] price is received, we will forward it to you for review. A meeting will be arranged to discuss the proposed roof work as well as any questions you may have with regard to the purchase of the facility."
Appellant was also advised that it would receive notice of the purchase price in approximately four to six weeks. (AF 46, 49).
23. Samples taken and tests conducted in late September and early October 1991 showed that asbestos containing material existed in about 500 square feet of the existing roof.[7] Removal of such material, if performed as part of the roof replacement project, was required to be done in accordance with specific New York State requirements. (Tr. 197; AF 43, 44; RExh. 44).
24. By October 16, 1991, Respondent's engineer had developed a drawing (with specifications) for the replacement of the roof. The roof designed by the engineer was not a built up roof of the type then on the building, but consisted of an EPDM (rubber) membrane over tapered insulation with an average thickness of 2.8 inches and an average "R" value[8] of 20. The R value of 20 was the minimum required by the New York State Energy Conservation Code. (AF 42; Tr. 222, 362, 539; RExh. 5).
25. Respondent received two bids on the work to remove and replace the roof -- in the amounts of $109,000 and $94,000 (AF 38, 40).
26. By letter dated October 23, 1991, the Contracting Officer's supervisor, Ralph Champa, advised Appellant that Respondent was about to enter into a contract to replace the roof, although the work was considered to be Appellant's responsibility. Appellant was advised that following construction, Respondent intended to recover all costs from Appellant. Finally, Appellant was advised that "if you have any intention of fulfilling your lease obligations in this regard" it was to notify Respondent within 15 days of receipt of the letter. (AF 36; Tr. 432, 446).
27. In an October 30, 1991 letter to the Contracting Officer, confirming a telephone conversation held that day, Appellant, through Robert Schlager, indicated that the Contracting Officer had agreed to send the drawings and specifications, the solicitation, the proposal received from the proposed contractor and an itemized engineer's estimate for the project. Mr. Schlager stated that upon receipt of those documents, Appellant would be able to provide a response to Mr. Champa's letter (Finding 26). Mr. Schlager also asked that the Contracting Officer forward the proposed purchase price that was to be developed as a result of the exercise of the purchase option (Finding 22). (AF 35).
28. By letter dated October 31, 1991, the Contracting Officer, referring to the same telephone conversation, stated that he was forwarding the plans and specifications for the new roof. He also indicated his understanding that Appellant was still insisting that the Postal Service "share in the cost of the new roof." The Contracting Officer stated that he had been advised by personnel at the facility that the roof was still leaking. Accordingly, he had concluded that the situation was a safety hazard and that the Postal Service had to take action to replace the roof before winter. The Contracting Officer further advised Appellant that the purchase option price appraisal would be completed soon and would be forwarded to Appellant as soon as it was received. (AF 34).
29. By FAX dated November 5, 1991, Appellant (through Robert Schlager) advised the Contracting Officer that it had received the roof drawing, but not the specifications. Appellant requested that the specifications and general provisions be forwarded as soon as possible. (AF 33).
30. Asbestos abatement work around the edges of the roof (Finding 22), which preceded the primary roof replacement and was performed by a different contractor, was performed between November 9 and November 11, 1991 (AF 31, 32).
31. Appellant (through Robert Schlager) wrote the Contracting Officer a letter, dated November 22, 1991, complaining that replacement of the entire roof was unnecessary in view of the short term left on the lease. Appellant also stated that it had received prices for the roof work, as drawn by Respondent's engineer, in the $50,000 to $80,000 range, and argued that a number of the features of the new roof (e.g., installation of roof drains, increased thickness of insulation) represented improvements for which Appellant should not, in any event, be held liable. Mr. Schlager stated that Appellant had received quotes in the $3,500 to $6,500 range for repairs consisting of "scratching the surface and hot mopping two plys of asphalt felt onto the membrane," and asserted that such action would allow for a "relatively leak-free environment" for the next three and one-half years. However, Appellant did not offer to have that work or any other alternative repair work performed. (AF 30).
32. Construction work to replace the roof began on or about November 27, 1991, and was essentially complete by January 10, 1992. The contract price for the work was $94,000. (AF 17, 18, 28).
33. By letter dated December 14, 1994, the Contracting Officer gave notice to Appellant's predecessors-in-interest that Respondent was exercising its option to purchase the facility,[9] in accordance with the lease amendment. The letter also stated that a recent appraisal had estimated the value of the property at $980,000. However, the Contracting Officer stated that the Postal Service intended to recoup the cost of the roof replacement, which it asserted was $113,000, from the purchase price and, therefore proposed a price of $867,000. (Stip. 4; AExh. 1). The letter made no mention of the September 1991 letter that had also purported to exercise the option to purchase (Finding 22).
34. By letter to the Contracting Officer, dated February 17, 1995, Appellant submitted what it labeled a claim, seeking an interpretation and contracting officer's final decision regarding the statement made in the December 14, 1994 letter that Appellant was obligated to reimburse Respondent for the cost of replacing the roof (AF 12).
35. By letter to Appellant dated March 16, 1995, the Contracting Officer acknowledged that title to the property had transferred to Appellant before the December 14, 1994 notification to Appellant's predecessor of the exercise of the option to purchase (Finding 33). Therefore, in the March 16, 1995 letter, the Contracting Officer formally notified Appellant that Respondent was exercising the option to purchase the building. The letter also stated that it would be necessary to update the previous appraisal and that Appellant would be notified as soon as that was accomplished. This letter also made no mention of the September 1991 letter purporting to exercise the option. (AF 9; see Finding 22).
36. Based on correspondence between the parties in early 1995 regarding the appraisal process, it appears that the parties elected to base their price negotiations on appraisals of the 1995 value of the property, well after the new roof was installed, and not on the value of the property as of the date of the first purchase option exercise in September 1991. (AF 8, 9, 11, 12).
37. The Contracting Officer issued a final decision by letter dated April 10, 1995. In the final decision, the Contracting Officer assessed Appellant $103,000 after crediting Appellant with $10,000 for the installation of an EPDM roof instead of a built-up roof and with $1,500 for the installation of new roof drains. The assessment of $103,000 included $76,998 for actual roof work, a $6,407 charge for asbestos removal, and $19,595 for the engineer's fees for roof design, construction follow-up and oversight of the asbestos removal project. (AF 6). This appeal followed.
DECISION
In this appeal, Respondent seeks to establish Appellant's liability for the costs of replacing the roof and to deduct those costs from the price to be paid Appellant for the Massapequa Post Office building, following Respondent's exercise of its purchase option.
Respondent argues initially that Appellant's obligation under the lease, as amended, was to maintain the roof so as to keep the premises dry and that Appellant breached that obligation. Respondent argues further that its remedies for this breach were not limited to cancellation of the lease or abatement of rent, but included the right to have repairs performed and to set off the costs from other monies due Appellant.
Respondent also argues that Appellant was not relieved of its maintenance obligations by the fact that Respondent had repair work performed on the roof. Finally, Respondent argues that replacement of the roof was the only reasonable alternative, that the decision to replace was not motivated by bad faith, and that the costs incurred in replacing the roof were reasonable.
Appellant argues that Respondent has not shown that the roof could not have been repaired sufficiently to last the rest of the lease term and has not shown that replacement was the only reasonable solution. Appellant contends that the evidence does not show serious or substantial leakage from the roof. Appellant also questions the need for roof replacement by noting the time that passed between receipt of the engineer's report in May 1991 and the decision to replace the roof made in September 1991.
Further, Appellant questions whether Respondent gave any serious consideration to repairing the roof rather than replacing it inasmuch as Respondent did not specifically ask the engineer who studied the roof to come up with repair alternatives and did not inform him either of the length of the remaining lease term or the amount of annual income Appellant derived from the lease. Appellant also questions the reasonableness of Respondent's direction to replace the roof and charge the cost to Appellant when that direction was issued immediately after Respondent exercised its purchase option for the building and, under the ordinary course of events, could have become the owner of the building within a short time thereafter.
Appellant also contends that even if the Board finds that replacement of the roof was justified, Appellant should not be charged the full amount of the incurred costs. First, Appellant argues that the roof installed represented an improvement rather than a replacement with a roof of "like kind." Specifically, Appellant points to the incurred engineering fees, the use of tapered insulation with a high "R" value, which represented an improvement (at extra cost) over the original flat roof with a lower "R" value, and the fact that the roof installed carried a 20-year guarantee and, therefore, was presumably designed to last that amount of time -- well beyond the end of the lease. Appellant also argues, based on the 20-year life expectancy, that any assessment should be apportioned between the parties so as to hold Appellant responsible only for a percentage of the cost representing the period of time for which it was to remain responsible for the roof -- i.e., until the expiration of the lease, four years after installation of the roof.
Finally, Appellant argues that under the lease, Respondent's only remedies were to offset the cost of roof replacement against rents, to abate the rent or to cancel the lease. Appellant contends that Respondent, having used none of those remedies, can not now recover from Appellant, even if there is a holding of entitlement.
Having considered the evidence and arguments, we conclude first that Respondent has shown, by a preponderance of the evidence, that there were substantial and increasingly frequent leaks in the roof at the Massapequa Post Office. Until February 1990, it was Appellant's practice to call its roofer to repair the leaks whenever they occurred. For reasons unexplained in the record, after February 1990, when the postmaster wrote his first letter to Appellant, Appellant's roofer was not called to make repairs. We need not decide whether Respondent was justified in making repairs on the roof in July 1990, since Respondent is not attempting to collect the cost of those repairs in this proceeding. However, under the facts of this appeal the roof work that Respondent had performed did not relieve Appellant of its obligation to maintain the roof. See Edward R. Ester, et al., PSBCA No. 3051, 93-3 BCA ¶ 25,960; M.R. Kaplan, et al., PSBCA Nos. 1147, 1298, 1303, 1310, 88-3 BCA ¶ 20,827 at 105,325. The evidence does not show that the repairs that Respondent had performed made it impossible for Appellant to continue to maintain the roof. In fact, the only evidence on the subject indicates that the patches applied by Respondent's contractor were compatible with the type of roof then existing. Although the patches were trapping and holding water on the roof, there is no evidence that these patches were the cause of the leaks that recurred in 1991. (Findings 11, 15).
Therefore, when Appellant was informed in January 1991, that the roof was again leaking, the position it took -- that it was no longer responsible for roof maintenance -- was incorrect. Appellant retained that responsibility under the lease, and its refusal to address any repairs to the roof breached its obligations under the contract. In the face of Appellant's breach, it was reasonable for Respondent to study the situation to decide what actions to take and to contract with an engineer to perform a study of the roof and make recommendations. It was also reasonable for Respondent to exercise its right to have the roof repaired and charge the costs to Appellant. Further, if a new roof was the only reasonable method to achieve a safe, dry interior, Respondent was entitled to have a new roof installed at Appellant's expense, J. Leonard Spodek, d/b/a Nationwide Postal Management, PSBCA No. 3710, 96-2 BCA ¶ 28,457, rec. den. 96-2 BCA ¶ 28,608; M.R. Kaplan, supra, 88-3 BCA ¶ 20,827 at 105,324, notwithstanding that only four years remained in the lease term. E.g., Harold Ferguson, GSBCA No. 7307, 85-2 BCA ¶ 18,125.
Respondent has established, by a preponderance of the evidence, that something more than patching was necessary in 1991 to ensure that the interior of the building would remain dry during the remainder of the lease period. Leaks in the roof had increased in frequency over the preceding few years to the point that the roof leaked after any rainfall. Patching performed by Respondent had apparently helped the problem during the latter part of 1990, but the roof began to leak again in early 1991. Experts for both parties agreed that, as of 1991, the roof had reached the end of its useful life and that it needed to be replaced. See Findings 6, 13, 14. The factual differences between the parties in this area relate to whether measures short of complete removal and replacement could have been used to prevent leaks over the remaining term of the lease.
The only short-term, lower cost alternative suggested through Appellant's evidence at the hearing was the addition of an EPDM membrane over the existing two roofs, with an additional thin layer to protect the membrane from damage by the underlying slag ballast and using a "weak" attachment system.[10] Both parties' experts agreed that the problem with that approach was that it could be subject to damage or failure by the uplift forces generated by high winds. Moreover, Appellant's expert indicated only that such an approach would "probably" have lasted for the time remaining on the lease. Respondent's expert testified that the addition of such a membrane over the existing roofs would likely exceed the structural limits of the roof. Although Appellant's expert testified that his calculations indicated, in theory, that there was adequate load bearing capacity available in the roof structure to support the addition of the EPDM membrane, he also conceded that with the two existing roofs the structure was already close to its load bearing capacity.
Appellant has not shown that a viable alternative to replacement of the roof existed. Although Respondent's expert testified that he would have considered alternatives at the time had he been informed of the relatively short period remaining on the lease, having done so afterward he concluded that there was no alternative available unless there was some tolerance for leaks. Respondent was required to mitigate Appellant's damages. However, with a substantial period of time still remaining on the lease term, Respondent was not obligated to implement a temporary solution that would have allowed leaks to persist. Accordingly, we conclude that Respondent's actions in having the roof replaced were reasonable and that Appellant is liable for the reasonable costs of that work.
We note also that Appellant was well aware of Respondent's plans to replace the roof before Respondent took that step and that Appellant was urged to take action itself. Appellant's position at that time was that roof replacement was not warranted. However, Appellant took no steps itself to implement any remedy short of roof replacement, having also taken the position that it was no longer responsible for the roof at all.
We have also considered Appellant's arguments concerning the timing of the decision to replace the roof. Under the provisions of the option clause (Finding 2), the price to be paid by Respondent was to be the fair market value at the time of option exercise. Appellant's argument is that, having exercised the option and thereby established the price, Respondent's subsequent decision to replace the roof was not made because a new roof was needed. Rather, Appellant contends that the decision was made because Respondent saw a way to have the roof replaced without cost to it -- i.e., by establishing a price for the building based on the fair market value with the old roof and then having Appellant pay for a new roof on the pretext that replacement was the only way to ensure a dry interior. Under the facts of this appeal we do not accept Appellant's arguments for two reasons. First, the evidence objectively establishes that a new roof was needed to provide a dry interior. Second, the price to be paid for the building was not based on the fair market value as of the first "exercise" of the option in 1991 (before the roof was replaced), but was instead based on the fair market value as of the subsequent option "exercise" in 1995, after the roof was replaced. See Finding 36.
We also do not accept Appellant's argument that the only remedies available to Respondent were abatement of rent or cancellation of the lease. As argued by Respondent, it, as any other creditor, has the common law right to withhold from funds otherwise due a contractor amounts necessary to satisfy claims that it has against that same contractor. United States v. Munsey Trust, 332 U.S. 234, 239 (1947); M.R. Kaplan, supra, 88-3 BCA ¶ 20,827 at 105,313. This principle has been applied by this Board to allow the Postal Service to withhold amounts from rent otherwise due. E.g., Real Properties MLP Limited Partnership, PSBCA No. 3450, 95-2 BCA ¶ 27,829. We see no reason that this principle should not be applied here to allow withholding from the amount Respondent became otherwise obligated to pay Appellant by virtue of Respondent's exercise of the purchase option.
Finally, as to Appellant's argument that part of the cost of the new roof represented the cost of improvements for which Appellant should not be liable, we note that Respondent has conceded that Appellant is correct, at least in part. In his final decision, the Contracting Officer credited Appellant with amounts that he stated represented additional costs associated with use of the EPDM membrane and installation of roof drains.
In addition, Appellant has argued that the installation of tapered insulation with an "R" value of 20, the incurring of engineering fees, and the installation of a roof with a 20-year guarantee also represented improvements for which it should receive credit. We agree that Respondent has not shown that the use of tapered insulation was essential to the roof replacement work. Accordingly, Appellant is not responsible for any added costs associated with the use of that type of insulation. However, insulation with a minimum R value of 20 was required by state code and is a cost that would have been incurred even if Appellant had performed the work. Therefore, Appellant is responsible for the associated cost. As to engineering fees, we have previously held that reasonable engineering fees may be recovered in similar situations, e.g., Real Properties MLP, supra, 95-2 BCA ¶ 27,829; M.R. Kaplan, supra, 88-3 BCA ¶ 20,827 at 105,319, and see no reason to reach a different conclusion here.
We also see no basis for either apportioning the costs based on the remaining time on the lease or giving Appellant a credit for the fact that Respondent installed a roof with a 20-year guarantee, as Appellant has argued. While such an apportionment might have been appropriate had the purchase price been based on the fair market value of the building in 1991 (with the old roof),[11] it is not appropriate given the parties' reliance on the fair market value of the building as of 1995.
As indicated above, Respondent may not recover the costs attributable to the installation of tapered insulation. Otherwise, the appeal is denied. The dispute is remanded to the parties for a determination of the amount recoverable by Respondent. If the parties are unable to agree, the Contracting Officer is to issue a further final decision, which may then be appealed by Appellant.
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] Respondent was then the Post Office Department. Pursuant to the Postal Reorganization Act, P.L. 91-375, 84 Stat. 719 (1970), all the functions, powers, and duties of the Post Office Department were transferred to the United States Postal Service and the Post Office Department was abolished.
[2] Appellant, Massapequa Partners Limited Partnership, was the owner of the facility as of the date this dispute arose, the title having been transferred by deed dated September 30, 1994, from Judith P. Schlager and Beatrice H. Poorvu. A certificate of transfer of title was delivered to Respondent, effective November 1, 1994. (Stipulation paragraph (Stip.) 4). The exact ownership structure of Appellant and the previous owner(s) is unclear from the record and is not relevant to a resolution of this dispute. Therefore, references to "Appellant" involving transactions occurring before the transfer of title (see Finding 33) refer to Appellant's predecessors, who were represented in their business dealings with Respondent by the same people, Lawrence and Robert Schlager, who represented Appellant.
[3] The amendment provided for a reduction of the annual rent to $16,354 from the effective date of the amendment until the beginning of any future option period, and to $13,856 for the five-year option period beginning November 7, 1990, if exercised. An October 1981 amendment to the lease changed these rental amounts to $16,767 and $14,205, respectively. (AF 1).
[4] There is evidence that following receipt of the May 7 letter Mr. Lawrence Schlager contacted an employee in a different Postal Service office to discuss Appellant's opposition to replacing the roof in Massapequa unless the lease was extended. However, the evidence does not show that Mr. Fassler or anyone in his office received a reply to the May 7 letter. (AF 70).
[5] Appellant's expert agreed that, based on the description of the roof in the engineer's report, the roof had reached the end of its useful life and was in need of replacement (Tr. 499, 528).
[6] Interviewing those who occupy a building is a recognized technique used by engineers to supplement their own observations as to the condition of a roof (Tr. 186, 349, 498, 523).
[7] It was in the process of taking these samples that the engineer discovered that there were actually two roofs on the building (AF 44; Tr. 197).
[8] The "R" value of a material is an indication of its resistance to the passage of heat, with higher R values indicating greater resistance (RExh. 5).
[9] By that date, however, Appellant, Massapequa Partners, was the owner of the facility (see footnote 2).
[10] There is no evidence that Appellant either suggested this alternative to Respondent at or about the time Respondent proposed to replace the roof, or offered to have this work performed itself.