PSBCA Nos. 6296 and 6337
February 16, 2011
Appeals of
MINUTE MAN PROPERTIES, L.P.
PSBCA Nos. 6296 and 6337
LEASE AGREEMENT
APPEARANCE FOR APPELLANT:
Richard J. Welch, Esq.
John J. Garrahy, Esq.
Moses & Afonso Ltd.
APPEARANCE FOR RESPONDENT:
Margaret E. Harper, Esq.
Facilities and Environmental Law Unit
United States Postal Service
OPINION OF THE BOARD ON RESPONDENT’S MOTION TO DISMISS
Respondent, United States Postal Service, did not provide written notice of its exercise of an available renewal option in a lease of a post office in Warwick, Rhode Island owned by Appellant, Minute Man Properties, L.P. When Respondent remained in possession after the lease term was scheduled to expire, Appellant claimed that Respondent had constructively exercised the renewal option. Appellant sought rent in the amount provided in the lease for the renewal option period, to the extent it exceeded the lower rental amount Respondent continued to pay. Respondent has filed motions urging the Board to dismiss two resulting appeals. We dismiss the appeals. The following findings of fact are determined solely for the purpose of deciding the issues presented at this time.
FINDINGS OF FACT
1. In 1989, Respondent leased the Warwick, Rhode Island Main Post Office (Warwick MPO) from Appellant for a ten-year term expiring May 31, 1999, with four renewal option periods of five years each. The renewal option clause, at section 5 of the Warwick MPO lease, provided:
This lease may be renewed, at the option of the Postal Service, for the following separate and consecutive terms and at [stated rentals] provided notice be given in writing to the Lessor at least 30 days before the end of the original lease term or any renewal term.
(Appeal File, Tab (AF) 1).[1]
2. In 1993, the parties executed a Lease Amendment which reduced the rental rates of the renewal options in exchange for Respondent’s early exercise of the first two options. The Lease Amendment provided:
The first five year option shall be $600,000 p/a for years 1 and 2. Years 3, 4 and 5 shall be at $625,000 p/a.
The second five year option shall be $700,000 p/a for years 1 and 2. Years 3, 4 and 5 shall be at $730,000 p/a.
The third five year option shall be $850,000 p/a for years 1 and 2. Years 3, 4 and 5 shall be at $900,000 p/a.
The fourth five year renewal option shall remain unchanged.
In all other respects, the Lease shall remain the same and is hereby confirmed.
(AF 1).
3. Respondent exercised the first two five-year renewal options.[2] Accordingly, the lease was due to expire on May 31, 2009. The annual rental payable during the last three years of that renewal period was $730,000, in accordance with the Lease Amendment. (AF 1).
4. Respondent did not provide written notice to Appellant of its exercise of the third renewal option (AF 3-5; PSBCA No. 6337 Complaint and Answer, ¶ 14).
5. Respondent remained in possession of the Warwick MPO after May 31, 2009, and paid Appellant for its continuing occupancy at the rate of $730,000 per year (PSBCA No. 6296 Complaint and Answer ¶¶ 9, 22; PSBCA No. 6337 Complaint and Answer, ¶¶ 10-11, 16).
6. Appellant transmitted a letter dated June 12, 2009, to Respondent’s contracting officer, noting that while the lease was “set to expire” on May 31, 2009, Respondent has remained in possession. The letter continued,
As a result, we hereby elect to treat you as exercising your option to extend the terms of the lease for the third five-year period in accordance with the lease amendment dated November 3, 1993. You should, therefore, remit rental to the undersigned in the amount of $850,000 per annum payable in equal installments at the end of each calendar month.
(AF 2).
7. By letter dated August 3, 2009, styled as a contracting officer’s final decision, Respondent replied. The contracting officer treated Appellant’s letter as a claim regarding interpretation of the lease, which he denied. The contracting officer recited that Respondent had attempted to negotiate a lower rental rate than provided in the Lease Amendment for the third renewal option period but that the parties did not agree on a new rate. He stated that Respondent did not exercise the renewal option available to it under the lease, and represented that Respondent intended to pay $730,000 per year for its continuing occupancy. (AF 3). On October 29, 2009, Appellant filed a notice of appeal of the contracting officer’s decision, which was docketed as PSBCA No. 6296.
8. After Respondent filed a Motion to Dismiss, or in the Alternative, Motion for Summary Judgment, the Board suspended PSBCA No. 6296 to allow Appellant an opportunity to submit a monetary claim to the contracting officer concerning Respondent’s continuing occupancy (March 22, 2010 Order).
9. Appellant transmitted a certified claim dated April 1, 2010, to Respondent’s contracting officer. The claim stated, in relevant part:
By lease amendment dated 9/27/93, the lessee has the right to extend the lease for a third five-year term with rent for years 1 and 2 at $850,000 per annum and for years 3, 4 and 5 at $900,000 per annum. By remaining in the premises, you have exercised the option for the third five-year option of the lease, but have failed to pay the amount due under the lease. Demand is hereby made for the balance due under the lease totaling $3,852,500.03. The breakdown is as follows: $850,000 per annum for years 1 and 2 as a result of your default under the lease, which amount is reduced by the amounts paid to date of $547,499.97 and balance due for lease payment for years 3, 4 and 5 at $900,000 per annum.
(AF 4).
10. Respondent’s contracting officer issued a final decision dated May 3, 2010, denying Appellant’s monetary claim. The final decision concluded, in relevant part:
As you are aware, the Postal Service tried on numerous occasions to extend the lease prior to its expiration. Our efforts included communication by letter, telephone and email. All proposals offered were rejected by you. You assert that the Postal Service has exercised the option. However, you offer no evidence or documentation indicating that the Postal Service took any action to exercise the option. As our efforts to extend the lease clearly demonstrated, the Postal Service never had any intention to exercise the option. Therefore, contrary to your assertion, the Postal Service has not exercised the option either expressly or by its actions.
(AF 5). On July 1, 2010, Appellant filed a notice of appeal of the contracting officer’s second decision, which was docketed as PSBCA No. 6337. The Board consolidated the appeals (July 30, 2010 Order). Respondent thereafter filed its Second Motion to Dismiss, Appellant filed a Memorandum of Law in Support of Appellant’s Objection to the Respondent’s Motion to Dismiss in response, Respondent filed a Reply to that brief, and Appellant filed a Surreply Memorandum. Oral argument was held on October 14, 2010.
DECISION
Respondent argues that the only appeals before the Board involve Appellant’s legal contention that by failing to vacate by May 31, 2009, Respondent constructively exercised the third renewal option of the lease, and consequently is responsible to pay the rent specified in the Lease Amendment for that option period.[3] Respondent contends that Appellant has failed to state a claim on which relief can be granted[4] because the third renewal option was exercisable only at Respondent’s option, and that it is undisputed that Respondent did not expressly exercise that option. Respondent concludes that applicable federal law is clear in that a government tenant is not bound to a continued lease term in such circumstances. Respondent further argues that any determination that the renewal option is effective based upon its conduct in holding over can only be the result of a contract implied-in-law over which the Board lacks jurisdiction.
We understand Appellant to present two arguments urging us to hold Respondent to the amended lease’s third renewal term notwithstanding Respondent not having provided written notice of its exercise of the option. First, Appellant argues that the Lease Amendment eliminated the written notice requirement found in the lease. Second and principally, Appellant argues that Respondent should be bound by the renewal period based upon a combination of Appellant’s waiver of the notice requirement and Respondent having remained in possession. Appellant has not alleged any other facts concerning exercise of the option. We interpret Appellant’s position to contend that these two elements require that we find that Respondent has constructively exercised the renewal option.[5]
The parties fully briefed and orally argued the issues.[6] Respondent’s motion includes one for failure to state a claim on which relief may be granted in addition to one to dismiss for lack of jurisdiction. We consider Respondent’s motion in that regard, accept all factual allegations of the complaint as true, and resolve all reasonable inferences in favor of Appellant, as the non-movant. See Colonna’s Shipyard, Inc., ASBCA No. 56940, 10-2 BCA ¶ 34,494.
Under the amended lease, to exercise the third renewal option, Respondent was required to provide written notice to Appellant.
The option provision in the 1989 lease allowed for lease renewals at Respondent’s election provided that Respondent gave Appellant notice in writing at least 30 days before the end of the preceding lease term (Finding 1). It is undisputed that Respondent did not provide such written notice (Finding 4). The 1993 Lease Amendment changed the rental rates for the renewal terms but standing alone, was silent concerning how the renewals must be exercised by Respondent. Appellant argues that by failing to mention that Respondent must provide written notice of renewal, the Lease Amendment supersedes and therefore eliminates the written notice requirement found in the lease (see Oral Argument Tr. 12; Memorandum of Law in Support of Appellant’s Objection to the Respondent’s Motion to Dismiss, at ¶ 18).
The renewal provisions of the 1989 lease and the 1993 Lease Amendment must be read together to achieve a harmonious result giving a reasonable meaning to the provisions of both. See Stewartsville Postal Properties, LLC, PSBCA No. 6309, 10-2 BCA ¶ 34,559. The Lease Amendment changed the renewal terms’ rental rates but did not alter the way in which those renewal options were to be exercised. To provide meaning to the notice provision of the 1989 lease therefore, we find that it remains part of the amended leasehold agreement.
The Lease Amendment also specifically stated that in all respects other than the altered renewal rates, the terms of the lease were to remain the same and were confirmed (Finding 2). Included in such confirmed provisions, therefore, was the method by which the renewal options were to be exercised. In this regard, we find the Lease Amendment’s phrase “In all other respects, the Lease shall remain the same and is hereby confirmed” to be plain and unambiguous, and it must be enforced according to its terms. See Adelaide Blomfield Management Co. v. General Services Administration, GSBCA No. 12851, 95-1 BCA ¶ 27,514. We conclude that the Lease Amendment did not abrogate the lease’s requirement that Respondent provide written notice to Appellant of its exercise of the third renewal term.
Respondent did not constructively exercise the renewal option.
Appellant’s primary argument is that the renewal option should be deemed to have been constructively exercised despite Respondent not having exercised the option in writing as specified in the lease. Its argument consists of two components. Appellant first argues that the written notice requirement is for the benefit of Appellant, as lessor, and that it therefore is entitled to and indeed expressly waived notice. Appellant next argues that Respondent’s conduct of remaining in possession requires a conclusion that it constructively exercised the option as a matter of law. Appellant relies exclusively on state law authority. Appellant further argues that whether it waived the notice requirement is a question of fact which must be construed in its favor at this stage of the proceedings.
Respondent counters that federal law contradicts Appellant’s waiver position, that the renewal option only could have been exercised as provided in the lease, and that Appellant may not unilaterally cause the option to have been exercised based on Respondent’s holdover or based upon waiver. Respondent further argues that even if we were to entertain the theory, any resulting contract would be one implied-in-law over which the Board lacks jurisdiction. It further argues that the effect of any potential waiver of notice is an issue of law which is not subject to presumptions.[7]
We need not resolve whether the notice requirement was for Appellant’s benefit as lessor, whether it may be waived or was effectively waived by Appellant, or whether waiver may be used affirmatively as Appellant seeks.[8] We conclude, as a matter of law, that a combination of Appellant’s waiver, which we presume to have occurred at this stage of the proceeding, and Respondent’s holding over cannot bind Respondent to the renewal period.
Our appellate authority requires that we apply federal law, rather than the law of the individual states, to disputes involving government leases. See Forman v. United States, 767 F.2d 875, 879-80 (Fed. Cir. 1985); Prudential Insurance Co. of America v. United States, 801 F.2d 1295, 1298 (Fed. Cir. 1986).[9] We conclude that federal law is dispositive of the constructive exercise issue presented, and it favors Respondent’s position. We therefore decline to survey state law principles or to address the state law precedents relied upon by Appellant.
Federal law provides that where a lease requires the government to take an affirmative act to renew, that act must be taken as specified in the lease for the government to be bound to the additional term. Failing to vacate will not be effective to invoke that option. Goodyear Tire & Rubber Co., Inc. v. United States, 276 U.S. 287, 292-93 (1928); Barcroft Lake Shores, Inc. v. United States, 135 Ct. Cl. 623 (1956). In addition to these binding authorities, the theory of constructive exercise of a renewal option has been rejected expressly by the boards. In Integral Systems, Inc. v. Department of Commerce, GSBCA No. 16321-COM, 05-2 BCA ¶ 32,984, the General Services Board of Contract Appeals concluded:
The terms of the contract between ISI and [the Department of] Commerce unambiguously required Commerce to provide ISI with written notice in order to extend the term of the contract to include the optional years . . . and Commerce never provided ISI with any such written notice. Although ISI asserts Commerce “constructively” exercised the options, we have been unable to find any legal authority to support ISI's position that the Government can exercise an option by doing something other than strictly complying with the terms of the contract which created the option. Because the contract required Commerce to provide ISI with written notice in order to extend the term of the contract . . . and because Commerce never provided ISI with any such notice, Commerce did not exercise [the] option . . .
Integral Systems, 05-2 BCA at 163,472.
Similarly, in Cafritz Co. v. General Services Administration, GSBCA No. 13525, 97-1 BCA ¶ 28,680 at 143,272, the GSBCA rejected the argument here urged by Appellant:[Appellant maintained that] as the Government has failed to pay rent in the amount stated above for the holdover period, and should the Government elect not to pay rent as stated above, the Lessor has no other recourse than to consider the Government's holding over as a renewal of the lease for an additional year's term in accordance with Federal and State Laws and the provisions of the original lease. . . . The Board lacks jurisdiction of Cafritz's claim . . . for rent based on an extended term. This case is similar to a case in the Supreme Court [Leiter v. United States, 271 U.S. 204 (1926), cited in Goodyear Tire & Rubber] concerning a landlord's claim against the Veteran's Bureau for holdover rent, based on an implied-in-law contract which extended the lease term. The Court held that the Government could not be bound by an implied-in-law contract.
Accord Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1275 (Fed. Cir. 1999) (to be effective, option exercise must be unconditional and done in strict accordance with contract terms); Griffin Services, Inc., ASBCA Nos. 52280, 52281, 02-2 BCA ¶ 31,943 (party seeking to enforce renewal option must prove option was properly exercised); J.E.T.S., Inc., ASBCA No. 26135, 82-2 BCA ¶ 15,986 (exercise of an option must be strictly construed); cf., Steven S. Freedman, PSBCA No. 3867, 96-1 BCA ¶ 28,170 (Board lacks authority to award reinstatement of expired contract as if option had been exercised). We conclude, based on dispositive federal law, that by failing to vacate the premises upon expiration of the lease, Respondent did not constructively exercise the third renewal option, and is not bound thereby.
As we conclude that a contract covering the third renewal option term was not formed by the parties, there is no operative contract on which to base our Contract Disputes Act jurisdiction. See Jonnet Development Corp., GSBCA No. 6943, 86-3 BCA ¶ 19,311. While the Board would possess jurisdiction to address an appeal of a claim for monetary damages caused by Respondent’s admitted breach of its obligation to vacate at the expiration of the lease term, see Asset #20024 LLC c/o Nationwide Postal Management, PSBCA No. 6249, 09-2 BCA ¶ 34,283, Appellant expressly has not taken the position in these appeals that Respondent is a holdover tenant, nor has it filed a claim with the contracting officer on that basis. (See Oral Argument Tr. 20-21, 30; Memorandum of Law in Support of Appellant’s Objection to the Respondent’s Motion to Dismiss, at 10). Such a claim therefore is not before us.[10]
CONCLUSION
The appeals are dismissed.
Gary E. Shapiro
Administrative Judge
Board Member
I concur: I concur:
William A. Campbell David I. Brochstein
Administrative Judge Administrative Judge
Chairman Vice Chairman
[1] Appeal file documents were not numbered. See 39 CFR § 955.5(c). AF 1-3 constituted the original appeal file and AF 4-5 constituted a supplemental appeal file.
[2] Respondent provided documentation for its exercise of the first two renewal options by written notice provided to Appellant in 1997 (AF 1). However, Appellant suggested that it may not have received written notice, but that Respondent’s exercise of the first two renewal options may have been based on its conduct (Appellant’s Surreply brief at fn. 1; October 14, 2010 Oral Argument Transcript page (Oral Argument Tr.) 10). We note that Appellant has offered no evidence on this point, and its correspondence to the contracting officer does not mention and is inconsistent with a prior course of conduct to that effect. In any event, it is unnecessary to resolve any such dispute, as it would not affect the outcome.
[3] The claim at issue in PSBCA No. 6296 was construed by Respondent as seeking a contract interpretation to that effect while PSBCA No. 6337 seeks monetary damages on the same basis. After Respondent filed a Motion to Dismiss, or in the Alternative, Motion for Summary Judgment, in PSBCA No. 6296, Appellant amended its complaint and filed the certified monetary claim which was denied by Respondent’s contracting officer. The resulting appeal, docketed as PSBCA No. 6337, was consolidated with PSBCA No. 6296 (Findings 8-10). Thereafter, Respondent filed its Second Motion to Dismiss, and it is this Motion we address here.
[4] Respondent’s motion combines elements of a motion to dismiss for lack of jurisdiction with one for failure to state a claim on which relief can be granted. Like the parties, the Board has considered documents in the record in addition to the pleadings and the parties’ arguments. Such consideration of extrinsic evidence to find facts necessary to determine our jurisdiction is proper. See Zobe, L.L.C., PSBCA No. 6239, 10-1 BCA ¶ 34,342.
[5] We emphasize what Appellant has not presented to the Board. Appellant has not presented a takings claim under the Fifth Amendment of the United States Constitution, an action for ejectment, or a claim for holdover rent, expectancy or consequential damages resulting from Respondent’s admitted breach (see Oral Argument Tr. 9, 17) of its obligation to vacate at the expiration of the lease term. We have held that we lack authority in regard to the first two potential claims, see J. Leonard Spodek, PSBCA No. 6146, 10-2 BCA ¶ 34,547; N.J. Hastetter, PSBCA No. 3064, 92-3 BCA ¶ 25,189, but under appropriate circumstances, have exercised jurisdiction over claims based on Respondent’s breach of its duty to vacate at the expiration of a lease term. See Spodek, 10-2 BCA ¶ 34,547.
[6] Briefing and argument of Respondent’s second motion included the legal issue raised in its summary judgment motion – whether Respondent should be bound to the terms of the third renewal term based on its holdover and Appellant’s waiver of written notice.
[7] There is no dispute that Appellant communicated its desire to waive the notice requirement, an issue of fact which if it were disputed, would be subject to appropriate presumptions in Appellant’s favor at this stage of the proceedings. The effect of Appellant’s undisputed action on the interpretation of the lease however, is an issue of law. See The Moreland Corp., VABCA Nos. 5409, 5410, 00-1 BCA ¶ 30,640, recon. denied, 00-2 BCA ¶ 30,934, aff’d, 259 F.3d 1377 (Fed. Cir. 2001); see also Prudential Insurance Co. of America v. United States, 801 F.2d 1295, 1300, n. 11 (Fed. Cir. 1986) (“determination [of the duties] implied in a lease agreement is a question of law. . . ”).
[8] We do note, however, that in Overflo Public Warehouse, Inc., PSBCA Nos. 4531, 4550, 4649, 04-1 BCA ¶ 32,488, this Board was presented with a similar waiver argument. In Overflo, an appellant claimed that the Postal Service’s failure to vacate a leased facility “waived or revoked Respondent's notice of termination and committed Respondent to continue its obligations to Appellant under the Contract.” We concluded that “Appellant cites no authority for this premise, and we find no support in the Contract for this interpretation.” Overflo, 04-1 BCA at 160,710.
[9] The Federal Circuit also has held that where federal law is not dispositive, we may consider “general property and contract law principles as they are embodied in state law pronouncements.” Ginsberg v. Austin, 968 F.2d 1198, 1200 (Fed. Cir. 1992); see also Prudential Insurance Co., 801 F.2d at 1298 (citations omitted) (“To the extent existing federal law is not determinative of the issue and permits an area of choice between the merits of competing principles, the best in modern decision and discussion, including the general principles of contract and landlord-tenant law, should be taken into account.”).