Appeal of
CHARLES AND LILLY HENDLISH
Under Lease Agreement
PSBCA No. 3661

APPEARANCE FOR APPELLANTS:
Marty Hendlish, Esq.

APPEARANCE FOR RESPONDENT:
Mark Brent Ezersky, Esq.

OPINION OF THE BOARD

            Appellants, Charles and Lilly Hendlish, have appealed from the Contracting Officer's denial of their claim for reimbursement of the costs of performing a seismic upgrade at the Fullerton, California, Main Post Office that Appellants leased to Respondent, United States Postal Service.  The appeal is being decided on the record under §955.12 of the Board's Rules of Practice, 39 C.F.R. Part 955.  Only entitlement is at issue.

FINDINGS OF FACT

            1.  In September 1962, utilizing POD Form 1449 (June 1958 edition), Appellants’ predecessors-in-interest leased the property in dispute in this appeal to Respondent^[1] for use as a post office in Fullerton, California.  The building, a “one-story, tilt-up concrete building ...,” had been built by Appellants’ predecessors in accordance with plans and specifications supplied by Respondent specifically for use as a post office.  (Appeal File Tab (AF) 36, 37).

            2.  The initial term of the lease was twenty years (from September 1, 1962, through August 31, 1982) at an annual rental of $33,840.  The lease also contained options exercisable by Respondent consisting of one ten-year option and four five-year options,^[2] all at annual rentals of $34,640.  In December 1966, the parties amended the lease to provide that Respondent would pay general real estate taxes on the property in return for a rent reduction to $26,840 for the initial term and $27,640 for the option periods.^[3]  The ten-year option and one five-year option have been exercised, yielding a current lease expiration date of August 31, 1997.  (Id.; AF 30, 32).

            3.  As part of the lease, Respondent also obtained options to purchase the property at the end of the base or any option period at prices specified in the lease.  The purchase price varied from $380,000 at the end of the base term to $330,000 at the end of the last five-year option period.  (AF 36).

            4.  The lease also contained the following relevant provisions:

“ 7.  The Lessor shall, unless herein specified to the contrary maintain the demised premises, including the building ..., in good repair and tenantable condition, except in case of damage arising from the act or the negligence of the Government’s agents or employees ....”

*        *        *

“10(c).  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, as determined by the [Postal Service], for the purposes leased.  If the lessor does not do so with reasonable diligence, the [Postal Service] in its discretion may cancel the lease ....”  (Id.).

            5.  Appellants purchased the property from the original lessors in June 1975 (AF 34).

            6.  In December 1990, the City of Fullerton enacted an ordinance that amended its Municipal Code by adopting Title 14, Chapter 89, entitled “Earthquake Hazard Reduction for Existing Tilt-Up Buildings.”  In relevant part, Chapter 89, which applied to the Fullerton Post Office, read:

“SECTION 8905    GENERAL REQUIREMENTS

The owner of each building within the scope of this chapter shall cause a structural analysis of the building to be made by a civil or structural engineer or architect licensed by the State of California.  If the building does not meet the minimum earthquake standards specified in this chapter, the owner shall either cause it to be structurally altered to conform to such standards; or cause the building to be demolished.”  (emphasis added ) (AF 31).

            7.  In a “NOTICE AND ORDER” dated February 1, 1991, addressed to Charles Hendlish,^[4] the Building Official of the City of Fullerton wrote:

“In accordance with Section 8906 of the Fullerton Building Code, this is to advise you that the building located at 1350 East Chapman Avenue, Fullerton has been identified as a structure which is likely to be damaged in an earthquake.  The subject building has been determined to be of concrete tilt-up construction built prior to the adoption of the 1973 Uniform Building Code.  These types of buildings typically ... present a hazard to the public in the event of an earthquake.  Due to this status, the building is deemed a hazardous structure and shall be abated per the provisions of Section 8905 of said code.”  (AF 28).

            8.  In 1992, a dispute arose between the parties with respect to responsibility for performing the structural alterations necessary to bring the building into compliance with the building code.  The Postal Service contended that the responsibility remained with Appellants since they were the owners of the building.  Appellants maintained that the Postal Service was responsible for the costs of the upgrade.  Eventually, the Postal Service retained the services of an engineering firm to prepare necessary drawings and a cost estimate to perform the seismic upgrade.  The engineering firm estimated the cost of performing the work at approximately $67,000.  (AF 17, 18, 22; Appellants’ Supplement to the Appeal File Tab 7).

            9.  In 1992 and 1993 the Postal Service advised Appellants of the need to have the seismic upgrade performed.  In September 1993, Appellants were advised that the Postal Service would have the work done and that the cost of the work would be deducted from rent otherwise due.  In October 1993, Appellants informed the Postal Service that they would have the work done themselves and resolve the question of responsibility through legal action.  (AF 15, 17, 21, 23).

            10.  By letter dated May 13, 1994, Appellants demanded the payment of $33,798.15 as reimbursement for the costs they incurred in performing the seismic upgrade.  In a final decision dated June 14, 1994, the Contracting Officer denied Appellants’ claim, concluding that the costs were Appellants’ responsibility under the terms of the lease.  This appeal followed.  (AF 1, 2).

DECISION

            In this appeal the question to be decided is which party to the lease is liable for the cost of seismic improvements to a leased post office building, which improvements were ordered by local public authorities.

            Respondent argues first that Appellants are liable for repairs to the building under the language of the ordinance passed by the City of Fullerton, which expressly imposes the responsibility for compliance on the property owner.  Appellants argue that the language of the ordinance is irrelevant to the question of  liability.  Rather, Appellants argue that liability for the improvements is to be determined by the language of the lease and the circumstances surrounding its execution.

            Respondent argues next that the two lease provisions quoted in Finding 4, above,^[5] place on Appellants the responsibility for these alterations.  Citing the language in the letter from the City of Fullerton (Finding 7), Respondent contends that a building that had been declared a “hazardous structure” that was “likely to be damaged in an earthquake” cannot be considered in “good, tenantable or satisfactory condition.”  Respondent cites William Fehn, PSBCA No. 3072, 93-1 BCA ¶ 25,496, in support of its argument.  In that case the Board, citing the same lease language, held the lessor liable for the cost of cleaning up mud and debris from a leased post office building following a flood.  Relying on Fehn, Respondent argues that Appellants are responsible for putting the building in satisfactory condition, provided only that Respondent’s actions did not make it impossible for Appellants to perform the required maintenance.   Appellants would distinguish Fehn on the basis that the dispute in that case focussed on the responsibility for maintenance and repairs made necessary by an act of God, and not on upgrades and improvements to the property, which was not otherwise in need of these repairs, required by the actions of public officials.

            Appellants argue further that the covenant obligating the lessor to keep the premises in good repair included only the obligation to keep the premises in their original condition, citing C. T. Drechsler, Annotation, Who, as Between Landlord and Tenant, Must Make, or Bear Expense of, Alterations, Improvements, or Repairs Ordered by Public Authorities, 22 A.L.R.3d 521, 527 (1968 and supplement); Ten-Six Olive, Inc. v. Curby, 208 F.2d 117 (8th Cir, 1953); and J.&R. Realty Co., Inc. v. United States, 418 F. Supp. 391 (E.D. Pa., 1976), and did not contemplate an obligation to perform improvements and upgrades ordered by public authorities.  Appellants also cite this Board’s decision in M.R. Kaplan, et al, PSBCA No. 1147, 1298, 1303, 1310, 88-3 BCA ¶ 20,827 at 105,315,  for the proposition that a lessor’s maintenance obligations do not include “... items of upgrading ... or of preventive maintenance....”  Appellants argue that the work done on the building was not intended to restore the building to its original condition.  Rather, Appellants contend that the work represented an improvement to the facility, not covered by the maintenance clause.

            Contrary to Respondent’s initial argument, the language of the ordinance, while potentially relevant, is not dispositive of the dispute before us.  The ordinance requires the owner to “cause” the building to be structurally altered to meet seismic standards or cause the building to be demolished.  We read this language to place the ultimate responsibility for compliance on the owner, where it normally would be. See e.g., Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal.2d 666, 672, 451 P.2d 721, 724 (1969).  However, there is nothing in the ordinance that would prevent an owner from “causing” the alterations to be accomplished by enforcing a provision in a lease making the tenant liable for the work and/or costs.  Although, under its ordinance, the City of Fullerton would look to Appellants if the necessary alterations were not accomplished, we must look to the lease to determine which party bears the ultimate financial burden of accomplishing the required alterations.

            Similarly, neither of the lease provisions relied on by Respondent expressly covers the situation before us -- i.e., improvements to a building, otherwise in good repair, required by local, public authorities in order to meet newly enacted or changed standards.  The lease provision requiring the lessor to maintain the premises in good repair and tenantable condition obligates the lessor to repair damage that occurs and to perform other maintenance actions generally necessary to keep the premises in good condition.  Similarly, we read the language requiring the lessor to put the property in satisfactory condition should it "become[] unfit for use" to refer to the tenant's right to cancel the lease in the case of uncorrected physical deterioration or damage to the property.  We do not read either provision to refer expressly to the situation where, as here, the property has become unusable and requires improvements solely by virtue of new or changed local building codes or standards.  For this reason, as argued by Appellants, William Fehn, PSBCA No. 3072, 93-1 BCA ¶ 25,496, relied on by Respondent, is factually distinguishable from the situation before us here.  See also Mayfair Merchandise Co. v. Wayne, 415 F.2d 23 (2d Cir. 1969); Mid-Continent Life Insurance Co. v. Henry's, Inc., 520 P.2d 1319 (Kansas 1974); Wolf v. 2539 Realty Associates, 560 N.Y.S.2d 24 (N.Y. App. Div. 1990); Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126 (Indiana 1995).

            Respondent argues, and Appellants concede, that, in the absence of more specific guidance, the general rule to be applied is that where substantial alterations or improvements are ordered by public authorities, the landlord is liable therefor, unless it appears, from the surrounding circumstances and the terms of the lease taken together, that the parties’ intention was to impose such liability on the tenant.  We agree.  See, e.g., Brown v. Green, 8 Cal.4th 812, 884 P.2d 55 (1994); Hadian v. Schwartz, 8 Cal.4th 836, 884 P.2d 46 (1994); C. T. Drechsler, Annotation, supra, 22 ALR3d 521 (1968).  Respondent argues that application of this rule leads to a determination that Appellants, as landlords, are liable for the improvements.  Appellants, on the other hand, argue that the exception applies here -- i.e., that the surrounding circumstances and the terms of the lease show that the contracting parties must have intended that the tenant assume liability for these alterations.

            Appellants, in an extensive brief, cite a number of facts and circumstances that lead them to the conclusion that at the time the lease was entered into, the Post Office Department intended to be responsible for alterations such as those ordered here.

            Initially, although not identifying language they consider ambiguous, Appellants argue that any ambiguous language is to be construed against Respondent, as the drafter of the standard form lease used in this case.  Appellants argue that construction of ambiguous language against Respondent is particularly appropriate here because the lease was drafted by what Appellants argue was the more sophisticated and knowledgeable party.  Appellants also argue that the lease terms are so one-sided as to make the resulting contract unconscionable, and therefore, Appellants urge that the lease language be interpreted so as not to preserve Respondent's "unfair and unreasonable advantage."

            Appellants also argue that Respondent could have, but did not, include a lease provision making the landlord responsible for complying with all laws and ordinances applicable to the building.  Appellants contend that it was Respondent’s custom and practice to include such provisions in its leases but that it did not do so in this case, even though orders by public authorities to upgrade the building were foreseeable, because Respondent intended to remain responsible for the costs of accomplishing those upgrades.

            Further, Appellants argue that the facility was built specifically to Postal Service standards and was designed in such a manner that it would have no use as anything but a post office, leading to the conclusion that Respondent intended from the beginning to become the owner of the building.^[6]    Appellants also argue that Respondent's intent to become the building's owner is confirmed by the terms of the lease.  Appellants argue that in the ordinary landlord-tenant relationship, there exist two estates in the property -- the tenant’s present possessory interest and the landlord’s future reversionary estate.  Appellants contend that the actual effect of the terms of the lease before us here is to reverse the positions of the parties, with the resulting relationship being the equivalent of life tenants (Appellants) and remainderman (Respondent).  Appellants argue that the extended term of the lease at little or no increase in annual rents coupled with Respondent’s purchase options (at what Appellants contend are below market prices) leave Appellants without any real reversionary interest in the property and Respondent with the indicia of ownership, notwithstanding the labels assigned the parties by the lease.  From this conclusion, Appellants reason that Respondent intended to assume the burden of any improvements or upgrades ordered by public authorities since it alone, as the eventual owner of the property, would ultimately derive the benefit from those improvements.

            Finally, Appellants argue that the Postal Service was aware of the City of Fullerton’s seismic mitigation program for over a year before taking any action to require Appellants to comply or before taking any action of its own to have the alterations performed.  From this fact Appellants reason that the Postal Service expected that it would be responsible for financing the alterations, but changed its position upon learning the cost of the work.  Appellants then argue that this action constituted a course of conduct through which Respondent indicated its expectation that it would be liable under the lease for the cost of construction.

            Initially, we note that the emphasis of much of Appellants' argument is on what they allege to be unconscionable and burdensome lease provisions -- in particular, the fact that rental payments remain essentially unchanged over the term of the lease and its option periods, and the fact that Respondent may purchase the property at what Appellants argue is an unfair, below-market price by exercising its purchase option.  Appellants urge the Board to interpret the lease provisions so as to counter Respondent's "unfair and unreasonable advantage."

            The issue of unconscionability, however, is not to be determined as of the present time but, instead, as of the time the original lease was entered into.  Glopak Corp. v. United States, 851 F.2d 334, 338 (Fed. Cir. 1988); U.C.C. §2-302; Restatement, Contracts 2d §208.  In this appeal, Appellants have offered no evidence that the original lessors were forced to submit an offer or were otherwise coerced into entering into the lease.  Further, there is no evidence that they did not believe they were entering into an arrangement that would ultimately prove profitable.  That the bargain was made less favorable by unanticipated inflation does not, by itself, support a finding that the lease was unconscionable when entered into.  Tell v. United States, 227 Ct. Cl. 519 (1981); Wanna M. Miller, PSBCA No. 3314 (opn. on recon.), 95-2 BCA ¶ 27,753; William H. Houser, PSBCA No. 2466, 90-1 BCA ¶ 22,504; Gene Peters, PSBCA No. 999, 83-2 BCA ¶ 16,694; Brubrad Co. v. United States Postal Service, 404 F.Supp 691 (E.D.N.Y. 1975), aff'd w/out opn 538 F.2d 308 (2d Cir. 1976), cert. den. 429 U.S. 834.  See also Leontarakis v. United States, 1989 WL 41446 (D. N.J.)(granting, on facts similar to those before us here, Defendant's motion for summary judgment on the issue of unconscionability of a Postal Service lease).^[7]  Therefore, there is no basis for concluding that Respondent has an "unfair or unreasonable" advantage that should be taken into account in rendering a decision.

            We also do not accept Appellants' argument that the absence of a lease provision requiring the lessor to comply with all applicable laws and ordinances means that such liability was intended to fall on the lessee.  Appellants have offered no evidence of Respondent's practice with regard to including such a provision in its leases in 1962 or at any other time.  Assertions in Appellants' brief do not constitute evidence.  RKM Const. Co., Inc., PSBCA No. 3370, 94-3 BCA ¶ 27,137, note 10 and cases cited.  Without evidence to the contrary, the inference to be drawn from the absence of these provisions is not that the lessee had agreed to accept liability for complying with applicable laws and regulations, but that the parties intended the liability to fall where it ordinarily would -- i.e., on the lessor, as the property owner.  See Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal.2d 666, 672, 451 P.2d 721, 724 (1969).

            Appellants' argument that Respondent is liable for these improvements because it intended from the beginning to become the eventual owner of the building and, therefore, would derive the ultimate benefit of any improvements made, requires more serious consideration.  The question of which party more likely would derive the ultimate benefit from improvements has been a factor considered by some courts that have addressed this issue.  Some of the other factors cited by Appellants have also appeared in cases considering this issue.  Indeed, in at least one case, such factors as the length of the lease (15 years) and the relatively small cost of the improvements (compared to the total rent to be paid under the lease) were important considerations in the court's conclusion that the lessee had agreed to be responsible for the cost of asbestos removal required by local authorities.  Brown v. Green, 35 Cal.Rptr.2d 598, 884 P.2d 55 (1994).^[8]  In that case, however, an important factor that went into the court's decision was the presence of lease provisions making the lessee responsible for virtually all maintenance on the property and expressly relieving the lessor of all repair responsibilities, including structural repairs.  The court concluded, as with the case before us, that the literal provisions of the various maintenance clauses did not apply to asbestos abatement required by the county Department of Health Services and would not, by themselves, shift to the lessee the burden of work that would ordinarily be the responsibility of the building owner.  However, the court concluded, based in part on the maintenance provisions, that the parties had intended to transfer to the lessee the "major burdens of ownership" of the property.  This finding and an evaluation of other factors led the court to conclude that the lessee had agreed to be responsible for the work required by the health department.

            Other cases in which courts have found the lessee liable for improvements required by public authorities have similarly also found some indication in the lease language of an intent to shift at least part of the burden of property maintenance to the lessee under certain circumstances or have found that the improvements were required because of the particular use to which the property was being put by the lessee.  See  C. T. Drechsler, Annotation, supra, 22 ALR3d at 537 (§7[b]).  Neither circumstance is found in the case before us.  Even if Appellants are correct in arguing that the ultimate benefit of these improvements will be Respondent's^[9] and that, at the time the lease was entered into, Respondent may have intended to become the owner of the building, we do not consider these sufficient bases for finding liability in Respondent, as a lessee.  There is nothing in the lease that suggests the parties agreed to a maintenance scheme in which Respondent was to bear responsibility for necessary maintenance of the property, other than to repair damage caused by itself.  There is nothing suggesting that any burden with respect to the physical condition of the property that would normally be the lessor's was to fall on Respondent.  From this we conclude that the parties intended that the lessor would remain responsible for those items for which it would normally be responsible -- items that would include, as conceded by Appellants, the seismic improvements.  Thus, the context of the lease suggests that, with the exception of damage "arising from the act or negligence of [Respondent]," the condition of the property was to be completely the responsibility of the lessor.  Under these circumstances, we do not conclude that Respondent agreed to be responsible for substantial improvements such as those at issue here, and we do not accept Appellants' argument.

            We also do not accept Appellants' final argument, that the conduct of Respondent's representatives during the early stages of this dispute indicated their belief that Respondent was liable for the cost of the work under the lease.  The exact basis for Appellants' position is somewhat unclear, but having examined the record, we do not see any evidence that could reasonably be interpreted as representing the opinion of any of Respondent's officials that the work was Respondent's obligation.  Respondent's actions were entirely consistent with its position that Appellants were responsible for the work and that if Appellants did not have the work performed, Respondent would have the work done and charge Appellants the associated costs.

The appeal is denied.
David I. Brochstein
Administrative Judge
Board Member

I concur:
James A. Cohen
Administrative Judge
Chairman

I concur:
James D. Finn, Jr.
Administrative Judge
Vice Chairman

^[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]  For a total potential lease term of fifty years.

^[3]  Under the original lease, the lessor was responsible for the payment of general real estate taxes in the amount of $7,000 per annum, with the lessee (Respondent) responsible only for any increases beyond that amount.  Through the lease amendment, the annual rental payment was reduced by $7,000 and the lessee assumed liability for the full amount of real estate taxes, including any increases.

^[4]  There is a question, which we need not resolve, as to whether Mr. Hendlish actually received the Notice (See AF 27).  However, Mr. Hendlish did receive a second notice from the City of Fullerton in May 1992, threatening to have the building posted with an order to vacate (AF 28).

^[5]  The provisions requiring the lessor to maintain the premises in “good repair and tenantable condition” and to put the building in “satisfactory condition” if it becomes unfit for use for the purposes leased.

^[6]  By exercising its purchase option.

^[7]  Appellants' arguments regarding unconscionability are also considerably weakened by the fact that they were not the parties that entered into the original lease with Respondent.  Appellants purchased the property from the original owners after the lease had been in effect for 13 years and, presumably, the purchase terms took into account the presence of the lease and the then existing economic conditions.  See e.g., Shell Oil Co. v. Hennessy, 639 F.Supp. 626 (D. Mass. 1986)(purchasers of property subject to a lease lack standing to assert unconscionability of the original lease terms).

^[8]  See also the companion case to Brown: Hadian v. Schwartz, 884 P.2d 46, 35 Cal.Rptr.2d 589 (Cal. 1994), finding a lessor liable for the cost of seismic improvements ordered by the City of Los Angeles.

^[9]  Although this requires us to speculate that the economic and operational conditions will be such that Respondent will consider it advantageous to exercise its purchase option.