Appeal of

PETER J. KOUTSOS
JOHN J. KOUTSOS
GEORGE KOUTSOS

LEASE AGREEMENT
PSBCA No. 4114

APPEARANCE FOR APPELLANTS:
Peter J. Koutsos

APPEARANCE FOR RESPONDENT:
Helen A. Nicholas, Esq.

OPINION OF THE BOARD

            Appellant,^[1] the lessor of real property to Respondent, United States Postal Service, filed an appeal from Respondent’s denial of its claim for additional rent for Respondent’s failure to vacate the premises upon the expiration of the lease.

At the parties' election, this appeal was submitted on the record without an oral hearing.  The parties have submitted evidence and briefs in support of their positions.  Both entitlement and quantum are at issue.

FINDINGS OF FACT

            1.  In 1987, Respondent entered into a lease for real property in York, Pennsylvania to be used by Respondent as a carrier annex and vehicle maintenance facility.  The term of the lease was from July 1, 1987, through June 30, 1992, at an annual rent of $72,000.  As additional rent, Respondent was responsible for payment of the real estate taxes on the premises.  (Lease^[2]).

            2.  Respondent was responsible for maintenance of the premises, utilities and services (Lease).

            3.  The lease authorized Respondent to make alterations and additions to the premises.  The “alterations” clause provided,

“Prior to expiration or termination of this lease the Postal Service shall, if required by the Lessor by notice in writing sixty days in advance of such expiration or termination, restore the premises to as good condition as that existing at the time of entering upon the same . . . reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the Postal Service has no control, excepted.” (Lease).

            4.  At some time after execution of the lease, Appellant succeeded to the interest of the lessor.  In November 1991, Appellant entered into an extension of the lease to June 30, 1993, at the same rental, $72,000 per year.  (Lease Addendum attached to Complaint).

            5.  Respondent paid rent through December 31, 1993 (AF 16).  By letter to Respondent dated February 14, 1994, Appellant complained that Respondent had failed to pay rent for January 1994 and stated that Appellant expected that Respondent would pay rent until Respondent had completed the restoration of the premises.  By then (February 14, 1994), Respondent had ceased using the building and had discontinued utility service.  (February 14, 1994 letter submitted into the record by Appellant on December 17, 1997).

            6.  In early 1994, Respondent agreed to assume the restoration and repair cost for the facility.  The parties contemplated that Respondent’s architect would conduct a thorough assessment of the building to determine the scope of restoration needed.  In a March 28, 1994 letter, Appellant requested a schedule for obtaining estimates for such work and stated that it would not accept return of the building until the restoration was completed.  Appellant noted, also,

“We also need payment of past rent during the months of January, February, and March and expect future rent payments until the Postal Service fulfills its obligation to restore the facility, as per the lease agreement.”

Postal Service and postal-employee vehicles were parked on the premises in January, February and March 1994, and Respondent plowed the snow in the parking lot to facilitate such use.   (Appellant’s Answer to Interrogatory #7; Photographs attached to Appellant’s Complaint; Answer; February 14, 1994 and March 28, 1994 letters submitted into the record by Appellant on December 17, 1997).

            7.  On February 15, 1995, the parties entered into a Restoration Agreement for the property.  The agreement recited that the lease had terminated effective December 31, 1993, and that the lessor had requested restoration under the terms of the lease.  The parties agreed,

“THEREFORE, in consideration of a one time lump sum payment of Two hundred fifty thousand ($250,000), the Lessor hereby releases the Postal Service from any past, present or future restoration claims in regard to said lease agreement.  Payment shall be made within thirty (30) days of Acceptance of this restoration agreement by the Postal Service Contracting Officer.  In addition, the United States Postal Service will provide for the closure of a 550 gallon waste oil tank and 8,000 gallon gasoline storage tank at the York, Pennsylvania Carrier Annex and Vehiclel [sic] Maintenance Facility (VMF) per Pennsylvania Department of Environmental Resources (PADER) requirements.”  (Appeal File, Tab (“AF”) 15).

            8.  On or about April 14, 1995, Respondent’s contractor excavated and removed the 550 gallon waste oil tank from Appellant’s property (AF 11, 12, 13; Declaration of Darren M. Durbin).^[3]

            9.  The soil around and under the 550-gallon tank had become contaminated, and Respondent’s contractor also excavated 95.72 tons of contaminated soil (Declaration of Darren M. Durbin; Underground Storage Tank Closure Report, August 1995).  The contaminated soil was removed from the premises on May 18, 1995 (Underground Storage Tank Closure Report, August 1995), and the excavation was backfilled and the blacktop paving restored no later than August 31, 1995 (AF 14).

            10.  The Pennsylvania Department of Environmental Protection (“PADEP”) required a site “characterization” (study) to determine the extent of soil and groundwater contamination.  Respondent’s environmental engineering contractor performed four borings and subsequently installed groundwater monitoring wells in three of the borings on or about May 14, 1996, a standard procedure to test the soil and groundwater for contamination.  Soil and water removed from the monitoring wells were stored in drums on the site.  (AF 9, 11, 12, 14).

            11.  After receiving the results of the groundwater monitoring, PADEP, by letter dated January 25, 1997, advised that it was requiring no further action regarding the site.  The letter noted, “This should not, however, be construed as a waiver of liability for any current or future problems that exist at the site.”  This type of letter from PADEP indicated that the cleanup was completed to its satisfaction, and PADEP’s practice was not to issue any further assurances regarding the site.  Respondent sent Appellant a copy of the January 25, 1997 PADEP letter on January 31, 1997.  (AF 7; Declaration of Darren M. Durbin).

            12.  On June 26, 1997, Appellant wrote to the contracting officer asserting its claim for being denied the use of its property by the actions of the Postal Service.  Appellant claimed payment by Respondent of $72,000 per year for lost rent from January 1, 1994, plus the real estate taxes, until such time as the property was certified as environmentally clean by PADEP.  As an alternative, Appellant suggested that Respondent could buy the property, which Appellant purchased in 1990 for $600,000, for $400,000.  (AF 4).

            13.  The real estate taxes for 1994 through 1995 were $11,000 per year (Appellant’s Answer to Interrogatory #8).

            14.  By final decision dated August 5, 1997, the contracting officer denied Appellant’s claim for lost rental, contending that Respondent was not liable because it had provided Appellant with a “no further action” letter from PADEP (AF 3).

            15.  On August 28, 1997, Appellant filed a Notice of Appeal from the contracting officer’s final decision (AF 1).

DECISION

            Appellant argues that it is entitled to recover rent from January 1, 1994, to the present because Respondent failed to relinquish possession of the premises upon lease termination at the end of December 1993.  Appellant seeks rent at the rate established for the lease term immediately preceding the termination, $72,000 per year plus additional rent of $11,000 per year for real estate taxes.  In its argument, Appellant also asserted for the first time a claim for the diminished value of the property due to the contamination of the soil and Respondent’s failure to obtain adequate assurance from the Pennsylvania Department of Environmental Protection that the site is clean.

            Respondent argues that it has fulfilled its obligations under the February 15, 1995 Restoration Agreement by supplying Appellant with the January 25, 1997 “no further action” letter from PADEP.  Regarding Appellant’s claim for rent from January 1, 1994, Respondent argues that Appellant has not shown that it lost rental opportunities and that any such damages would be too speculative to be recoverable.

Scope of the Restoration Agreement

            Respondent has not argued specifically that Appellant’s claim for rent is barred by the Restoration Agreement, but it does suggest that it is not liable for additional rent because it has fully complied with the requirements of the Restoration Agreement.  Appellant argues that the Restoration Agreement was only intended to compensate Appellant for the physical damage to the leased building and did not address Appellant’s entitlement to rent for the premises after December 1993 if Respondent were to retain possession.  Respondent has offered nothing to contradict Appellant’s understanding of the Restoration Agreement, and the language of the Restoration Agreement (Finding 7) supports Appellant’s interpretation.  The Restoration Agreement specifically identified the consideration given by Appellant as the release of Respondent “from any past, present or future restoration claims in regard to said lease agreement.”  No mention is made of any rental claims being satisfied, even though before the parties entered into the Restoration Agreement, Appellant had stated clearly its understanding that Respondent was obliged to continue paying rent after the expiration of the lease on December 31, 1993 (Findings 5, 6).  Accordingly, Appellant’s claim for lost rent is not barred by the terms of the Restoration Agreement.  See Diamond Plaza, Inc., PSBCA No. 3846, 97-1 BCA ¶ 28,737.

Entitlement to Lost Rent

            In Prudential Ins. Co. of America v. United States, 801 F.2d 1295, 1299 (Fed. Cir. 1986), cert. denied, 107 S.Ct. 1289 (1987), the court held that "an implied duty to vacate is an inherent part of every fixed term lease agreement unless the parties explicitly express an intention to the contrary."  Accord T. W. Cole, PSBCA No. 3076, 92-3 BCA ¶ 25,091.  There is no evidence that when entering the lease or the subsequent extensions the parties intended anything other than that Respondent would vacate the premises at the end of the term, and there is no evidence that the parties extended the lease term beyond the December 31, 1993 expiration.^[4]  Therefore, if Respondent failed to vacate upon lease expiration, its conduct constituted a breach of its duty entitling Appellant to recover its damages.  Id.

            There is little evidence in the record regarding the events that occurred between the December 31, 1993 expiration of the lease and the execution of the Restoration Agreement on February 15, 1995.  Neither party offered evidence of their dealings that led up to the execution of the Restoration Agreement.  However, Respondent accepted responsibility for restoring the premises (Findings 5, 6) and intended to conduct a thorough assessment of the property to determine the extent of restoration necessary (Finding 6).  Furthermore, in its correspondence of early 1994 (Findings 5, 6), Appellant stated its view that it would not accept possession of the premises until the anticipated restoration was completed.  There is no evidence in the record showing that Respondent ever stated any disagreement with Appellant’s understanding that the premises remained in Respondent’s possession.

            Additionally, although there is no direct evidence of the condition of the building throughout 1994 and early 1995, that Respondent agreed to pay $250,000 to repair and restore a building worth $400,000 to $600,000 (Findings 7, 12) indicates that the premises were in need of significant restoration work.  The need for such substantial work would likely have interfered with Appellant’s ability to regain possession and re-rent the premises.  Since there is no evidence to the contrary, we conclude that, at least until the Restoration Agreement was entered into, Appellant reasonably did not attempt to regain possession of the premises for the purpose of putting them to productive use.

            Respondent’s argument that the lost rentals Appellant seeks are too remote and speculative to be recoverable is rejected.  Respondent’s failure to provide for the restoration of the premises until it executed the Restoration Agreement denied Appellant the opportunity to re-rent the property.  When the parties entered into the lease, it was reasonably foreseeable that a failure to perform or provide for substantial repairs needed at the conclusion of the lease would prevent Appellant’s rental of the property and would result in lost rent.  Accordingly, Respondent is liable for damages for its failure to vacate the premises from January 1, 1994, through February 15, 1995.  See Diamond Plaza, Inc., PSBCA No. 3846, 97-1 BCA ¶ 28,737, and cases cited therein.

            However, Appellant has not shown that once the February 1995 Restoration Agreement was concluded and the parties had agreed that Respondent would pay $250,000 in lieu of restoring the premises, it was reasonable for Appellant to make no effort to use the property.  Appellant’s earlier correspondence had stated its position that it would not accept the premises until restoration was complete (Finding 6), and we concluded above that Appellant’s refusal to accept return of the premises before the restoration issue was resolved was reasonable.  However, on February 15, 1995, Respondent satisfied its responsibility to restore the premises by executing the Restoration Agreement.  Therefore, in order to recover damages beyond February 15, Appellant must show other grounds for finding that Respondent remained in breach of its duty to vacate the premises.

            There has been no showing that removal of the 550-gallon underground waste oil tank^[5] would have significantly interfered with Appellant’s use of the premises.  No evidence was submitted showing the impact of the removal of the tank and the contaminated soil or of the subsequent monitoring of the soil and water as required by PADEP.  Parking of Postal Service or employee vehicles on the premises (Finding 6) and the drums of water and soil from the monitoring wells (Finding 10) were not shown to have interfered with Appellant’s use.  Under these circumstances, Appellant had a duty to take reasonable steps to recover possession of the property in order to mitigate its damages.  See Corbetta Constr. Co. of Illinois, Inc., PSBCA Nos. 817, 818, 82-2 BCA ¶ 15,805 at 78,278; Seaway Shipping Lines, PSBCA No. 2840, 91-2 BCA ¶ 23,731.  Appellant’s failure to make any attempt to recover the premises after the Restoration Agreement was concluded precludes its recovery of damages for its lack of possession beyond February 15, 1995.

            Appellant insisted and continues to insist in this litigation that Respondent provide it an ironclad assurance from PADEP that there is no contamination in the soil, groundwater or bedrock remaining from the removal of the 550 gallon tank.  This is an assurance PADEP would not have given under any circumstances (Finding 11), and Respondent’s obtaining such assurance for Appellant was not a requirement of the Restoration Agreement (Finding 7).  Once the restoration issue had been resolved through execution of the Restoration Agreement, it was unreasonable of Appellant to refuse to accept the property and to make an attempt to use it.  See Cafritz Co. v. General Services Administration, GSBCA No. 13525-REM, 98-2 BCA ¶ 29,936 at 148,122; T. W. Cole, PSBCA No. 3076, 92-3 BCA ¶ 25,091.

Extent of Damages

            As its damages for Respondent’s breach of the duty to vacate the premises, Appellant seeks the rental value of the property, and the rental rate in the expired lease is evidence of rental value, absent evidence that some other value is appropriate.  See Burdette A. Rupert v. General Services Administration, GSBCA No. 10532, 93-1 BCA ¶ 25,243 at 125,728, citing 49 Am. Jur. §1125 and 2 M. Friedman, Friedman on Leases, ¶ 18.2 (2d ed. 1983); Jonnet Development Corp., GSBCA No. 6943, 86-3 BCA ¶ 19,311 at 97,656.  The lease rental rate (base rent of $72,000 (Finding 1) plus the additional rent for the real estate taxes, $11,000^[6] (Finding 13)) being the only evidence of damages in this record, Appellant is entitled to recover at the rate of $83,000 per year for a period of one year and 46 days (January 1, 1994, through February 15, 1995).  This results in an award to Appellant of $93,460.27 ($83,000 + 46 days/365 days per year x $83,000 per year = $93,460.27).

Diminished Value of Premises

            In filings with the Board, Appellant for the first time asserted a claim for what it contends is the diminished value of the property due to Respondent’s causing the contamination in the first place and its failure to clean the premises adequately.  However, the Board does not have jurisdiction to consider these issues because Appellant has never made a written claim to the contracting officer asking for compensation for these alleged damages.  See The Sharman Co. v. United States, 2 F.3d 1564 (Fed. Cir. 1993), overruled in part, Reflectone Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995); Sharon Rhoades, PSBCA No. 3455, 94-2 BCA ¶ 26,950; Janie Marie Winkle, PSBCA No. 1548, 86-3 BCA ¶ 19,255.  Accordingly, the claim for the alleged loss in value of the premises due to Respondent’s actions is dismissed without prejudice.

Conclusion

            The appeal is sustained in the amount of $93,460.27 plus Contract Disputes Act interest from the date the claim was submitted until paid, and is otherwise denied.  Appellant’s claim for the diminished value of the premises is dismissed for lack of jurisdiction.

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]   Appellant is a partnership consisting of John, Peter and George Koutsos.  The caption of the appeal has been changed to reflect this.

[2]   The appeal file did not contain a copy of the lease.  “Lease” in this decision refers to the copy of the lease attached to Appellant’s Complaint.

[3]   The 8,000-gallon gasoline storage tank mentioned in the Restoration Agreement was included by mistake—it was located on adjacent property, also controlled by Respondent.  At the time the Restoration Agreement was entered into, the only underground storage tank on the leased premises was the 550 gallon waste oil tank (AF 11, 12, 13; Declaration of Darren M. Durbin).

[4]    Nothing in the record explains the basis for the extension of the lease term from July 31, 1993, to December 31, 1993.  However, we accept the Restoration Agreement’s acknowledgement of December 31, 1993, as the termination date of the lease as evidence that the term was extended by agreement of the parties.

[5]   The Restoration Agreement obliged Respondent to “provide for the closure” of the tank, but there is no evidence that by that term the parties intended anything other than the excavation and removal of the tank that was eventually accomplished.

[6]    The only evidence in the record of the amount of real estate taxes due on the property was in Appellant’s answer to Respondent’s interrogatories.  However, the interrogatory answers were placed in the record by Respondent, there was no evidence to contradict that figure and Respondent did not challenge Appellant’s statement of the amount of the real estate taxes.