Appeal of

GEORGE P. GURDAK

LEASE AGREEMENT
PSBCA No. 5049

APPEARANCE FOR APPELLANT:
Bradley M. Wilson, Esq.
Nowell Ambroso Klein Bierman, P.A.

APPEARANCE FOR RESPONDENT:
Barbara H. Frazier, Esq.
St. Louis Law Department
United States Postal Service

OPINION OF THE BOARD

            Respondent, United States Postal Service, leased space for a postal station in a building owned by Appellant, George P. Gurdak.  As the lease neared its expiration, Appellant and Respondent entered into a new lease under which Appellant would improve other space in his building and Respondent would lease it for ten years for its postal station.  Appellant designed the new space to Respondent’s requirements, and at the time the construction plans were finalized the parties entered into a lease modification that provided for Respondent’s payment of $165,000 for improvements it added after the lease was entered into and for a reduction of the annual rent.  After the new space was completed and occupied by Respondent, Appellant submitted a claim seeking to restore the rent to the original amount and for costs of Respondent’s added improvements that exceeded the $165,000 payment provided in the lease modification.  The contracting officer denied the claim based on the modification, and Appellant appealed, arguing that the modification was unenforceable as Appellant only agreed to it under duress.

            A hearing was held, and the parties filed post-hearing briefs.  Only entitlement is at issue (Hearing Transcript, page (“Tr.”) 6).

FINDINGS OF FACT

            1.  Since about 1985, Appellant leased Respondent ground-floor space in his building in West New York, New Jersey, to house a postal retail outlet known as Taurus Station.  In 1996, the parties entered into a five-year lease, from May 1, 1996, to April 30, 2001, at an annual rent of $39,995.  (Tr. 21, 24, 82-83; Appeal File, Tabs (“AF”) 1-11).

            2.  Appellant’s wife’s medical office was also in the building, occupying a smaller, separate space adjacent to Respondent’s, and Appellant also rented out offices located on the second and third floors of the building (Tr. 80-81, 113, 131).

            3.  In March 1999, Appellant advised Respondent of his intention to renovate the entire building, including the upstairs offices, and to move the medical office into the Taurus Station space, which was the larger of the two retail spaces.  He proposed renovating the smaller ground-floor space to house Taurus Station in substantially the same configuration then existing.  He advised that the entire building renovation would be phased so the Taurus Station could remain in operation throughout the project.  (Tr. 25, 39, 84; AF 12, 13; Appellant’s Exhibit (“App. Exh.”) B).

            4.  When the original lease was entered into in 1985, Appellant had personally managed the renovation for the Taurus Station to the satisfaction of the Postal Service and consistent with Postal Service-supplied plans and specifications.  He intended to do the same for this planned renovation, using his own architect and contractor.  (Tr. 82-83).

            5.  Respondent understood that under no circumstances would Appellant enter into a new lease with Respondent for the existing Taurus Station space (Tr. 25, 84; AF 14, 21 (p. 6), 23; App. Exh. A, D, E).

            6.  In May 2000, the parties agreed to a month-to-month extension of the existing lease beyond its April 30, 2001 expiration date to allow time for planning and reaching agreement on the new Taurus Station facility.  Either party could terminate the lease extension on a 30-day basis.  (Tr. 37-38, 75-76, 78; AF 16-18).

            7.  After some preliminary negotiations between the parties regarding the rent for the new space, Appellant, on July 10, 2000, made a written offer to Respondent for a ten-year lease for the relocated Taurus Station at an annual rental of $46,800.  The offer described the premises as approximately 1,250 square feet of ground floor space.  (Tr. 86-87; AF 19).

            8.  In considering the proposed layout of the new space, Respondent was aware that the net interior space being offered was 1,250 square feet or less (Tr. 42-43; AF 21 (pp. 2 (Grygus email), 3 (D’Ercole email), 6 (Bennett email))) and knew that it was Appellant’s intention to duplicate the improvements in the existing station as to configuration and quality of materials and construction (Tr. 39, 44).  Respondent knew that any improvements it required that exceeded the existing installations would be done by Appellant but at Postal Service expense (Tr. 66, 76).

            9.  In late July 2000, Appellant submitted a formal offer of the space on Postal Service lease forms prepared by Respondent and signed by Appellant (Tr. 30, 37, 99; AF 24).  Paragraph 1 of the lease/offer stated the “net floor space” leased to be 1,469 square feet, and included the following language:  “SUBJECT TO CHANGE WITH NEW SPACE.”  Respondent had typed that language and the figure of 1,469 square feet in the form before Appellant signed it (Tr. 72, 99).  The legal description of the lease (Paragraph 8), also prepared by Respondent, described the building as “providing approximately 1469 S/F, net interior measurements, on the first floor.”  (AF 30).  The description of the premises in the Memorandum of Lease, which was signed by both parties at the same time the lease was signed, used the same description except stated that the premises provided “approximately 1,250 S/F, net interior measurements.”  (AF 31; App. Exh. N).

            10.  In his written proposal, Appellant offered to construct the space at his expense in accordance with his architect’s layout of the proposed postal space as shown on plans attached as Exhibit “A” to the lease/offer (Tr. 89-90; AF 30 (p. 5), 34; App. Exh. Y; Respondent’s Exhibit 60).  The proposed lease included an Addendum, drafted by Appellant, that provided,

“Lessor agrees to perform extra work at additional cost for which there is no price included in the lease.  Such work shall be performed in accordance with the specifications provided by the USPS within 30 days of execution of the lease and will be paid for as provided by the Construction Rider Existing Buildings C-1 [a Postal Service form included in the lease].  Extra work includes but is not limited to Bulletproof Screening and camera installation.”

(AF 34 (p. 8)).

            11.  The layout shown on the lease/offer’s Exhibit A plans for the proposed space reflected that the exterior measurements of the rectangular space containing Respondent’s space and a stairway to the upper floors were 25 feet by 58.75 feet, or 1,468.75 square feet (Tr. 68; App. Exh. Y; Respondent's Exhibit5. 60).  Respondent knew that the 1,469 square foot figure included in the offer to lease was not interior space (Tr. 43, 58, 63-64, 69; AF 25).

            12.  Appellant considered the offer to be for a rental of $46,800 per year for the space identified for Taurus Station on Exhibit A of the offer to lease without regard to the precise interior square footage of the resulting space and had so advised Respondent’s representative (Tr. 50, 86).  Appellant’s proposal made no mention of a rent-per-square-foot figure, and the lease form used contained no provision authorizing adjustment of the rent based on the as-designed interior square footage of the finished space (Tr. 59-60, 63; AF 30).

            13.  However, Respondent generally evaluated space offered for lease in terms of interior square footage available for postal use.  In internal discussions before Respondent accepted Appellant’s offer, Respondent’s officials recognized that the space offered was less than 1,200 square feet of interior space.  Using per-square-foot rental figures they agreed among themselves that Appellant’s rent should be lower.  (Tr. 42-43; AF 21 (pp. 3, 6), 28 (p. 8 (Grygus email of 8/11/00))).

            14.  In his July 2000 assessment of the proposed lease, Respondent’s construction manager commented in an internal email that the space was considerably less than 1,200 square feet and warranted rent of only $35,520 per year.  He expressed his view that the rent and square footage issues should be resolved with Appellant (“I think it is critical to get an agreement on the net space rented.”) (AF 21 (p. 6)).  Nevertheless, the contracting officer accepted Appellant’s offer on September 5, 2000, by signing the lease form as proposed by Appellant and making no objection to the $46,800-per-year rent or regarding the square footage of the space (Tr. 104; AF 34; App. Exh. G).

            15.  The Construction Rider, which was part of the lease, provided that once Respondent approved Appellant’s design for the new postal space, Appellant was to submit a cost proposal for construction and could not begin construction until the cost proposal was approved and accepted by Respondent.  If the parties were unable to agree on the construction costs for Respondent’s space, Respondent had the option of taking over the design and pursuing construction on its own or terminating the lease.  (AF 30 (p. 16, Clauses 2, DESIGN PHASE, and 3, CONSTRUCTION PHASE).

            16.  In October 2000, Respondent advised Appellant that because of the stringent specifications it would require for the space and because Appellant’s architect did not have the capability to receive them via a CD, Appellant should hire CTS Group, an architectural firm regularly used by Respondent and experienced in Postal Service projects (Tr. 102-104, 155-156; AF 43B; App. Exh. H, I, J).  Although he already had an architect for the overall project, Appellant hired CTS to design the space to Postal Service standards, but he expected that Respondent would pay for CTS (Tr. 103, 173; AF 36; App. Exh. K, L, M, P, X).

            17.  Respondent required that the space be designed to its then-current standards which were much more stringent than the standards reflected in Appellant’s Exhibit A to the lease/offer (Finding 10) as well as much more stringent and costly than existed in the old Taurus Station.  These new standards were given to Appellant for the first time well after the lease was signed.  (Tr. 101-107, 142).

            18.  As CTS completed the design, in October 2001, Respondent advised Appellant that he needed a specialized contractor to do the construction, one familiar with Postal Service standards, and provided three names for Appellant to choose from.  Appellant contracted with one of the three instead of using his own contractor for the Postal Service space.  (Tr. 104-106, 144; AF 43B).

            19.   Meeting the more stringent design standards required by Respondent after the lease was executed, hiring Respondent’s architect and contractor, and adding discrete requirements such as bulletproof screening and security cameras increased Appellant’s estimated costs of designing and fitting out the Postal Service space over what he had anticipated when making his offer.  These circumstances plus delays by Respondent in providing and finalizing its requirements delayed the project.  (Tr. 97, 101-102, 104-107, 115-116, 142).

            20.  In February 2002, Appellant sent Respondent a breakdown of project costs, showing costs totaling $391,000 that he considered to be extras to the scope of work in the lease and which he contended Respondent was obligated to pay (Tr. 119, 160; AF 42B; Stip. 14).  After some discussions, Respondent’s officials agreed to pay $165,000 (Tr. 109, 138, 160, 162-164, 169, 185-188; AF 42C, 43A).  Appellant did not agree to that figure, but Respondent presented it on a “take it or leave it” basis (Tr. 110; contra Tr. 191).  Although that amount was not agreed to by Appellant, Respondent prepared a lease amendment, “Lessor Improvement Agreement,” that included the $165,000 figure as Respondent’s share of the additional costs.  On April 9, 2002, Respondent sent the proposed Lessor Improvement Agreement to Appellant for signature.  (AF 43A).

            21.  The Lessor Improvement Agreement also proposed, for the first time, to decrease the annual rent to $37,360.  Respondent had calculated the net interior space provided by the final design to be 1,173 square feet and concluded that that constituted a reduction from the area of 1,469 square feet stated in the lease (Finding 9).  The contracting officer claimed Respondent was entitled to a rental reduction to reflect the “smaller” space.  (Tr. 110-111; AF 43A).

            22.  By letter of April 19, 2002, Appellant rejected the rental reduction and argued that any rental adjustment should be an increase to pay him for the additional costs of complying with Respondent’s requirements.  He reminded the contracting officer that the refusal of the Postal Service to allow Appellant to proceed with construction in its space would hold up his entire building renovation project.  (AF 37B; App. Exh. Q).

            23.  The parties discussed their disagreements further, and in a letter of May 3, 2002, the contracting officer confirmed his position that the square footage of the facility had been reduced from the 1,469 stated in the lease to 1,173 and that a commensurate reduction in rent was necessary.  He stated,

“As I explained to you, if the Postal Service is to move to the new location we need to reduce the rental from $46,800.00 to $37,360.00 to account for the loss of 296 sq. ft. of space.  Should you decide not to adjust the rent for the square footage lost, you leave us no choice but to remain at the present location.”

(Tr. 138; AF 44A; App. Exh. R).

            24.  Appellant responded on May 6, 2002, reminding the contracting officer that the lease agreement was only for the new space; that Respondent had no option to remain in the old space; and that the entire project was being held up (AF 44B).

            25.  The contracting officer refused to change his position.  By this time, the project had been stalled for more than a year due to Respondent’s changing and additional requirements (Tr. 111-114); Appellant’s other rental offices had remained vacant for two years earning no rent (Tr. 87-88, 93-94, 113, 131; AF 38, 39, 40, 41); his wife’s medical practice had already been moved from what was to be Respondent’s space and, with Respondent’s agreement, relocated in confined, partially-constructed temporary space in an unused back portion of the existing Taurus Station (Tr. 113); and Appellant believed that attempting to evict Respondent would involve a difficult and lengthy process (Tr. 114, 146).

            26.  As construction in the Postal Service space could not begin without the contracting officer’s authorization, Appellant’s entire building renovation plan was stopped (Tr. 112).  Believing he had no practical economic choice, Appellant signed the Lessor Improvement Agreement on or about May 21, 2002 (Tr. 111-114, 146; AF 37B, 46).  The contracting officer signed the Agreement on May 22 and issued a notice to proceed with construction the same day (Tr. 118, 146; AF 46; App. Exh. S).

            27.  By October 7, 2002, Respondent had accepted the construction and occupied the new space (Tr. 119; AF 50, 51; App. Exh. T).

            28.  In January 2003, Appellant billed for the $165,000 provided in the Lessor Improvement Agreement, reserving on the invoice his right to pursue additional amounts for the improvements, and was paid that amount in a lump sum (Tr. 167; AF 52).

            29.  On May 8, 2003, Appellant submitted a certified claim to the contracting officer demanding payment of $163,696 as the added costs he incurred allegedly to comply with Respondent’s requirements that exceeded the $165,000 included in the Lessor Improvement Agreement, plus a retroactive adjustment to the rent back to the $46,800 per year stated in the lease (AF 56; Gurdak Declaration dated May 5, 2003).

            30.  By final decision dated July 7, 2003, the contracting officer denied Appellant’s claim (AF 57; App. Exh. V), and Appellant filed a timely appeal.

DECISION

            Appellant argues that the parties’ agreement regarding the new space in his building was that he would essentially duplicate the improvements of the old space in the new and lease it to Respondent for ten years at an annual rental of $46,800.  If Respondent required construction in the new space that exceeded what was in the old, Appellant was to perform the work but Respondent was to pay for it.  Appellant claims entitlement to his costs of designing and constructing the new space to Respondent’s additional and more stringent requirements and for restoration of the rental reduction effected by the Lessor Improvement Agreement.

            Regarding the rental adjustment, Respondent argues that the phrase “subject to change with new space” in the lease paragraph describing the premises (Finding 9) permitted Respondent to reduce the rent commensurate with the difference between the figure stated in the lease, 1,469 square feet, and the actual square footage of 1,173 square feet.  The lease contains no provision specifically authorizing Respondent to adjust the rent unilaterally (Finding 12), and including the above notation did not authorize such an adjustment.  The note made no reference to the rent or to the rental paragraph of the lease and was not sufficient to apprise Appellant of Respondent’s belief, unstated at the time, that it could reduce the rent unilaterally.  Moreover, Respondent’s officials knew that Appellant viewed the offer as one for rental of the space designed to the requirements in the lease for an annual rent of $46,800, without regard to the resulting square footage (Finding 12).  Signing the lease knowing Appellant’s interpretation would ordinarily bind Respondent to that interpretation.  See Perry and Wallis, Inc. v. United States, 192 Ct. Cl. 310, 314-315, 427 F.2d 722, 725 (Ct. Cl. 1970); Ship Analytics Int’l, Inc., ASBCA No. 50914, 01-1 BCA ¶ 31,253 at 154,352; Fallen Trucking Co., PSBCA Nos. 3133, 3237, 93-2 BCA ¶ 25,827 at 128,565.

            Respondent however relies on the Lessor Improvement Agreement to argue that Appellant voluntarily agreed to accept $165,000 as payment for all of the extra work he claims to have performed and to the reduced rent.  Appellant argues that the Lessor Improvement Agreement is not binding because Respondent improperly coerced him into signing the agreement and that it is unenforceable as a product of duress.

            To render the Lessor Improvement Agreement unenforceable for duress, Appellant must establish that (1) he involuntarily accepted Respondent’s terms, (2) circumstances permitted no other alternative, and (3) such circumstances were the result of Respondent’s coercive acts.  See Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1329 (Fed. Cir. 2003), cert. denied, 541 U.S. 987 (2004).  The record reflects that Appellant’s acceptance of the Lessor Improvement Agreement was involuntary.  He strenuously and repeatedly objected to Respondent’s terms in the Lessor Improvement Agreement (Findings 20-26).  Yet, Appellant had no reasonable economic choice under the circumstances.  Appellant’s building renovation had been long-delayed; his rental spaces were vacant and had been for two years; and he had incurred substantial design fees and costs for preparatory work, including relocating his wife’s medical practice to temporary space in the old Taurus Station (Findings 16, 17, 19, 25, 26).  Respondent’s stated refusal to move from the old space and its refusal to authorize Appellant to begin construction of its space stopped the entire project and raised the prospect of further delay and expense if Appellant refused to accept the Lessor Improvement Agreement.  While terminating the lease extension and initiating proceedings to evict Respondent may have been a theoretical alternative, we are not persuaded that it was a realistic or reasonable alternative under the circumstances, and thus Appellant was left with no reasonable alternative save to agree to the Lessor Improvement Agreement.  See David Nassif Assocs. v. United States, 226 Ct. Cl. 372, 385, 644 F.2d 4, 12 (1981); Home Entertainment, Inc., ASBCA No. 50791, 99-2 BCA ¶ 30,550 at 150,862.  Thus, Appellant has established the first two elements necessary to support a finding of duress.

            Moreover, Respondent’s actions put Appellant in these desperate circumstances.  It was Respondent’s delay in providing its requirements (Findings 17, 19), its urging Appellant to use its architect and construction contractor (Findings 16-19) and then its delays in approving the design (Finding 19) that placed Appellant in the predicament he was in when Respondent proposed the Lessor Improvement Agreement with a nonnegotiable rent reduction and a firm figure for Respondent’s estimated extra construction costs.

            Respondent points out that the lease provided for Respondent’s approval of the estimated construction costs once the design was accepted and before construction could begin (Finding 15).  Further, Respondent notes that it had a right under the lease extension to remain in the old space, at least until Appellant gave notice of termination (Finding 6), which he did not do.  From this, Respondent argues that its demand that Appellant accept its figure for the extra construction costs and its threat not to move were within its rights under the lease and lease extension and thus were not coercive.

            However, Respondent’s assertion of a legitimate contract right “may nonetheless support a claim of duress if the act violates notions of fair dealing by virtue of its coercive effect.”  Systems Technology Assocs. v. United States, 699 F.2d 1383, 1387-88 (Fed. Cir. 1983).  We are persuaded that by threatening not to move and refusing to authorize Appellant to begin construction in the new space, Respondent intended to take advantage of Appellant’s predicament (that it had caused) in order to pressure Appellant into signing the Lessor Improvement Agreement.  While arguably justified under the contract, Respondent's refusal to allow Appellant to proceed with the project was not done to enforce in good faith Respondent’s rights under the lease but was for the wrongful purpose of forcing Appellant to accept Respondent’s terms regarding the extra costs and rental reduction.

            Respondent’s actions regarding the rental adjustment particularly demonstrate that Respondent was not dealing fairly and in good faith with Appellant.  Respondent’s officials knew before entering into the lease that the lease overstated the interior square footage—and were, in fact, responsible for the error—and knew Appellant intended that the stated rent would be for the space fitted out to Respondent’s requirements whatever square footage resulted (Findings 9, 11-14).  Nevertheless, they chose to ignore Respondent’s construction manager’s advice (Finding 14) and made no effort to resolve the issue before the contracting officer accepted Appellant’s offer without raising any question regarding the square footage of the new postal space (Findings 8, 9, 11-14).  Instead, they waited to demand a rent reduction until Appellant was deeply and irreversibly committed to renovation of his building (Findings 21, 25) and unable to resist their demand without derailing his entire project.

            Respondent’s conduct was wrongful and breached its implied covenant of good faith and fair dealing under the lease.  It was coercive, and, accordingly, we conclude that Appellant’s agreement to the Lessor Improvement Agreement was obtained by duress that renders the agreement not binding upon Appellant.  See Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1330-1331 (Fed. Cir. 2003), cert. denied, 541 U.S. 987 (2004); Aircraft Assocs. & Mfg. Co. v. United States, 174 Ct. Cl. 886, 898, 357 F.2d 373, 379 (1966).

            The appeal is sustained.  Appellant is entitled to rent at the rate agreed to in the September 5, 2000 lease and to a retroactive adjustment back to the lease commencement date.  Calculation of the back rent and Contract Disputes Act interest thereon and negotiation of the additional costs to meet Respondent’s requirements are remanded to the parties.^[1]

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]  We express no view whether the $165,000 figure included in the Lessor Improvement Agreement reflected, understated or overstated Appellant’s entitlement to construction costs for Respondent’s additional requirements.