May 6, 2019

NATIONWIDE POSTAL MANAGEMENT v. UNITED STATES POSTAL SERVICE

PSBCA No. 6645

APPEARANCE FOR APPELLANT
Glenn L. Smith, Esq.
Wheeler Upham, P.C.

APPEARANCE FOR RESPONDENT
Barbara H. Cioffi, Esq.
United States Postal Service Law Department

OPINION OF THE BOARD

Appellant, Nationwide Postal Management (Nationwide), seeks damages resulting from Respondent, United States Postal Service, having remained in possession of a post office more than two years after its lease expired.  Deciding this case on the written record without an oral hearing pursuant to 39 C.F.R. § 955.12, we rule in favor of Nationwide, and award it $118,571.80 plus Contract Disputes Act interest.

Findings of Fact

1. The parties’ predecessors¹ entered into a 20-year lease for the Wyandotte, Michigan Post Office in 1965.  The lease included a series of five-year option periods.  (AF 1). 
2. The building consists of 14,254 square feet of net interior space (sf),² approximately a quarter of which was used for retail, with the rest used primarily as a warehouse (AF 1; Corson Decl., ¶ 9; Coe Decl., ¶ 7).³
3. In 2006, J. Leonard Spodek, doing business as Nationwide Postal Management, purchased the property, and became the lessor (App. Exhs. 32-34; AF 4).  In 2010, the Postal Service exercised the final, five-year option, expiring on April 30, 2015 (AF 4).
4. Under the lease, which did not include a holdover provision, Nationwide paid the first $5,000 of annual real estate taxes, with the Postal Service reimbursing the remainder.  When the lease expired, the annual rent was $20,000, or $1.40 sf for the interior space.  (AF 1 at 1, 4).
5. As the end of the final option period approached, in September 2014, the Postal Service had its real estate service provider, CBRE Group, Inc., conduct a market survey analyzing the value of comparable rented space.  The survey adjusted for several factors, but not for the lease’s duration.  The CBRE Market Survey concluded that the rental market value for the Wyandotte Post Office was between $11.36 and $13.36 sf, settling on $12.36 sf.  (AF 5, 44).
6. Nationwide and CBRE (acting as the Postal Service’s agent) then negotiated for a successor lease (AF 6-8, 10-12, 15, 19, 22; App. Exhs. 6, 11).  On March 31, 2015, a Postal Service official⁴ directed CBRE to “go ahead with the lease” at $13.50 sf with 3% annual increases for a five-year term.  Although a lease on those terms was prepared, it was never signed.  (AF 7-8; App. Exhs. 6, 11).
7. The 1965 lease expired on April 30, 2015.  However, the Postal Service did not vacate the premises, beginning a holdover the next day (Complaint, ¶ 1; Answer, ¶ 1).
8. In July 2015, the Contracting Officer sent an internal email explaining that when the Postal Service holds over after a lease expires, “the rental rate should be the same as the rental rate that was being paid under the expired lease.” (App. Exh. 7).  On that premise, from May 1, 2015, until April 30, 2016, the Postal Service paid Nationwide $1.40 sf based on the rent under the now-expired lease (AF 41; App. Exhs. 8, 10).
9. In November 2015, the Postal Service ordered a market rent appraisal for the Wyandotte Post Office.  The Postal Service instructed the appraiser, Valbridge Property Advisors, to base the market rate on both a five-year lease and a ten-year lease, but not on a month-to-month occupancy or on an occupancy lasting for a duration within the occupant’s control.  The Postal Service ordered the appraisal to be completed in one month.  (AF 23; App. Exh. 3). 
10. On March 4, 2016, Nationwide submitted a $161,508 invoice seeking holdover compensation for May 2015 through February 2016.  The amount was based on a total of $15.00 sf:  $13.60 sf, in addition to $1.40 sf that the Postal Service had paid to that date.  (AF 30).
11. On April 12, 2016, Valbridge issued the appraisal that the Postal Service had ordered in November 2015.⁵  On April 18, 2016, a Postal Service real estate specialist and an appraisal administrator approved the Valbridge Appraisal without change.  (AF 34; App. Exh. 3; Resp. Exh. 3). 
12. The Valbridge Appraisal evaluated the Wyandotte Post Office entirely as warehouse space.  The appraisal concluded that both $8.15 sf and $8.17 sf represented market value, without explaining the discrepancy.  This conclusion was based on rent for a five-year triple net lease (tenant responsible for maintenance, taxes, and insurance).  (AF 34 at 139 ($8.17), 142; Resp. Exh. 3 at 74, 89 ($8.15); App. Exh. 3 at 28). 
13. On April 20, 2016, Nationwide informed the Postal Service that it deemed the Postal Service to be a holdover tenant on a triple net basis.  Nationwide also stated that its receipt of any payments from the Postal Service was without prejudice to its legal rights and remedies for additional compensation.  (AF 36). 
14. Also on April 20, 2016, despite its pending invoice based on $15 sf, Nationwide sent the Postal Service an email seeking $16 sf for the holdover period.  It stated:  “The Postal Service is currently a holdover tenant at this building and has been so since April 2015.  As a holdover tenant your rental rate is $16 per sq. ft. (double your own appraisal) with the Postal Service responsible for all maintenance, utilities, taxes and insurance.”  Nationwide also stated that the Postal Service should consider its email as a claim under the Contract Disputes Act, and requested a contracting officer’s final decision.  (AF 38).
15. On May 3, 2016, the Contracting Officer responded to Nationwide’s email by stating that the Postal Service intended to pay a total of $8.17 sf, retroactive to May 1, 2015, while disputing the remainder of the amount requested.  The Contracting Officer stated that because the disputed amount exceeded $100,000, Nationwide should provide a certification if it wanted to pursue the matter as a Contract Disputes Act claim.  He also acknowledged that the disputed amount would increase each month that the holdover continued.  (AF 38).
16. On May 23, 2016, the Postal Service paid Nationwide $104,148 for holding over between May 1, 2015, and April 30, 2016.  Despite the Contracting Officer’s May 3 conclusion that the Postal Service would pay $8.17 sf, this payment represented $8.15 sf (less $1.40 sf, which the Postal Service had paid).  (AF 38, 41; Resp. Exh. 1 at 4).
17. On June 8, 2016, Nationwide certified its April 20, 2016 invoice as a claim seeking $228,064, based on $16 sf (AF 38).
18. On June 27, 2016, the Contracting Officer issued a final decision denying that claim.  The Contracting Officer stated that the Postal Service would continue to pay $8.15 sf for the duration of its holdover, expected to end by April 30, 2017.  The Contracting Officer also expressed the Postal Service’s position that by holding over, Nationwide “is entitled to damages in the amount of the market rent value (or reasonable rental value) of the premises for the holdover period.”  The Contracting Officer rejected Nationwide’s position that the Postal Service was responsible for maintenance and insurance during its holdover.  He stated that if this were not the case, the market rent value would be lower.  (AF 44). 
19. On July 1, 2016, Nationwide appealed the final decision to the Board (AF 45).
20. On May 16, 2017, Integra Realty Resources issued a Market Rent Study ordered by Nationwide.  The Integra Study concluded that rent for a month-to-month tenancy should exceed rent for a five-year lease by 25%-30%.  The Integra Study did not address the specific market rental rate of the Wyandotte Post Office during the holdover period.  (App. Exh. 47).
21. The Postal Service vacated the Wyandotte Post Office on June 2, 2017, but did not notify Nationwide that it had done so until June 9, 2017 (App. Exh. 4; Resp. Exh. 6).
22. In July 2017, Treadwell & Associates, Inc., issued an appraisal ordered by Nationwide.  The Treadwell appraisal, considering the property as commercial space, identified $16.50 sf as market rent based on a modified gross lease under which the landlord pays all real estate taxes.  To reach this conclusion, Treadwell multiplied an $11 sf market rate by 150% to account for occupancy lasting for an uncertain duration within the occupant’s exclusive control.  (App. Exh. 35; Treadwell Aff., ¶ 3). 
23. In response to Postal Service criticisms identified in litigation submissions (see Corson Decl., November 6, 2018), Treadwell lowered its market value opinion to $13.50 sf, based on a market valuation of $9 sf multiplied by a 50% premium (Treadwell Aff., ¶¶ 5-7).  The reduction accounted for the lessor’s obligation, based on the allocation in the expired lease, to pay $5,000 for real estate taxes rather than what he identified as the full annual tax liability of $33,789.99 (id., ¶ 3).  Treadwell opined that this holdover differs from a month-to-month tenancy because the Postal Service remains in sole control of the duration of its occupancy, justifying the 50% increase that he continued to apply to what otherwise would be market rent (id., ¶ 5). 
24. The Postal Service submitted a February 13, 2018 declaration from John Logan, a real estate specialist contractor who reviewed the Valbridge Appraisal and conducted some additional market analysis of his own.  Mr. Logan agreed with the Valbridge Appraisal that fair market rent is $8.15 sf.  (Logan Decl., ¶¶ 10-12). 
25. Attached to Mr. Logan’s declaration is an unsworn April 11, 2017 letter from one of the authors of the Valbridge Appraisal.  It stated:

    A rental premium for holdover tenancy could be warranted depending on the market.  I equate a holdover tenancy as being leased on a month to month basis.  Typical properties in high demand areas will receive a premium for a short term lease.  Based on the market conditions, building’s location and physical characteristics of the building, it is my opinion a rental premium would not be warranted.

    (Logan Decl., Attachment A at 2).

26. The Postal Service submitted a February 16, 2018 declaration from Charles Corson, an appraisal administrator for the Postal Service.  Mr. Corson analyzed the appraisals and studies previously submitted by the parties.  (Corson Decl., ¶ 4).  Considering the property comparable to a junior-sized anchor tenant, he concluded that the Treadwell appraisal is unreliable, and that the market rent should be less than $10 sf, if properly adjusted (id., ¶¶ 16, 30, 38).
27. Nationwide submitted a November 7, 2018 declaration from James T. Coe, who has considerable experience in postal real estate (Coe Decl., ¶¶ 2-4 and Exhibit A thereto).⁶  Mr. Coe analyzed the appraisals and studies (id., ¶¶ 5-8), and concluded that reasonable rental value for the Wyandotte Post Office for a five-year lease term was $9.75-$10.25 sf (id., ¶ 9).  He also opined that a premium should be applied to account for the short-term, indefinite duration of the Postal Service’s continuing occupancy without a lease, noting that Nationwide lacked an effective mechanism to evict the Postal Service to end its holdover.  Mr. Coe’s calculation of the reasonable rental value during the holdover period with this factor considered is $13.85 sf.  (Id., ¶ 10).

Decision

The Postal Service is not entitled to remain in possession of a post office after its lease expires.  Its continued occupancy of the Wyandotte Post Office prevented Nationwide from being able to use its property as it saw fit, and breached the duty implied in the lease to vacate the premises at its expiration.  See Prudential Ins. Co. of Am. v. United States, 801 F.2d 1295, 1299-1300 (Fed. Cir. 1986).  We determine the damages resulting from that breach.
We start by highlighting the posture of this dispute.  The Postal Service’s unilateral ability to hold over without a legal right to do so but without significant risk of eviction (as explained below) presents somewhat similar implications to the government’s unilateral exercise of a termination for convenience clause.  That exercise, which is within the government’s sole control, requires the government to compensate the other contracting party “fairly and to make it whole.”  Nicon, Inc. v. United States, 331 F.3d 878, 885 (Fed. Cir. 2003); Elton T. Colvin, Jr., PSBCA No. 6220, 09-2 BCA ¶ 34,310 at 169,486.  We apply that same gloss to this situation, and endeavor to treat Nationwide fairly and make it whole for the Postal Service’s continued occupancy of its property for over two years without legal right.
If the Postal Service were a commercial, non-government tenant, eviction would have been available to Nationwide when the Postal Service failed to vacate at the lease’s expiration.  However, the parties agree that eviction of the Postal Service was not available to end its holdover.  Indeed, courts generally have reached that conclusion based on a balancing analysis, holding that the important public policy of uninterrupted postal service renders money damages, rather than eviction, as the appropriate remedy.  See, e.g., Nationwide Postal Mgmt. v. United States, No. 98–CV–401 RNC, 2000 WL 502619 (D. Conn. 2000); Weissman v. U.S. Postal Service, 19 F. Supp.2d 254, 262 (D. N.J. 1998); Kerin v. U.S. Postal Service, Civ. 2:90CV367(TPS), 1994 WL 1720688 (D. Conn., Oct. 14, 1994), aff'd in part, rev'd in part on other grounds, 116 F.3d 988 (2d Cir. 1997); but see Jackson v. U.S. Postal Service, 611 F. Supp. 456 (N.D. Tex. 1985) (based on state law, allowing eviction against the Postal Service).  We analyze the resulting damages accordingly.
Both parties ask the Board to measure the Postal Service’s liability, at least in part, by determining the “fair value” or “reasonable value” of the property for the holdover period.  We will apply that measure of liability as a viable remedy.  See J. Leonard Spodek d/b/a Colorado Postal Holdings, PSBCA No. 6146, 10-2 BCA ¶ 34,547; Rupert v. Gen. Serv. Admin., GSBCA No. 10523, 93-1 BCA ¶ 25,243; Prudential Ins. Co. of Am. v. United States, 7 Cl. Ct. 710, 714-15 (1985), aff’d as modified, 801 F.2d 1295 (Fed. Cir. 1986).
To analyze fair value, we must consider the nature of the Postal Service’s holdover occupancy.  We agree with the parties that rent in comparable leases can be used to demonstrate fair value.  However, the Valbridge Appraisal’s analysis was based on a fictitious five-year lease term.  This holdover does not involve a five-year lease term, or any lease term at all.  We therefore consider the Valbridge Appraisal’s analysis to be under-valued.  We also do not view the Postal Service’s holdover as creating a month-to-month periodic tenancy which readily would allow eviction of the tenant with proper notice.  Both parties have premised their positions on a mutual understanding that eviction is not possible.  Without a viable eviction remedy, the Postal Service’s continuing occupancy is far more uncertain in duration, and out of the lessor’s control.⁷ 
Nationwide argues that the uncertain duration of the holdover requires application of a rental “premium”.  We agree that the weight of the evidence presented in this case compels our conclusion that this situation increases the fair value owed for the holdover occupancy.  Compare App. Exhs. 36, 47; Treadwell Aff.; Coe Decl. with Logan Decl., Attachment A.  The Postal Service is liable to compensate Nationwide accordingly.  See Asset # 20024 LLC c/o Nationwide Postal Management, PSBCA No. 6249, 09-2 BCA ¶ 34,283.  In doing so, we reject the Postal Service’s argument that awarding a so-called premium would impose an impermissible penalty or punitive damages.  Rather, to determine fair value, we shall consider the indefinite duration of the holdover, which is controlled by the Postal Service, as a factor with which to determine holdover damages necessary to make Nationwide whole.  See Rupert, 93-1 BCA ¶ 25,243.⁸
With this in mind, we start our monetary analysis by reiterating the valuations presented by the parties:

(1) $8.15/$8.17 sf for a five-year term, per Valbridge Appraisal with which the Contracting Officer and Mr. Logan agree (Findings 11, 12, 18, 24); 
(2) $12.36 sf, for an unidentified term, per CBRE Market Survey (Finding 5); 
(3) $13.50 sf for a five-year term, per agreed but unexecuted March 2015 lease (Finding 6); 
(4) $13.50 sf, for an uncertain duration controlled by the occupant, per adjusted Treadwell Appraisal (Finding 23);  
(5) $13.85 sf, for an uncertain duration controlled by the occupant, per Mr. Coe (Finding 27); 
(6) $16 sf, per the claim (Findings 14, 17).

In considering these disparate valuations, we acknowledge the parties’ disagreement about the property’s usage for purposes of adjusting comparable rents.  The Valbridge Appraisal presumed that warehouse space is the most appropriate comparable use (Finding 12).  As a quarter of the interior of the property involves retail space (Finding 2), which is more valuable than warehouse space, those assessments undervalue the property (Treadwell Aff. ¶ 6; Coe Decl., ¶ 7; Corson Decl., ¶ 8).  The Treadwell Appraisal considers the property as commercial space (Finding 22) and Mr. Corson (of the Postal Service) considers the property comparable to a junior anchor-sized tenant (Finding 26).  We find these more appropriate comparables than a warehouse.⁹
We find the parties’ analyses somewhat confused and inconsistent concerning how maintenance and real estate tax responsibility should be considered in the fair value analysis.  However, in the end, the parties appear to assess those responsibilities on the same basis as had been allocated in the expired lease, and we will do the same for purposes of determining fair holdover value in this case.¹⁰
Of the fair value opinions presented to us, we find Mr. Coe’s valuation a reasonable starting point.  His analysis is even-handed, being critical of both parties’ appraisals.  He analyzed the nature of the space correctly, and explained how the Postal Service’s control over the holdover’s duration affects valuation.  Mr. Coe applied a 35% “premium” to a rental value of $10.25 sf yielding his opinion that $13.85 sf represents fair value for the holdover.  However, we find the need to modify both elements of Mr. Coe’s calculations.
Mr. Coe calculated the holdover rate, before adjusting for a 35% “premium”, within a range between $9.75 sf and $10.25 sf.  He did not, however, explain how he arrived specifically at that valuation.  Rather than utilize the middle of that range - $10.00 sf – we begin by applying the $9.00 sf valuation presented by the updated Treadwell analysis (Finding 23), a figure that is somewhat close to the Postal Service’s own position of $8.15 sf.  We then apply an upward adjustment of 30%, rather than 35% as presented by Mr. Coe, to that $9.00 sf figure.  We reduce Mr. Coe’s adjustment because his opinion is premised on Nationwide’s absolute inability to have evicted the Postal Service.  While Nationwide’s ability to evict the Postal Service is highly questionable based on the balancing analysis typically performed by the courts, eviction of the Postal Service does not appear to be proscribed absolutely.  Thus, Mr. Coe’s analysis, which relies on an absolute inability to evict, must be adjusted downward.¹¹ We therefore award Nationwide damages based on $11.70 sf, calculated as $9 sf adjusted upwards by 30%.  Calculations on that basis follow.
The holdover period began on May 1, 2015 (Finding 7), but the end of that period is disputed.  The Postal Service argues that holdover damages should cease on June 2, 2017, the day it vacated the Wyandotte Post Office.  However, the Postal Service did not notify Nationwide that it had vacated until June 9, 2017.  (Finding 21).  Nationwide argues that it is entitled to holdover damages for the entire month of June.  Nationwide does not explain its theory, but we infer that it involves a period of notice under a month-to-month type tenancy.   
Compensation unquestionably is due for the period of the Postal Service’s actual occupation.  Beyond that though, as the General Services Administration Board of Contract Appeals has explained:

Without a lease the [owners] had no way of anticipating when the Government’s occupancy would end unless the Government told them.  Under these circumstances the Government had a duty to make certain that the [owners] knew when it would vacate the premises.  It also had a duty to give notice a reasonable period of time in advance of the day it intended to vacate.  There is little precedent for how long this notice period should be.  50 Am. Jur. 2d Landlord and Tenant § 619 (the tenancy continues when tenant at will abandons premises without notice.)

Isadore and Miriam Klein, GSBCA No. 6614, 6767, 84-2 BCA ¶ 17,273 at

86,007 (emphasis added).   
Although we do not believe that the Postal Service’s tenancy at sufferance can be equated to a month-to-month tenancy, we agree with the GSBCA that a holding-over government occupant owes a duty to notify the owner before it vacates, ending the holdover.¹²  In this case, the Postal Service did not provide notice that it would vacate at any time until after it had done so.  Nationwide argues that this failure to notify entitles it to holdover damages through the end of June.  We deem that a reasonable position given the Postal Service’s breach of this duty to notify, which would have been simple for it to satisfy.  Accordingly, we award holdover damages from May 1, 2015, through June 30, 2017.
As to the damages calculation itself, the Postal Service owes Nationwide the difference between $8.15 sf paid through June 2, 2017, and $11.70 sf which we award.  That $3.55 sf difference, when multiplied by 14,254 sf, yields damages owed of $50,601.70 per year.  Through the end of May, 2017, the holdover lasted two years and one month, which calculates to $105,501.08.¹³ 
The Postal Service paid Nationwide $8.15 sf for two days in June 2017 for an unpaid difference of $277.27, and paid nothing for the other 28 days in June for which we find entitlement.  This adds $13,070.72 for June 2017.¹⁴  In all, the Postal Service owes Nationwide $118,571.80.¹⁵ 
While a party in Nationwide’s position might be eligible for additional foreseeable damages,¹⁶ we reject its argument for Prompt Payment Act interest, the only additional measure of damages it seeks.  We agree with the Postal Service that at the time Nationwide’s April 2016 invoice was issued (the only invoice identified on which Prompt Payment Act interest could be based), the remaining holdover damages were disputed, precluding application of Prompt Payment Act interest.  See Inversa, S.A. v. United States, 73 Fed. Cl. 245, 247 (2006), aff’d, No. 2007-5110, 2007 WL 4467656 (Fed. Cir. 2007).  However, until the Postal Service pays Nationwide the $118,571.80 judgment ordered by this decision, it owes Contract Disputes Act interest from June 8, 2016, when Nationwide certified its claim.  The appeal is granted to that extent.
Finally, we briefly address three additional issues that the Postal Service raised.  The Postal Service emphasizes that it possessed the ability to condemn the Wyandotte Post Office property through the power of eminent domain.  It speculates that costs resulting from a condemnation would be less than holdover damages, which should limit recovery in this case. 
The Postal Service did not use its condemnation power, and did not identify the amount of a hypothetical resulting award.  A holdover gives rise to a breach of contract claim against the Postal Service acting in its proprietary capacity rather than a takings claim as would be the case had the Postal Service acted in the government’s sovereign capacity.  We therefore find the Postal Service’s argument legally unpersuasive, as well as being speculative.  See Stromness MPO, LLC v. United States, 134 Fed. Cl. 219 (2017); see also Piszel v. United States, 833 F.3d 1366, 1376 (Fed. Cir. 2016).  In any event, the owner of condemned property must be made whole by the government, the same principle we apply here.  See United States v. 674.54 Acres of Land, More or Less, Situated in Monroe and Pike Counties, Pa., 441 U.S. 506, 516 (1979).
The Postal Service argues that a considerable amount of deferred maintenance – maintenance tasks that Nationwide did not perform during the term of the expired lease – resulted in the property being in a condition that should lower its fair value.  It offered a similar argument for functional obsolescence of the property.  While we might credit these positions had they been proved along with a reasoned valuation reduction as a result, they have not been.  The Postal Service’s evidence in this regard is based entirely on hearsay, and a hearing was not conducted at which the property’s disputed condition could be determined by the Board.  No sworn testimony supports the Postal Service’s position.  While Nationwide also provided limited evidence in this regard, it did submit sworn testimony from Mr. Richter, its property manager, who testified that Nationwide always responded timely to maintenance requests (App. Exh. 50, ¶ 8; AF 35).  We therefore will not lower holdover damages based on maintenance deficiencies that were Nationwide’s responsibility, or based on functional obsolescence, neither of which have been proved.
Finally, the Postal Service argues that Nationwide conceded that fair holdover value was $8 sf, and should be precluded as a result of that concession from arguing for a higher valuation.  The Postal Service bases this position primarily on a statement in Nationwide’s claim: “[a]s a holdover tenant your rental rate is $16 per sq. ft. (double your own appraisal). . . .”  (Finding 14).  We do not read this statement as a concession that $8 sf represented appropriate holdover damages.  The statement merely noted that $16 sf is double $8 sf.  Even if Nationwide had taken the position that $8 sf represented fair value for the holdover period, it would not be bound by such a statement in this de novo proceeding.

CONCLUSION AND ORDER

The appeal is granted.  The Postal Service shall pay Nationwide $118,571.80, plus interest calculated under the Contract Disputes Act from June 8, 2016 until payment is made.

Gary E. Shapiro
Administrative Judge
Chairman

Alan R. Caramella
Administrative Judge
Vice Chairman

Diane M. Mego
Administrative Judge
Board Member