Care Realty v. Lakeview, et al.

2012 DNH 061

• Court: District Court, D. New Hampshire
• Decided: March 29, 2012
• Docket: 10-CV-095-SM
• Status: Published

Opinion

Care Realty v . Lakeview, et a l . 10-CV-095-SM 3/29/12 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Care Realty, LLC; and THCI Company, LLC, Plaintiffs

v. Case N o . 10-cv-95-SM Opinion N o . 2012 DNH 061 Lakeview Neurorehabilitation Center, Inc.; Lakeview Management, Inc.; and Lakeview Neurorehab Center Midwest, Inc., Defendants

O R D E R

This suit was brought to resolve an issue left unaddressed

in earlier litigation between the parties. See Lakeview Mgmt.,

Inc. v . Care Realty, LLC, Case N o . 07-cv-303-SM. In the earlier

suit, the court determined that the defendants (collectively

referred to as “Lakeview”) effectively exercised an option to

extend commercial leases on neurorehabilitative facilities it

operated in New Hampshire and Wisconsin.1 The court also found

that plaintiff (“THCI”) behaved inequitably and breached its

contractual obligation of good faith and fair dealing under the

lease, such that THCI was estopped from invoking a default

provision in the lease that otherwise might have precluded

1 The Amended Leases at issue are interrelated and identical in every material respect. For ease of reference, the parties, leases, and facilities will be referred to as if there is a single plaintiff, defendant, and lease. Lakeview’s ability to extend the lease term. The parties now

return to resolve a dispute about the applicable “Base Rent” owed

under the lease during the extended term.

The case was tried to the court on two claims related to

determining the applicable Base Rent (Count I , seeking a

declaratory judgment, and Count II seeking specific performance)

while the remaining claims (related to damages) were reserved for

future resolution, if necessary.

Pertinent Facts

An extended recitation of facts previously found relevant to

this overall dispute appears in the court’s decision in the

earlier case.2 That factual record provides context for this

dispute, but the discussion here will focus on those facts

critical to resolving the pending issue - determining the

applicable Base Rent.

THCI purchased the leased premises and assumed the original

lessor’s rights and obligations under the lease. After gaining

some experience administering the lease, THCI thought Lakeview

was improperly calculating one of the components of the total

2 Lakeview Mgmt., Inc. v . Care Realty, LLC, 2009 WL 903818 (D.N.H. March 3 0 , 2009).

2 rent due - referred to in the lease as “Additional Rent.” THCI

so informed Lakeview, but Lakeview disagreed, contending that the

formula it was using to calculate Additional Rent was correct

(based upon a definitional modification alleged to have been

agreed to by the prior landlord, before THCI acquired the

property). THCI did not formally press the matter and did not

notice a default under the lease. Rather, it sat on its claim,

intending to bring it up only if Lakeview attempted to exercise

its option to extend the lease term (or after the period in which

Lakeview was required to exercise its option expired). That i s ,

THCI determined not to put Lakeview on notice of a default

condition, at least not in a way that would permit Lakeview to

either cure the default or seek legal relief (to determine

whether a default condition actually existed), in time to

exercise its renewal option.

The lease was for a “Fixed Term” of ten years, terminating

on September 3 0 , 2007, but subject to Lakeview’s unilateral right

to extend the term for three successive periods of five years

each. Lakeview could exercise its option to extend the term by

giving THCI written notice “of each such extension” within a

defined time window - at least 180 days, but not more than 360

days, before expiration of the Fixed Term (or an extended term if

the option had previously been exercised). Lakeview’s option

3 rights are set out in Article 1.4 of the lease, which provides,

in pertinent part:

During each effective Extended Term, all of the terms and conditions of this Lease shall continue in full force and effect, except that the Base Rent for each such Extended Term shall be the greater of (a) the fair market value rent for the Leased Property performed by an appraiser mutually acceptable to the Lessor and the Lessee, as of the first day of each of the Extended Terms or (b) The Base Rent in effect immediately prior to the expiration of the preceding term. Said Base Rent shall be determined concurrently with the Lessee’s giving of the Extension Notice to the Lessor. (emphasis added)

As the matter stands, then, Lakeview validly exercised its

option to extend the lease term on March 1 6 , 2007, within the

described window. THCI will not be heard to argue that the lease

could not be extended, or was not extended, because a default had

“occurred and was continuing.” (Article 1.4) That issue was

resolved against THCI in the earlier litigation.

In this litigation, the parties are at odds with respect to

what Base Rent applies during the extension period. Lakeview

says the Base Rent is equivalent to the Base Rent in effect

immediately prior to expiration of the preceding term. THCI, on

the other hand, claims that the appraisal process referred to in

Article 1.4 must be completed before the Base Rent can be

determined, since the Base Rent “shall be” the “greater of” fair

4 market value rent as determined by a mutually agreed upon

appraiser, or the preceding term’s Base Rent.

Discussion

A lease is construed in accordance with familiar principles

applicable to contract construction. Interpretation of a lease

is ultimately a question of law for the court, and the intent of

the parties to a lease is generally determined from the plain

meaning of the language used and the lease as a whole. See

generally J.G.M.C.J. Corp. v . Sears, Roebuck & Co., 391 F.3d 3 6 4 ,

368 (1st Cir. 2004) (citing cases). The applicable provisions of

Article 1.4 are generally straightforward. The Base Rent due

during an extended term is the greater o f :

a) “The fair market value rent,”

“to be determined by an appraisal,”

“performed by an appraiser mutually acceptable to the Lessor and Lessee.”

or

b) “the Base Rent in effect immediately prior to the expiration of the preceding term”

and

c) “Said Base Rent shall be determined concurrently with the Lessee’s giving of the Extension Notice to the Lessor.” (emphasis added)

5 Ordinarily, one would expect that, within a reasonable time

after Lakeview gave notice of its exercise of the option to

extend the lease term (March 1 6 , 2007), the parties would have

had a discussion about either continuing the current Base Rent

into the extended term, or arranging for a mutually acceptable

appraiser to generate an appraisal to set the “fair market value

rent,” so a comparison could be made and the “greater” amount

determined. That did not happen, of course, and it is clear why

it did not happen.

To be sure, the parties’ strained relationship, and THCI’s

penchant for obfuscation and avoidance muddied the factual

waters. Nevertheless, it is clear, and I so find, that THCI’s

disregard of its contractual duties of good faith and fair

dealing, and its bad faith, animated its conduct from the time it

decided to refrain from giving Lakeview notice of the claimed

default condition until litigation began in the Fall of 2007.

THCI was determined not to proceed under the existing contractual

terms and endeavored to thwart Lakeview’s exercise of its option

to extend the lease term. THCI was committed to restructuring

the relationship with Lakeview on decidedly more favorable terms,

or replacing Lakeview altogether. It had no interest in

extending the then current lease, and no intent to acknowledge,

6 even contingently, that the option to extend had been validly

exercised.

Lakeview exercised its option to extend the term, but THCI,

for reasons satisfactory to i t , determined to follow a course of

action completely divorced from that called for under the lease.

First, it adopted the view, incorrectly as it turns out, that it

had succeeded in defeating the lease extension by invoking the

Additional Rent default after the option period expired. But,

rather than declare the lease terminated as of the impending

expiration date, it merely “reserved its rights.” Lakeview, 2009

WL 903818 at * 1 5 . THCI then intentionally refused to address the

lease provisions related to setting the Base Rent for the

extended term. THCI took the position that Lakeview was required

to enter into an entirely new contractual arrangement, or there

would be no relationship.

Lakeview, for its part, also hoped for a new agreement, but

one more favorable to it then the current arrangement. As it

became increasingly clear after April of 2007 that THCI had no

intention of modifying the existing lease terms in a way more to

Lakeview’s liking, and was actually insisting upon an entirely

new lease, Lakeview requested that the appraisal process

contemplated by the lease be carried out:

7 “ . . . we need to move on getting fair market real estate appraisals. We had hoped that we could avoid the costly appraisal step. We have identified the certified appraisers in both areas [NH and WI] and if you could identify 5 that we could choose from we should have a mutually agreed upon appraiser, attached is the list,”

Ex. L875, Email from McDermott (Lakeview) to Torzelli (THCI),

dated May 2 , 2007. That email plainly invoked the Article 1.4

appraisal process. McDermott referred to the need to get an

appraisal, to the “appraisal step” as a costly preexisting

obligation it hoped to avoid, and to the requirement that the

appraiser be “mutually agreed upon” - all of which tracks the

language of Article 1.4. THCI understood that Lakeview was

invoking the Article 1.4 appraisal process for the purpose of

setting the Base Rent for the first extended term. As THCI

concedes, it “did not accept [Lakeview’s] invitation to conduct a

fair market appraisal as set forth in [the] email.” THCI’s Post-

Trial Memorandum (document n o . 60) at 8 . Subsequently, in June

of 2007, Lakeview again sought to have THCI cooperate in having

an appraisal done, and again THCI refused.

On August 3 0 , 2007, as expiration of the original term and

commencement of the extended term approached, Lakeview, through

counsel, put THCI on formal notice that it would pay the current

Base Rate in the extended term:

8 [Lakeview] previously requested [THCI’s] cooperation in selecting an appraiser to identify the current market value of the Lease. To date, [THCI] has not responded to [Lakeview’s] requests. Accordingly, unless or until [Lakeview] receives a timely and appropriate response to these requests it shall continue payment of the current Base Rent.

Ex. 3F. THCI, as was its apparent custom, did not respond.

The Base Rent adjustment provisions in Article 1.4 are

reasonably clear. The language contemplates that Base Rent

during an extended term will either remain the same as in the

previous term or increase, if a fair market appraisal, performed

by an appraiser mutually agreed upon by the parties, supports a

higher rate. In no event will the extended term’s Base Rent be

less than the current term’s Base Rent. Therefore, since the

Base Rent can only increase as a result of the appraisal process,

that process can only benefit the lessor - THCI.

Here, THCI consciously decided not to avail itself of that

process, preferring instead to assume (or posture) that it was no

longer bound by the lease terms, because that position better

facilitated its demand that Lakeview agree to completely

different terms. That position was consistent, as well, with its

intent not to continue under the existing lease unless compelled

to do s o . Not only did THCI not invoke the appraisal process

9 that could only benefit THCI, but when the lessee sought to have

an appraisal done (which could only increase the Base Rent), THCI

still refused. THCI’s argument to the effect that it wished to

avoid the costs of an appraisal while negotiating new terms rings

hollow - THCI never communicated that thought to Lakeview, and no

internal THCI documents support i t . Why THCI refused to

acknowledge or cooperate in the appraisal process is evident - it

simply was not interested in determining a fair market rate

adjustment in the context of the existing lease. It wanted a

completely new deal, at a substantially higher rental rate,

without regard to what an appraised fair market value might

support.

THCI was perfectly willing to ignore the existing lease, or

perfectly willing to bank exclusively on the validity of its own

conclusion that the existing lease term had not been extended and

so it was relieved of its lease obligations with respect to an

extended term. That position was, of course, based upon its

earlier inequitable conduct - THCI thought it had gotten away

with its “trump” of Lakeview’s right to exercise the option to

extend. See Ex. L000754. And, that position was wrong.

Needless to say, perhaps, but THCI cannot be heard to

complain about the absence of a fair market appraisal where the

10 lease it spurned provided for one, and when it could very well

have had one for the asking, but neither asked, nor agreed to

cooperate in that process when Lakeview asked. THCI staked out

its ground when it behaved inequitably, when it declined to

invoke the appraisal process itself, and when it refused the

appraisal process when it was offered. Demanding that process

only after its rascality was established, its conclusions exposed

as erroneous, and well beyond any period that might conceivably

be called “contemporaneous” with Lakeview’s exercise of the

option to extend, is of course a meritless demand.

Although extensively discussed by the parties, resolution of

this dispute does not turn on whether THCI “waived” or

“forfeited” its right to invoke the appraisal process - at least

not in the classic sense. Nothing in Article 1.4 suggests that

an appraisal is required. Whether an appraisal is done or not

done is a matter committed, as a practical and common sense

matter, to the discretion of the lessor, THCI. Because only THCI

stands to benefit from an appraisal relative to setting an

extended term’s Base Rent, and because such appraisals are not

inexpensive, THCI surely could not, under the provision, be

forced to undertake such a costly endeavor. That would be

particularly so under circumstances in which THCI considered the

11 current Base Rate not only satisfactory, but undoubtedly higher

than a fair market value appraisal might justify.

The parties’ intent is manifested by the plain meaning of

the escalation language used in Article 1.4, and that intent is

clear - the lessor is entitled to a Base Rate increase during an

extended term if a fair market appraisal, performed by a mutually

agreed-upon appraiser, supports a higher rate which is determined

concurrently with the lessee’s notice of extension. But, the

lessor is not required t o , and cannot be compelled to complete

the process if the lessor is satisfied with the then-current Base

Rent amount. Article 1.4 permits the lessor to exercise its own

judgment about its own interests, and to decide not to exercise

its option to incur substantial costs associated with an

appraisal of doubtful potential value. Indeed, the lessor may

exercise its discretion not to undergo an appraisal process for

any reason at all. Making such a decision is not properly

described as a “waiver” or “forfeiture,” but rather, an election.

Judge (and Professor) Keeton explained the dispositive legal

point in Taylor v . Marsh, 624 F. Supp. 1042 (D. M a . 1985):

A waiver is the intentional relinquishment of a known right.

12 Professor John Ewart in his writings on the distinction between waiver and election identified election as the choice of one of two or more courses each of which has distinct legal consequences. J. Ewart, Waiver Distributed Among the Departments: Election, Estoppel, Contract, Release, 7–9, 84–87 (with an Introduction by Roscoe Pound 1917). Having chosen a particular course, a party is then foreclosed from pursuing any other course, even if at the time of his choice the party was not aware of the consequences.

Professor Ewart explained this aspect of election, that a party is bound by the consequences of his choice even though he may not have known them at the time the choice was made, by means of the following example:

we may take as illustrative . . . the case of a landlord who knew that a sub-lease had been executed but was unaware that, for that reason, he had a right to elect to terminate the lease. If under those circumstances he should receive, or demand, or distrain for rent subsequently falling due, he would be held to have elected to continue the tenancy; and his election would be irreversible notwithstanding his lack of knowledge.

Id. at 7 5 . See also id. at 85–86.

Although courts have not adopted Professor Ewart’s terminology, his observation that waiver has been used in very different senses is apt. Some confusion, which may have affected the course of the present litigation, may be avoided by distinguishing between “waiver” in the sense of “voluntary relinquishment of known right” (“strict waiver”) and “waiver” in the sense that Professor Ewart calls “election” (“waiver by election”).

Id. at 1044-45.

That is precisely what THCI did - it elected, for reasons

satisfactory to itself, to follow a different course and not

obtain an appraisal in accordance with Article 1.4. It was not

13 contractually obligated to obtain an appraisal, and failing to do

so visited no harm on the lessee. After all, the lessee can

hardly complain about not being exposed to a process that could

only result in maintaining or increasing the current rent

structure.

Whether THCI’s reasons for following another course were

ill-advised, erroneous, contrary to its own economic interests,

or a consequence of its own misconduct or ignorance, is no more

relevant than if those reasons were sound, justified and

consistent with principles of good faith. It matters only that

THCI, for reasons satisfactory to i t , made the decision to follow

that course (declining the appraisal process), and that it was

not misled or wrongly induced to do so (it was n o t ) .

Having chosen its course, having decided to ignore the

appraisal process provision after Lakeview exercised its option,

having decided to bank on its own conclusions about the legal

enforceability of that option exercise, and having decided to

pursue an effort to obtain a restructuring of the commercial

relationship completely divorced from the existing lease, THCI is

foreclosed from revisiting those choices and making different

ones now. Indeed, as a practical matter, THCI was likely

foreclosed well before October 1 , 2007, when the extended term

14 began, for at least two reasons beyond the fact that it declined

the appraisal process in May and June: 1 ) an appraisal process

begun in September would not likely allow for a determination of

Base Rent “concurrently” with Lakeview’s March notice of

extension; and 2 ) by that time, Lakeview undoubtedly was

prejudiced by THCI’s failure to invoke or participate in the

appraisal process, and/or its indifference to the process. As

M s . McDermott testified, these neurorehabilitative institutions

are highly regulated and complex operations. Fundamental costs,

like Base Rent, must be determined in a timely manner to allow

other fiscal adjustments that are dependent in myriad ways on

that Base Rent (e.g., budgeted public reimbursement rates), all

of which is critical to the continued delivery of medical care to

needy patients.

Conclusion

For the above reasons, judgment shall enter in favor of

defendants on Count I (Declaratory Judgment) and Count III

(Breach of Contract - Specific Performance). Counts I I , IV, and

V all relate to damages claims that are dependent upon success on

Counts I or III. Accordingly, those claims are dismissed. This

decision shall constitute the court’s findings of fact and

rulings of law. Fed. R. Civ. P. 52(a)(1). If either party

believes this decision leaves specific, and pertinent, requests

15 for findings of fact or rulings of law unaddressed, that party

may, by pleading filed within fourteen (14) days of the date of

this order, identify those specific requests and specific rulings

will be issued.

SO ORDERED.

Steven J./McAuliffe Jnited States District Judge

March 2 9 , 2012

cc: Kristen R. Blanchette, Esq. Christopher H . M . Carter, Esq. Daniel M . Deschenes, Esq. Ovide M . Lamontagne, Esq. Jonathan M . Shirley, Esq. Daniel E . Will, Esq. Leigh S . Willey, Esq.