TRO Avenue of the Arts v. The Art Institute

• Court: Superior Court of Pennsylvania
• Decided: August 22, 2014
• Docket: 1670 EDA 2013
• Status: Unpublished

Opinion

J-A15017-14

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

TRO AVENUE OF THE ARTS, LP, IN THE SUPERIOR COURT OF PENNSYLVANIA Appellant

v.

THE ART INSTITUTE OF PHILADELPHIA, LLC,

Appellee Nos. 1670 EDA 2013

Appeal from the Judgment Entered May 6, 2013 In the Court of Common Pleas of Philadelphia County Civil Division at No(s): 2305 August Term, 2009

BEFORE: PANELLA, J., LAZARUS, J., AND JENKINS, J.

MEMORANDUM BY: JENKINS, J. FILED AUGUST 22, 2014

This is a dispute over the interpretation of a commercial lease. In

occupy a commercial building in Center City Philadelphia for ten years with

an

Near the end of the original ten year term, Tenant timely renewed the lease,

but the parties disagreed on the amount of rent that Tenant owed for the

Renewal Term.

to pay the full amount of Renewal Term rent. Following lengthy pretrial

1 J-A15017-14

calculations and entered findings of fact and conclusions of law determining

that the total amount of Renewal Term rent was $15,715,604.87. Landlord

filed timely post-

findings of fact and conclusions of law to award Landlord additional rent -- in

effect, a motion for judgment n.o.v. In the alternative, Landlord requested a

new trial on the basis of two evidentiary rulings during trial. The court

-trial motions, and on May 6, 2013, Landlord entered

judgment1 and filed a timely notice of appeal. Without requiring a statement

of matters on appeal, the court entered an opinion incorporating its findings

by reference.

After careful review, we hold that the trial court failed to award

Landlord the amount of Renewal Term rent that Landlord is entitled to

receive under the lease. We vacate the May 6, 2013 judgment and remand

to the trial court for proper computation of Renewal Term rent.

We first analyze the pertinent provisions of the lease, then describe

on appeal.

Pertinent Provisions Of The Lease. Landlord owns a commercial

building at 1346 Chestnut Street in Philadelphia. On April 16, 1999,

Landlord and Tenant entered into a lease giving Tenant the right to possess

1 R.R. 1139; see also Pa.R.Civ.P. 227.4(2) (permitting any party to enter judgment when court denies post-trial relief but does not itself enter judgment or order the prothonotary to do so). 2 J-A15017-14

17 floors of the building for 10 years with an option to renew the lease for

an additional 5 years. Tenant, a college, utilized some floors in the building

for student housing and other floors for offices.

Paragraph 5 of the lease2

Tenant to pay $208,902.66 for year 1 of the Original Term and $217,236.00

for the second year, respectively. Paragraph 5(a)(iv) provides that at the

start of year 3, and on each anniversary for the rest of the Original Term,

monthly Rent shall be adjusted, but not decreased, annually. Such adjustment shall result in a monthly Rent equal to the monthly Rent payable for the then- expiring twelve (12) months period, plus an amount equal to such Rent multiplied by a percentage equal

period commencing with the "Old Base Month" (as defined below) and ending with the "New Base Month" (as defined below). In no event, however, shall Rent ever be increased (due to an increase in the Consumer Price Index) more than 3% per annum.

rent steadily rose from year to year during the Original Term.

Paragraph 3(a) of the lease3 permits Tenant to renew the lease for one

its decision to renew 180 days or more before the end of the Original Term.

2 All references below to paragraph 5 derive from page 80 of the reproduced record (R.R. 80). 3 All references below to paragraph 3 derive from R.R. 79. 3 J-A15017-14

all

provisions of the lease will be equally applicable during the Renewal Term,

Paragraph 3(a)(2) defines the amount of rent that Tenant must pay

during the Renewal Term as follows:

The annual rent for the Renewal Term will be the greater of (i) the annual rent payable for the immediately preceding period or (ii) an amount

the Premises then being leased and occupied by Tenant as of the start of the Renewal Term.

[Emphasis added].

during the tenth and final year of the Original Term, $3,187,563.00. We

defined in

paragraph 3(b):

Fair market rent a new tenant of comparable net worth and creditworthiness would pay for comparable space in the building, or if no figures are available, then for comparable space in a similar building in a similar location in the City of Philadelphia, determined as set fair market rent provisions of this lease, the determination shall also be made as to the extent of tenant improvement allowances, brokerage commissions, rent abatements or concessions or other benefits which would be made available to a new tenant under then market conditions, all of which benefits shall also be

4 J-A15017-14

made available to Tenant in connection with the Fair Market Rent to the extent any such amounts are not actually paid in connection with any such transaction, or Tenant elects not to take advantage of all or any of such Fair Market Rent for the applicable transaction shall be reduced on an equitable basis to reflect such facts.

More simply stated, the calculation of fair market rent in paragraph

3(b) consists of three steps, -

(i) Determine the amount of rent a new tenant of comparable net worth and creditworthiness would pay for comparable space at the start of the Renewal Term.

(ii) Calculate all amounts allocated for tenant improvement allowances, brokerage commissions, rent abatements, concessions or other benefits

made available to a new tenant under then market conditions.

(iii) If Tenant does not actually spend these allowances, fair market rent is reduced on an equitable basis to reflect the unspent allowances.

Paragraph 3(c) provides that if the parties cannot reach agreement

arbitration panel of three licensed real estate brokers. Each panelist must

perform steps i-iii individually. The average of the two closest computations

5 J-A15017-14

Two important points emerge from our summary of the lease. First,

during the Renewal Term, annual rent is the greater of the immediately

preceding rent of $3,187,563.00 or 90% of fair market rent after deduction

of allowances. Therefore, annual rent during the Renewal Term cannot be

less than $3,187,563.00.

Second, the CPI escalator does not apply to the Renewal Term. While

the CPI escalator is an integral component of paragraph 5, the rent formula

for the Original Term, it is omitted from Paragraph 3, the rent formula for

the Renew

indicates that the parties intended annual rent to remain constant

throughout the Renewal Term instead of increasing under a CPI escalator4.

Procedural History. In early 2009, Tenant timely renewed the lease,

2009, the parties submitted their dispute to an arbitration panel of real

estate brokers in accordance with paragraph 3(c) of the lease. The panel

determined that annual fair market rent before allowances was

$4,218,750.00. The panel further determined that the tenant improvement

allowance for the Renewal Term was $2,250,000.00, and brokerage

commissions for the Renewal Term were $843,750.00, making total

4 As noted above, paragraph 3(a)(3) states that all provisions of the lease apply during the Renewal Ter absence of the CPI escalator from the Renewal Term rent formula is one such modification. 6 J-A15017-14

allowances of $3,093,750.00 for the Renewal Term. The panel did not

decide what amount, if any, of unspent allowances that Tenant could deduct

under the final clause of paragraph 3(b).

On

announced that it would pay annual Renewal Term rent of $3,393,121.00, or

$282,760.00 per month.

determination of fair market rent. Tenant responded with a petition to

under the law governing judicial review of common law arbitration

proceedings.

Landlord filed two amended complaints asserting breach of contract

rent was binding, and dismissed the second amended complaint. Landlord

appealed to this Court.

unilaterally informed Landlord that it would reduce rental payments from the

monthly figure of $282,760.00 that it had been paying since July 29, 2009.

Tenant advised that for the next 20 months, it would pay $242,135.09 per

7 J-A15017-14

month, the equivalent of $2,905,620.00 annually5. Then, for the following

21 months (until the end of the Renewal Term), it would pay $261,921.75

per month, the equivalent of $3,143,061.00 annually6. Tenant based this

payment schedule on the premises that (1) the paragraph 3(a)(2)

comparison of immediately preceding rent vs. fair market rent takes place

prior to deduction for allowances; and (2) following this comparison, Tenant

had the right to deduct 100% of the paragraph 3(b) allowances determined

by the arbitration panel, regardless of whether Tenant spent or did not

spend them.

In an unpublished memorandum dated May 23, 2011, this Court 7 affirmed th . We agreed

-allowance fair

market rent ($4,218,750.00) was not subject to judicial review. We held,

ionary calculations of the

adjustments, concessions and improvement allowances that it made to the 8 . We

ordered a remand for the trial court to determine the amount of allowances

that Tenant had the right to deduct from fair market rent9. We did not

address, however, whether the paragraph 3(a)(2) comparison of

5 R.R. 1870-71 (letter from Tenant to Landlord). 6 Id. 7 TRO Avenue of the Arts, LP v. The Art Institute of Philadelphia, LLC, TRO I . 8 Id. at 21. 9 Id. 8 J-A15017-14

immediately preceding rent vs. fair market rent must take place before or

after the deduction of the paragraph 3(b) allowances.

In January 2012, Landlord filed a third amended complaint alleging

Tenant breached the lease by paying insufficient rent10.

In December 2012, the trial court held a bench trial to determine

m

rent11

the tenant improvement allowance and brokerage commission. The court

determined that Tenant agreed to pay $282,760.00 per month in rent from

July 2009 until May 2011, $242,135.00 per month from May 2011 until

January 2013, and $261,921.75 per month for the remaining 21 months of

the Renewal Term12. This resulted in total rent of $15,715,604.87 and

annual rent of $3,143,120.97 a smaller annual amount than the

immediately preceding rent of $3,187,563.00.

Discussion.

Landlord divides this argument into four subparts:

A. The Trial Court Erred In Failing To Give Effect To The Lease's Annual CPI Rent Escalation Provision And Apply It To The Renewal Term.

10 R.R. 404-11. 11 TRO I, p. 21. 12 Trial Court Findings of Fact, pp. 5-8, ¶¶ 36-53. 9 J-A15017-14

B. The Trial Court Erred In Failing To Give Effect To Paragraph 3(a)(2) Of The Lease And In Concluding That [Tenant] Should Pay Less Rent During Each Of The Five Years Of The Renewal Term Than It Paid In The Immediately Preceding Period.

C. The Trial Court Erred By Failing to Give Effect to The Critical Words "On An Equitable Basis" in Paragraph 3(b) of The Lease.

D. The Trial Court Erred In Failing To Recognize That The Superior Court Remanded The Case So That [Landlord] Could Challenge

Arbitration Pa

In effect, Landlord contends that the trial court erred in denying judgment

n.o.v. to Landlord on the amount of rent Tenant owes for the Renewal Term.

Landlord also seeks a new trial on the basis of two evidentiary rulings:

(1) the court improperly excluded evidence that would have showed that a

100% deduction of the tenant improvement allowance and brokerage

commission was inequitable; and (2) the court improperly quashed

subpoenas duces tecum issued t

award sufficient rent to Landlord under the terms of the lease. In an appeal

we must consider the evidence, together with all favorable inferences drawn therefrom, in a light most favorable to the verdict winner. Our standard of review when considering motions for a directed verdict and judgment notwithstanding the verdict are identical. We will reverse a trial court's grant or denial of a judgment notwithstanding the verdict only when we find an abuse of discretion or an error of law that controlled the outcome of the case. Further, the standard of review for an appellate court is the same as that for a trial court.

10 J-A15017-14

There are two bases upon which a judgment n.o.v. can be entered: one, the movant is entitled to judgment as a matter of law and/or two, the evidence is such that no two reasonable minds could disagree that the outcome should have been rendered in favor of the movant. With the first, the court reviews the record and concludes that even with all factual inferences decided adverse to the movant the law nonetheless requires a verdict in his favor, whereas with the second, the court reviews the evidentiary record and concludes that the evidence was such that a verdict for the movant was beyond peradventure.

Polett v. Public Communications, Inc., 83 A.3d 205, 211-12

(Pa.Super.2013).

Applying this standard, we conclude that the trial court erred by failing

to find that rent for year 1 of the Renewal Term is at least $3,187,563.00.

Paragraph 3(a)(2) of the lease prescribes that annual rent for the Renewal

the greater of (i) the annual rent payable for the immediately

preceding period or (ii) an amount equal to ninety percent (90%) of the

words, annual rent must be the greater of the immediately preceding rent

of $3,187,563.00 or 90% of the fair market rent remaining after deduction

of allowances. Having found that 90% of fair market rent after deduction of

allowances was less than $3,187,563.00, the trial court should have ordered

Tenant to pay the immediately preceding rent of $3,187,563.00 annually

11 J-A15017-14

during the Renewal Term13 requires

us to remand this case for entry of judgment in the proper amount.

The trial court reached the wrong result by performing the calculations

required under paragraph 3 of the lease in the wrong sequence. The trial

court used paragraph 3(a)(2) as the starting point for calculating year 1 rent

during the Renewal Term. The lease, however, required the trial court to

use paragraph 3(a)(2) as the end point. Landlord explains this point well in

its brief:

[P]aragraph 3(a)(2) did not provide a starting point for calculating the first year annual rent but rather the end point. The Lease directed that no matter what the result of the Fair Market Rent Determination process (including any reductio

decision was binding as to the amount of Renewal Term rent. One of

-serving interpretation of

is bound by the lease and the determination forms of [the panel] but not to Id. We do not interpret this to

amount of Renewal Term rent. At most, Landlord agreed that the trial court rmination of fair market rent and maximum deductible allowances when calculating Renewal Term rent under paragraph

consistent with its position throughout this case that the court is required under paragraph 3(a)(2) to declare the greater of immediately preceding rent or 90% of fair market rent after deductions as Renewal Term rent. 12 J-A15017-14

Paragraph 3(a)(2) required the parties to reduce the annual Fair Market Rent to 90% and compare that amount to the annual rent for the immediately preceding period to determine the annual Rent for the first year of the Renewal Term. Any reduction e comparison required by Paragraph 3(a)(2), which required [Tenant] to pay as rent for the first year of the Renewal Term, the greater of (1) 90% of the annual Fair Market Rent, after the reduction on an equitable basis. . .or (2) $3,187,563, the annual rent [Tenant] paid for the immediately preceding period.

-35.

The trial court reached the wrong result a finding that year 1 rent

was less than $3,187,563.00 -- by using the wrong sequence of steps.

Specifically, it:

1. annual fair

market rent before allowances ($4,218,750.00) as binding

(paragraph 3(c));

2. Calculated 90% of annual fair market rent before allowances

($3,796,875.00);

3. Selected the greater of $3,796,875.00 and the immediately

preceding rent of $3,187,563.00, i.e., $3,796,875.00;

4. Determined the total allowances that Tenant is permitted to deduct

from $3,796,875.00;

5. Subtracted total permissible allowances from $3,796,875; and

13 J-A15017-14

6. Concluded that the remaining amount is year 1 rent during the

Renewal Term, even though this amount was less than

$3,187,563.00.

Paragraph 3 required the trial court to use a different sequence of steps. It

should have:

1. annual fair market

rent before allowances ($4,218,750.00) as binding (paragraph

3(c));

2. Calculated 90% of annual fair market rent before allowances

($3,796,875.00) (paragraph 3(b));

3. Determined the total allowances that Tenant is permitted to deduct

(paragraph 3(b));

4. Subtracted

5. Compared fair market rent after allowances with immediately

preceding rent of $3,187,563.00 (paragraph 3(a)(2)); and

6. Concluded that rent in Year 1 of the Renewal Term was the greater

of these two values (paragraph 3(a)(2)).

comparison in paragraph 3(a)(2) after performing all steps in paragraph 3(b)

(the calculation of 90% of fair market rent minus all permissible allowances).

14 J-A15017-14

Applying the correct sequence of steps, we agree with Landlord that year 1

rent during the Renewal Term is at least $3,187,563.00.

2-5 under the CPI escalator. As explained on page 6 above, the CPI

escalator only applied during the Original Term; it does not apply during the

deduction of allowances exceeds the immediately preceding rent of

$3,187,563.00. The trial court permitted Tenant to deduct 100% of all

allowances, whether spent or unspent, in the course of calculating Renewal

Term rent. This was error, Landlord claimed, because paragraph 3(b) only

per

portion of unspent allowances, which would have made 90% of fair market

rent after allowances greater than immediately preceding rent.

This argument is unavailing. The trial court determined, and we

agree, that a 100% deduction of unspent allowances is equitable because it

benefits both parties:

The credible evidence in this case supports a finding that a dollar-for-dollar deduction from Fair Market Rent and application of an amortization rate was the appropriate manner to account for unelected and unpaid tenant concessions awarded to [Tenant] in the [July 2009 arbitration] Proceeding. The dollar for dollar deduction for unelected and unpaid tenant concessions benefits the tenant and the landlord. It

15 J-A15017-14

provides the tenant with an inducement to remain in the property and to renew its lease at a market competitive rent. The landlord eliminates the problem of a costly vacancy and is not required to pay for unneeded and/or unwanted improvements. If no funds are expended by the landlord, it is only fair that the tenant receives the full benefit of the unspent funds by reducing its rent accordingly14.

Since a 100% deduction is proper, 90% of fair market rent after allowances

is lower than immediately preceding rent of $3,187,563.00, leaving

$3,187,563.00 as annual Renewal Term rent.

Landlord also seeks a new trial based on two evidentiary rulings. First,

Landlord argues that the court improperly excluded evidence that would

have shown that a 100% deduction of the tenant improvement allowance

and brokerage commission was inequitable. In particular, Landlord objects

to the exclusion of evidence of rents and profits that Tenant made by

subleasing space to its students.

of the trial court, and in reviewing a challenge to the admissibility of

evidence, we will only reverse a ruling by the trial court upon a showing that

B.K. v. J.K., 823

A.2d 987, 991 92 (Pa.Super.2003)

narrow.... To constitute reversible error, an evidentiary ruling must not only

14 -7. 16 J-A15017-14

Hawkey v. Peirsel, 869 A.2d 983, 989 (Pa.Super.2005) (citing Turney

Media Fuel, Inc., v. Toll Bros., 725 A.2d 836, 839 (Pa.Super.1999)).

Assuming that the court improperly excluded evidence of rents that

Tenant obtained through subleases, Landlord fails to demonstrate that

admission of this evidence would have changed the outcome. The court

enjoyed broad discretion in deciding whether a 100% deduction of unspent

deduction benefited both Landlord and Tenant15. Further, Tenant correctly

notes that Landlord was able to introduce some of this evidence through 16 cross- .

Second, Landlord argues that the court improperly quashed subpoenas

l documents to trial

in their possession relating to rent rates Tenant charged its students for the

apartments it leased from Landlord; the percentage of occupancy of the

building; amendments and modifications to the Leases examined and relied

upon by Tena

apartments to its students; and comparable apartment building leases that

Tenant entered.

We review a challenge to an order quashing a subpoena for an abuse

of discretion. Slusaw v. Hoffman, 861 A.2d 269, 272 (Pa.Super.2005).

15 -7. 16 Brief for Tenant, p. 49. 17 J-A15017-14

supporting it, and we will not substitute our judgment for the trial court. Id.

We conclude that the court acted within its discretion by quashing the

subpoenas as untimely. Landlord issued these subpoenas immediately

voluminous materials that Landlord demanded. Moreover, this ruling caused

Landlord no discernible prejudice,

cross-

cannot demonstrate that production of the documents in question would

have changed the outcome of trial.

For the foregoing reasons, we vacate the judgment entered on May 6,

2013. We conclude that rent for each year in the Renewal Term is not less

than $3,187,563.00. We remand with directions that the trial court

determine the amount of rent Tenant has paid to date and order Tenant to

pay Landlord the difference between the amount Tenant has paid and the

amount owed consistent with our decision.

Order vacated, jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq. Prothonotary

Date: 8/22/2014