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finding there was no need to resort to parol evidence where contract was unambiguous and the dispute could be "resolved within the four corners of the lease document, seasoned by a little common sense"
Summary of this case from HMV Indy I, LLC v. HSB Specialty Ins. Co.Opinion
Case No. 1:03-cv-0127-DFH-TAB.
August 2, 2004
ENTRY ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
This diversity action presents cross-motions for summary judgment concerning the calculation of base rent under a commercial real estate lease dating from 1977. Plaintiff Northstar Partners is the successor in interest to the original lessor-developer, Speedway Plaza Associates. Defendant Marsh Supermarkets, LLC is the successor in interest to the original lessee, which was Marsh Supermarkets, Inc. The property is a Marsh Supermarket on Crawfordsville Road in Indianapolis. As explained below, the court grants Marsh's motion for summary judgment on the disputed issue. The undisputed facts show that Marsh is not required to pay additional rent for the portion of the store that Marsh built at its own expense. The court also grants Northstar's motion for summary judgment on Marsh's counterclaim for unjust enrichment.
Undisputed Facts
In 1977 the lessor-developer completed construction of a shopping center that included the new Marsh store. The parties agreed to a 20-year lease renewable by Marsh for four additional five-year terms. Section IV-A of the lease provided for the original base rent, stating in relevant part:
LESSEE shall pay to LESSOR as the monthly base rental hereunder, the sum of Eleven Thousand, One Hundred and Twenty-Two and 75/100 Dollars, ($11,122.75) representing an annual rate of One Hundred Thirty-Three Thousand, Four Hundred Seventy-Three and No/100 Dollars ($133,473.00) or 3.73 Dollars per square foot on 35,760 square feet of storeroom, in advance, on or before the first day of each calendar month, by check mailed to LESSOR at the address to which Notices are to be sent hereunder.
In Section III-B of the lease, the parties agreed to a lower base rent for the second, third, and fourth optional renewal terms:
LESSEE shall have four (4) separate and successive options to extend the term of this lease, each for an additional term of sixty (60) months upon the same terms and conditions as those herein stated, except that the rental provided for in Section IV A hereof shall be $3.00 per square foot for the 2nd, 3rd and 4th option terms, only if so exercised. To exercise any such option LESSEE shall give LESSOR written notice in accordance with the Notice provisions hereof at least six months prior to the end of the then current term.
The lease contains the following provision in Section VIII giving Marsh the right to expand the premises at its own expense:
LESSEE may from time to time and at its own expense, redecorate, refurbish, alter, enlarge or remodel the demised storeroom and premises, provided that no substantial change having a deleterious affect [sic] on the structural integrity or exterior appearance of the demised storeroom shall be effected without the prior written approval of LESSOR. No such addition, alteration, or remodeling shall be cause for the modification of any of the terms and provisions hereof. LESSEE shall be entitled to enlarge the demised storeroom within the 50' × 149' expansion area outlined in green and shown at Exhibit B (Site Plan). [Emphasis added.]
The dispute here arises from the fact that Marsh exercised its right under Section VIII of the lease to expand its store in 1991. The original store was 35,760 square feet. The expansion added 12,824 square feet, for a total size of 48,584 square feet. Marsh paid for the expansion, incurring total costs of more than $1.5 million.
Northstar contends that, beginning with the second optional renewal term, Marsh must pay $3.00 per foot on the entire 48,584 square feet, which includes the portion that Marsh built. Marsh disagrees and has been paying rent of $3.00 per square foot for only the original 35,760 square feet.
Preliminary Matters
The Counterclaim: Marsh has agreed to dismiss its counterclaim for unjust enrichment, which had been based on the fact that the store addition would revert to the lessor at the end of the lease. The lease clearly provided that, upon the expiration of the lease, the Marsh store premises — including any additions built by the lessee — would revert to the lessor. The parties' agreement to that effect bars Marsh's claim for unjust enrichment. Accordingly, Northstar is entitled to summary judgment on Marsh's counterclaim.The Drafter: Northstar cites Woodbridge Place Apartments v. Washington Square Capital, Inc., 965 F.2d 1429, 1439 (7th Cir. 1992), for the proposition that, because Marsh drafted the lease, Northstar is entitled to the benefit of the doubt in construing ambiguous lease terms. However, the undisputed evidence in this case shows that at the time the lease was negotiated, both parties were experienced and sophisticated in business matters. The undisputed evidence also shows that the same parties had previously done a very similar transaction in which the lessor-developer was assisted by what was then the largest law firm in Indiana, which gave its blessing to the lease documents. In fact, it was the lessor-developer itself who adapted the prior lease documents to the new property and submitted the revised document to Marsh. Based on these undisputed facts, there would be no basis for construing the document against Marsh, even if the court deemed it ambiguous when read in its entirety. See Beanstalk Group, Inc. v. AM Gen. Corp., 283 F.3d 856, 858 (7th Cir. 2002) (under Indiana law, the principle of contra proferentem does not apply to commercially sophisticated parties advised by counsel).
Parol Evidence: Both sides have offered testimony from the principal negotiators in 2004 about their intentions and actions in 1977. This dispute, however, can be resolved within the four corners of the lease document, seasoned by a little common sense. See Beanstalk Group, 283 F.3d at 860, 862 (explaining role of common sense in interpreting contracts to avoid improbable interpretations, as well as the need to read contracts as a whole); Hartford Fire Ins. Co. v. St. Paul Surplus Lines Ins. Co., 280 F.3d 744, 747-48 (7th Cir. 2002) (interpreting contract to make economic sense in light of the agreed price).
Moreover, the principal parol evidence offered by each party consists of the negotiators' subjective intentions or understandings, not evidence of objective manifestations of either party's intentions during the negotiations. The offered parol evidence therefore would be of no help. See Brooklyn Bagel Boys, Inc. v. Earthgrains Refrigerated Dough Products, Inc., 212 F.3d 373, 382 (7th Cir. 2000) (one party's "private expectations are of no consequence, particularly since he offered no factual basis to demonstrate [other party's] awareness of his expectation or understanding"), citing Sethness-Greenleaf, Inc. v. Green River Corp., 65 F.3d 64, 66-67 (7th Cir. 1995) (one party's unexpressed views about meaning of contract were irrelevant: "Contractual obligations are created and defined by objective signals the parties exchange."); Central Illinois Public Service Co. v. Atlas Minerals, Inc., 146 F.3d 448, 451 (7th Cir. 1998) (subjective understanding of contract communication was irrelevant); Holloway v. Giganti, Inc., 540 N.E.2d 97, 99 (Ind.App. 1989) ("The intent relevant in contract matters is not the parties' subjective intents but their outward manifestation of it.").
Accordingly, the court disregards the parol evidence offered to explain the written lease, as well as the principle that ambiguities in the contract should be construed against the drafter.
The Merits
The language of the lease agreement clearly defines the "demised premises" as "[t]he storeroom" diagramed by the parties, "containing at least 35,760 feet," and built by the lessor. Under Northstar's interpretation of the lease, Marsh would have the privilege of (1) paying $1.5 million to expand the store, then (2) paying Northstar rent on that space amounting to $38,472 per year for five, ten, or fifteen years, at which point (3) the entire premises will belong to Northstar. One can understand why Northstar might prefer this lopsided and profitable result, but it is not required by the language of the lease.
Northstar construes the provision in Paragraph III-B requiring Marsh to pay rent of "$3.00 per square foot" during the second, third and fourth option terms to mean that space added by Marsh at its own expense would become part of the rent calculation since the provision does not specify the exact number of square feet to be leased. In Northstar's interpretation, "[a]t the beginning of the second option period, the manner in which rent was to be calculated changed."
The most natural reading of Paragraph III-B is that its references to a Paragraph IV-A but a different rental rate beginning with the second optional term mean that only the rental rate would change, and that the number of square feet to which the rate is applied would not change. Northstar argues that the reference in Paragraph III-B to Paragraph IV-A is "inconsequential," Pl. Br. at 5. The court disagrees. The parties wrote Paragraph IV-A to set forth the substance of the rental agreement, including the total amount of square footage being rented at that time or during any subsequent option period. If Marsh chose to add to the building, as it did, Section VIII provides that such an addition would not result in the modification of any other terms, including the rent.
Northstar's argument depends entirely on the fact that Paragraph III-B speaks of the reduced rate only in terms of $3.00 per square foot, without echoing the reference in the principal rent provision, Paragraph IV-A, to 35,760 square feet. Northstar does not point to any explicit language in the lease agreement that reflects its interpretation as the interpretation intended by the parties. Nothing in Paragraph III-B indicates that the terms of any subsequent option period, other than the rent amount to be paid by Marsh, were intended to be different from the terms of the previous option period. The difference in language between Paragraphs III-B and IV-A is much too subtle to reflect an agreement by Marsh to pay rent for any additional space it would build at its own expense, which would also revert to Northstar in another five, ten, or fifteen years.
Even if the terms of the contract could somehow be viewed as unclear, courts can and should use common sense when construing contracts. Marsh is still abiding by the terms of the agreement requiring it to pay $3.00 per square foot of property constructed and owned by the lessor. Suppose that Marsh had not built the addition. Northstar would be entitled to receive exactly the same base rent it receives now. Under Northstar's theory, Marsh's decision to add on to the store at its own expense requires Marsh to pay the same rental rate for space built at Northstar's expense as for space built at Marsh's expense. That result is so improbable that it would require much more specific language to compel it. See Rhode Island Charities Trust v. Engelhard Corp., 267 F.3d 3, 7 (1st Cir. 2001) ("parties can contract for preposterous terms. If contract language is crystal clear or there is independent extrinsic evidence that something silly was actually intended, a party may be held to its bargain, absent some specialized defense."). Instead, the lease provides in Section VIII: "No such addition, alteration, or remodeling shall be cause for the modification of any of the terms and provisions hereof." The best reading of this provision is that it precludes Northstar's attempt to extract extra rent based on the additional space built at Marsh's expense.
Or suppose that Marsh had built the addition in the second year of the lease. Under Northstar's reading of Paragraph III-B and other lease provisions, Marsh would not have paid any additional rent as a result of that addition for the next 24 years (the remainder of the original 20-year term, plus the first five-year optional term). Then, after 24 years, Marsh would have been required to start paying $38,472 per year for the next five, ten, or fifteen years on that 24-year-old addition. That result would have no apparent economic or other rational basis, yet it would be required under Northstar's interpretation. See Tice v. American Airlines, Inc., 288 F.3d 313, 316 (7th Cir. 2002) ("The interpretation of a contract does not take place in a vacuum; it is not a purely semantic exercise; it has regard for the consequences of alternative interpretations, the parties being assumed to have intended something sensible by their contract."). Reading the lease as a whole, and without considering outside evidence, the court has "reasonable confidence that it knows what the contract means," so that the litigants out not to be put to the expense and uncertainty of a trial. Overhauser v. United States, 45 F.3d 1085, 1088 (7th Cir. 1995). The document is not ambiguous as applied to the issue of additional base rent on the addition. Marsh is not required to pay additional base rent on the addition it built at its own expense.
To the extent the Marsh expansion might have added some costs to the landlord, Paragraph IV-B of the lease provides for increases in Marsh's share of the common expenses based on the "square footage of the demised storeroom." The parties have interpreted that language for years as applying to the total Marsh square footage (original plus the addition). Marsh Dep. at 27-28. The language governing base rent is different and calls for a different result, one that does not require Marsh to pay Northstar as much for space that Marsh built at its own expense as it pays for space built at the expense of Northstar's predecessor.
Conclusion
Accordingly, Northstar's motion for summary judgment is granted as to Marsh's counterclaim but denied in all other respects. Marsh's motion for summary judgment is granted in its entirety. Final judgment shall be entered dismissing all claims and the counterclaim with prejudice.So ordered.