Landlord/Tenant – Lessee Did Not Satisfy ‘Early Termination’

NCO Financial Systems Inc. v. Montgomery Park LLC (Lawyers Weekly No. 001-171-16, 19 pp.) (Niemeyer, J.) No. 15-1988, Nov. 29, 2016; USDC at Baltimore, Md. (Russell, J.) 4th Cir.

Holding: A financial systems company did not comply with a lease’s early termination provision when it offset its second payment of the required fee of 10 months’ rent with a deduction for providing its own janitorial services; the 4th Circuit reverses a district court decision finding the company had satisfied the early termination conditions and upholds its decision that the company was not overcharged for rent of “usable” space in the property.

Lease Conditions

Under Maryland law, which applies here, when the terms of an option impose conditions on its exercise, those conditions must be exactly matched for exercise to be effective. In determining whether an option has been exercised, the court in Elderkin v. Carroll, 941 A.2d 1127 (Md. 2008), articulated a three-part test to be applied. A court must evaluate whether the exercise exactly matched the terms specified by the offer. If the match is not exact, the court must consider whether any variance is covered by a number of highly specific exceptions, none of which applies to the present case. Finally, the court must determine whether any breach was of a covenant or of a condition.

Applying these principles to the lease before us, the language could hardly be more clear that § 1.05 of the lease reveals an intent to impose two conditions on the exercise of the right of early termination: 1) that the lessee give 10 months’ notice prior to the specified early termination date; and 2) that the lessee make payment – in two equal installments – of a “termination fee” defined to equal 10 months’ rent. As § 1.05 states, the right to early termination can be exercised only “upon strict compliance” with the two requirements.

The lease then uses language indicative of a condition when describing how early termination can be effected, stating that early termination will be effective if and only if tenant both timely delivers the termination notice and timely pays the termination fee. It makes unmistakably clear that the lease is imposing conditions by stating the obverse – that early termination is not exercised if the tenant fails either timely to deliver the termination notice or timely to pay the termination fee.

Full Payment

We conclude that the lease unambiguously imposes two conditions on the lessee’s exercise of its right of early termination – timely notice and timely payment of the termination fee. Because lessee undisputedly failed to make full payment of the termination fee, it did not satisfy those conditions and therefore did not successfully exercise the right of early termination.

When the lessee paid the first 50 percent installment, it remitted $779,964.15, and the lessor never expressed any reservation or disagreement with the accuracy of that amount. Similarly, the second installment differed only because the lessee made the decision to set off against that amount a janitorial services credit, as if it were rendering an account, not paying a specifically defined fee. It thus reduced the second installment to $697,100.55, contrary to the condition that required payment of the defined fee in equal parts. Because appellant’s underpayment derived not from any miscalculation but from the lessee’s deliberate decision to offset an unrelated payment, any concerns about the posited difficulty of calculation are irrelevant.

The clear and unambiguous language of the lease agreement made payment in full of the termination fee a condition, and appellant failed to satisfy it. Because appellant failed to exercise its right of early termination, the lease continued in force after March 15, 2011, and lessor is entitled to pursue its counterclaim against the lessee for breach of the lease agreement for failing to pay rent.

Usable Square Footage

In its counterclaim, the lessee contends lessor misrepresented or misstated in the lease the usable-square-footage portion of the total space for which lessee paid rent.  Lessee contends certain portions of the space were not “usable” under standards published by BOMA, the Building Owners and Managers Association.

We conclude the district court did not err in its construction of the lease and that its finding that the disputed areas – bathrooms, mezzanine and areas holding mechanical equipment – were used and possessed exclusively by lessee was not clearly erroneous. When these disputed areas are included in the usable square feet, as the court concluded, the lease did not misrepresent or misstate that the premises constituted approximately 106,267 rentable square feet.

The district court received the parol evidence as to the BOMA standards during trial but decided not to use it in light of the court’s conclusion that the term “usable” was unambiguous. This was not error.

The district court did not err in concluding that lessee was properly charged for “approximately 106,267” square feet. We reverse the ruling that appellant satisfied the lease’s conditions for early termination, affirm the ruling rejecting lessee’s overcharge claims and remand for further proceedings.