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Contractor’s claim is denied due to mutual mistake. The contractor alleged the government breached by not paying its contractually-agreed share of real-estate taxes under a lease. The government claimed that the figure in the lease used to calculate the government’s tax share was wrong. The government contended the parties had a made a mutual mistake and asked the court to reform the lease. The court sided with the government. The parties had agreed to a methodology for calculating the government’s tax share as part of the solicitation process, but that process had not been included in the final lease. The government had demonstrated a mutual mistake. The court reformed the lease to add the tax figure to which the parties had actually agreed.

In 2009, the General Services Administration issued a solicitation seeking to lease office space in Texas. The solicitation provided that GSA would pay a share of the lessor’s real estate taxes. The amount GSA owed would be adjusted each year depending on the amount of the lessor’s annual taxes.

The solicitation provided a formula for the tax adjustment. The formula began with a set tax base tax number. This number was either (1) the amount of real-estate taxes levied for the first tax year, (2) an amount negotiated by the parties. The formula then required the parties to subtract the tax base amount from the actual amount of taxes assessed against the property in an given year. The difference was then multiplied by the percentage of the building that GSA occupied.

As an example, suppose that the taxes assessed during the first year of the lease were $500,000. Assuming the parties did not negotiate another number, the base tax number would thus be $500,000. Now suppose the real-estate taxes for a given year were $600,000, and that GSA occupied 20 percent of the building. In accordance with the formula, the base amount ($500,000) is subtracted from the assessed taxes ($600,000). The difference ($100,000) is then multiplied by the percentage of GSA’s occupancy (0.2). This would result in GSA owing the lessor $20,000 in taxes.

GSA awarded the lease contract to SAOP Northwest Center. The parties executed lease was a standard government lease form. The executed lease established that GSA’s percentage of occupancy was 18.3%. The lease also included a provision establishing base rate for the annual real-estate tax adjustment at $133,000. The problem with this was that this rate did not reflect the taxes assessed during the first year of the lease, nor had the parties negotiated this number. Indeed, for the first year of the lease, 2012, the assessed real estate taxes were $541,000. Thus, the tax base used to calculate GSA’s share should have been $541,000 (or a negotiated amount close to that) instead of $133,000.

This meant that GSA was paying more than its share in taxes. For instance, in 2012, the real-estate taxes assessed were $541,000. Subtracting the lease’s $133,000 base number from this amount and multiplying it by GSA’s 18.3% occupancy rate resulted in GSA owing about $75,000 in taxes. But if the parties had used the $541,000 (from the 2012 assessed) taxes as the base rate, GSA would have paid nothing.

No one, however, noticed this mistake. GSA ended up paying SAOP more than it owed in taxes for a couple of years. In 2013, SAOP sold the building to Westdale Northwest Center. SAOP assigned the lease to Westdale. GSA paid Westdale the wrong tax amount for a year, but in 2014, GSA realized there was error in the base tax rate. Thereafter, GSA withheld funds from its rent payments for the amount it was overpaying in real-estate taxes. Westdale filed a several claims with GSA for the amounts GSA was withholding. GSA denied the claims.

Westdale filed suit with the Court of Federal Claims alleging that GSA had breached the lease. GSA asserted an affirmative defense of mutual mistake and asked the court to reform the lease.

Both parties alleged that the lease was ambiguous. GSA alleged the lease contained a patent ambiguity, which meant that Westdale had a duty to inquire about the ambiguity, and because it hadn’t, the lease should be construed against Westdale. For its part, Westdale argued that the lease contained a latent ambiguity and should be construed against the drafter, i.e., the government.

The court rejected both arguments, finding that the lease was not ambiguous. The plain text of the lease established that the real-estate base was $133,000. The figure required no interpretation and established a clear tax base for adjusting GSA’s tax payment.

But the court found the government’s mutual mistake argument more compelling. Citing the Restatement (Second) of Contracts, the court noted that parties make a mistake if they reach an agreement that is not reflected in the final written document. Here, the court found that the parties came to an agreement on the base tax rate before signing the lease. The solicitation established that the tax base would be either the real-estate taxes for the first lease year or a negotiated amount. The parties had shared understanding on the methodology used to set the tax base. They were therefore mutually mistaken about the lease they signed, which contained the $133,000 tax base.

Westdale noted that generally a lease cannot be reformed against a good faith purchaser. A good faith purchaser its one that pays valuable consideration for property without notice of adverse claim. Westdale contended that it acquired the property when SAOP and GSA were both unaware of the error in the base tax provision. Westdale bought the property expecting a certain income stream based on the real-estate tax rate listed in the contract. Thus, Westdale argued, it was a good faith purchaser, and the court should not reform the contract.

But the court found that Westdale’s status as a good faith purchaser did not preclude reformation. The good faith purchaser rule only applies insofar as the rights of the purchaser were unfairly affected. While reformation would reduce Westdale’s income stream, the reduction was not ipso facto unfair. Indeed, without a reformation Westdale would receive a windfall.

The court noted that under Federal Circuit caselaw, reformation is available upon proof of four elements: (1) the parties were mistaken in their belief regarding a fact, (2) that mistake was a basic assumption of the underlying contract, (3) the mistake had a material effect on the bargain, and (4) the contract did not place the risk of the mistake on the party seeking a reformation.

The court found that all these elements were satisfied. The parties signed a contract under the mistaken belief that the lease would accurately adjust GSA’s yearly tax payment. This mistake was a basic assumption of the lease. The mistaken figure had a material impact on the bargain; it resulted in GSA making higher tax payments than either party intended. Moreover, there was no agreement allocating the risk of a mistake.

The court reformed the lease to change the $133,000 tax base to the $541,000, the amount of taxes that were actually levied in the first tax year after the lease began.

Westdale is represented by Jennifer A Gehrt of Barbee & Gehrt, LLP. The government is represented by Michael D. Austin, and Mariana Acevedo of the Department of Justice as well as Helen Kerns of the General Services Administration.