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The government terminated a lease after it determined that a flood in the building had rendered the premises untenantable. The contractor alleged the government had breached because the untenantability determination had not been based on an objective standard. Instead, the contractor contended, the government had improperly relied on its subjective belief. The court, however, rejected the contractor’s argument. The lease gave the government discretion to determine whether the property was unfit. So long as the government exercised its discretion in good faith, the untenantability determination did not need to be based on an objective standard.

27-35 Jackson Ave. LLC v. United States, COFC No. 16-947

Background

27-25 Jackson Ave., LLC leased property to the General Services Administration. The actual tenant was US Citizenship and Immigration Services (USCIS). The lease included a contingency for partial destruction of the building, which stated that “in the case of partial destruction, so as to render the premises untenantable, as determined by the government, the government may terminate the lease.”

The relationship between Jackson and USCIS was contentious. USCIS repeatedly complained about disruptions caused by noise, construction, and the poor quality of Jackson’s build out.

In January 2015, a sprinkler head in the premises broke, flooding the property. GSA determined that the entirety of the leased premises were no longer tentantable. Jackson submitted a remediation plan, but GSA rejected it and terminated the lease under the untenantability clause.

Jackson sued the government in the Court of Federal Claims, alleging breach and seeking over $10 million in lost rent and reimbursement of tenant improvements.

Analysis

GSA Had Discretion to Terminate

Jackson alleged that GSA breached the lease because its determination that the premises were untenantable lacked any objective standard. In support of this argument, Jackson cited several cases in which courts had assessed the validity of an untenantability determination by independently evaluating a series of factual questions—e.g., severity of damage, value of the lease, etc. Jackson contended GSA should have considered these objective factors before terminating.

The court, however, found the cases cited by Jackson inapposite. None of those cases involved a lease that expressly delegated the untenantability determination to one party. In this case, however, the lease expressly stated untenantability would be determined by the government.

Jackson alleged GSA could not simply rely on its subjective belief and that its determination should be subject to independent evaluation. But the court found this argument contravened the plain terms of the lease. When the parties vest one party with discretion to make critical factual determinations under a contract, the court will review that decision narrowly. This is not to say that the discretion is unbounded; it still must be made in good faith. But that discretion is conclusive where, as here, the disagreement amounts to honest differences between parties.

Jackson contended GSA never actually determined that the premises were untenantable because it never properly memorialized and documented the determination. But Jackson had not identified any authority that required such formal documentation. GSA had provided written notice of the determination. Nothing more was required.

Duty of Good Faith

Jackson contended GSA had breached implied duty of good faith and fair dealing because the termination was pretextual. Basically, Jackson argued, USCIS had long wanted out of the lease and the sprinkler flood had finally provided an excuse.

The court didn’t agree. As an initial matter, while USCIS had complained about the lease, the decision to terminate was made by GSA. Jackson had not provided any evidence that GSA had been motivated by ill will. Additionally, no one disputed that after the sprinkler broke, the premises were, in fact, unfit for use. Once a contracting officer rightfully determines that premises are untenantable, the decision to terminate becomes a matter of contract administration that is left to the discretion of the agency.

Equitable Estoppel

Lastly, Jackson argued the government should be estopped from terminating the lease because its own actions contributed to the property damage. Jackson asserted that agency officials had not properly responded to an alarm when the sprinkler broke and inhibited the fire department’s access to the building on the night of the flood. But the court found that even if these allegations were true, they amounted to mere negligence, not the type of misconduct required for equitable estoppel.

Jackson is represented by Jeffrey W. Varcadipane of Varcadipane & Pinnisi, PC. The government is represented by Stephanie A. Fleming, Elizabeth M. Hosford, Patricia M. McCarthy, and Brian M. Boynton of the Department of Justice as well as Leigh E. Izzo of the General Services Administration.

–Case summary by Craig LaChance, Senior Editor