1651 North Collins Corp v. Laboratory Corporation of America

Filing 36

MEMORANDUM OPINION AND ORDER by Judge Jennifer B. Coffman on 8/10/12: IT IS ORDERED that LabCorps motions for summary judgment 18 and 20 are GRANTED and 1651s motion for partial summary judgment 21 is DENIED. IT IS FURTHER ORDERED that LabCorps motion in limine 19 is GRANTED IN PART and DENIED IN PART. The PCR is inadmissible because it is not probative pursuant to FRE 403, but summary judgment in favor of LabCorp obviates the need to rule on the admissibility of Caninos testimony. A separate judgment will issue.cc:counsel (JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 11-197-C
1651 NORTH COLLINS CORPORATION,
V.

PLAINTIFF,

MEMORANDUM OPINION AND ORDER

LABORATORY CORPORATION OF AMERICA,

DEFENDANT.

***********
This matter is before the court on the following motions: the motion for
summary judgment by Laboratory Corporation of America (“LabCorp”) (R. 18);
LabCorp’s motion in limine (R. 19); LabCorp’s motion for summary judgment on its
counterclaim (R. 20); and the motion for partial summary judgment by 1651 North
Collins Corporation (“1651”) (R. 21). 1651 seeks damages from LabCorp due to
an alleged breach of a five-year renewal term of a property lease; however, because
LabCorp and 1651 did not agree to renew the lease, LabCorp was a month-tomonth tenant at the time it terminated its occupancy and is not liable for the
damages sought by 1651. Accordingly, the court will grant LabCorp’s motions for
summary judgment, deny 1651’s motion for summary judgment, and grant
LabCorp’s motion in limine in part and deny it in part as moot.
1651 owns a building and related improvements at 4500 Conaem Drive in
Louisville. LabCorp entered into a long-term lease agreement for the property for a
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term from July 1, 1987, to June 30, 2002. The lease was “triple net,” meaning
that LabCorp was responsible for maintenance, utilities, taxes, and insurance.
Pursuant to Paragraph 11(a) of the lease, LabCorp was responsible for maintenance
and repairs of the premises, “except for normal wear and tear.” Paragraph 27 of
the lease gave LabCorp the option to renew the lease for an additional five-year
term prior to the expiration of the original term of the lease, and further provided
that LabCorp had the option to renew the lease for two additional terms of five
years. To exercise the option to renew, LabCorp was required to do so six months
prior to the expiration of the lease or any renewal term. The rent for each five-year
renewal term would be “the then market rent for similar space in the Louisville area,
but not less than the immediately preceding five-year period.” The lease also
contained in Paragraph 4 a holdover clause that provided for LabCorp to become a
month-to-month tenant if it continued possession without renewing the lease.
LabCorp exercised the first renewal option with the renewal term running
from July 1, 2002, to June 30, 2007. The terms, which were negotiated by
Norman J. Buhrmaster of Orion Investment and Management Ltd. Corp. for 1651
and Larry Williams and Pat Richardson for LabCorp, included a monthly rent of
$41,250.00. The parties memorialized the renewal in an Exercise of First Renewal
Option agreement.
As the first renewal term neared its end, LabCorp sought to renegotiate the
terms of the lease. On December 12, 2006, LabCorp’s brokers sent Buhrmaster a
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letter proposing a reduction in rent. Buhrmaster responded on December 18, 2006,
acknowledging the proposal, but reminding them of the unexercised option to
renew in the lease. In response, LabCorp sent Buhrmaster a letter on December
26, 2006, as follows:
On behalf of Laboratory Corporation of America (LabCorp), we
hereby exercise the (2nd) second option to renew our lease at 4500
Conaem Drive, Louisville, Kentucky as provided for in paragraph 27 of the
original lease. [ . . . ]
In addressing LabCorp’s needs going forward, we hope to structure
the lease renewal with an eye toward the optimum term, while
simultaneously addressing the deteriorating condition of the facility.
Facing an ever changing business climate, it is paramount that LabCorp
(a) achieve efficiencies in the operation of the building, (b) have a sound
water-tight roof, and (c) install a modern energy-efficient HVAC System.
Through our brokers at Harry K. Moore Co. Colliers we look
forward to the initiation of negotiations to determine the appropriate
market rent. We are confident this will result in a timely lease extension.
R. 18-12. Buhrmaster did not respond to this letter until May 2007, when he
advised LabCorp’s brokers that he planned to obtain an appraisal in order to frame
negotiations. However, no such negotiations occurred. Instead, on June 27,
2007, Buhrmaster sent LabCorp a letter providing only that “[t]his letter is to
confirm that 1651 North Collins Corp. accepts the conditions of the 5 year lease
renewal as provided in the lease and further agrees to continue the rent at
$41,250.00 monthly.” R. 18-15. After sending this letter, Buhrmaster had an
Exercise of Second Renewal Option Agreement prepared, but LabCorp did not
execute it.
After the end of the first renewal period on June 30, 2007, LabCorp
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continued to occupy the premises and paid $41,250 monthly rent. On January 28,
2011, LabCorp provided 1651 notice of its intent to vacate the premises and
terminate its tenancy in thirty days. 1651 asserted that LabCorp was obligated
under a new term until June 30, 2012. In the ensuing conflict, the parties agreed
to waive their arbitration rights under the lease and 1651 initiated the present
action.
After filing suit, Buhrmaster retained AEI Consultants to inspect the property.
Though Buhrmaster’s goal was to investigate possible new damage claims against
LabCorp, he did not disclose this to AEI, and AEI commenced the investigation
under the impression that it was assisting in the underwriting of a proposed
mortgage. After inspecting the property, AEI prepared a Property Condition Report
(“PCR”), which it issued in the form of several drafts, the first on July 6, 2011, and
the third and final draft on February 16, 2012. Based on this PCR, 1651 amended
its complaint to assert new damages claims for necessary repairs.
1651 asserts two counts, one for breach of contract and one for breach of
implied contract, in which it claims that it has incurred damages in excess of
$1,040,000 representing the rents owed by LabCorp under the remainder of the
five-year renewal term, taxes and insurance on the property, interest, necessary
repairs, and attorneys’ fees. Because the parties did not agree to renew the lease
for a second five-year term in 2007, however, and LabCorp thus became a holdover
tenant on a month-to-month lease, and because 1651 has not provided admissible
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evidence to support its repair claims, the court will grant summary judgment in
favor of LabCorp on both 1651’s claims and LabCorp’s counterclaim for return of
pre-paid insurance premiums.
LabCorp and 1651 did not agree to renew the lease because LabCorp
conditioned its attempt to exercise the option to renew on further negotiation of
material terms. The exercise of an option must be unconditional and unqualified in
order to be binding on the parties. See 1 RICHARD A. LORD, WILLISTON ON CONTRACTS
§ 5:18 (4th ed.); accord Elderkin v. Carroll, 941 A.2d 1127, 1135 (Md. 2008);
Guy Dean’s Lake Shore Marina, Inc. v. Ramey, 518 N.W.2d 129, 133 (Ne. 1994);
Jones v. Landmark Leasing, Ltd., 957 S.W.2d 369, 374 (Mo. 1997); Wharf
Restaurant, Inc. v. Port of Seattle, 605 P.2d 334, 340 (Wa. 1979). Furthermore,
though “[a]n acceptance according to the terms of the option is not rendered
conditional by mere suggestions for some future modification, nor by demands as
to performance which do not qualify the acceptance,” Kentucky Consumers Oil Co.
v. General Bonded Warehouseing Corp., 184 S.W.2d 972, 973 (Ky. 1945), such is
not the case here, where LabCorp explicitly stated a desire to change the terms of
the lease through further negotiations, including the lease term and the rent, and to
“address[] the deteriorating condition of the facility.” Thus, while the first
paragraph of the December 26, 2006, letter purports to “hereby exercise the (2nd)
second option to renew [the] lease,” the remainder of the letter seeks to modify the
material terms of the option and thereby renders ineffective any intent to exercise
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the option. Furthermore, Buhrmaster’s June 27, 2007, letter to LabCorp that
purported to “confirm that 1651 North Collins Corp. accepts the conditions of the 5
year lease renewal as provided in the lease and further agrees to continue the rent
at $41,250.00 monthly,” R 18-15, did not create a binding agreement as it ignored
the proposal in LabCorp’s December 26, 2006, letter and attempted to accept an
offer that LabCorp did not actually make.
Accordingly, no agreement was reached between LabCorp and 1651
regarding the five-year renewal of the lease, and the option to renew the lease
lapsed on June 30, 2007, after which LabCorp became a holdover tenant pursuant
to Paragraph 4. Though LabCorp continued to make monthly rent payments to
1651, such payments do not support an implied contract for the renewal of the
lease for an additional five-year term; they are consistent with a month-to-month
tenancy, and LabCorp’s refusal to execute the Exercise of Second Renewal Option
Agreement should have put 1651 on notice that LabCorp did not, in fact, agree to
such a renewal. Likewise, LabCorp’s pre-payment of insurance expenses for one
year in advance is an insufficient ground upon which to imply a five-year contract.
Because there was no five-year contract between LabCorp and 1651 after June 30,
2007, LabCorp is entitled to summary judgment on 1651’s claims for damages
related to rents, taxes and insurance that would have been incurred on the property
after February 28, 2011, and interest on those amounts.
LabCorp is also entitled to summary judgment on 1651’s repair claims. The
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lease details LabCorp’s repair responsibilities in Pargraph 11(a): “[t]enant agrees
that it will, at its own cost and expense, keep the premises and improvements
thereon and the appurtenances thereto and every part thereof, in as good condition
and repair as they were upon commencement of the term of this lease, except for
normal wear and tear.” R. 18-2 at 11. Pursuant to the lease, LabCorp is not liable,
as a matter of law, to replace in their entirety the aging roof or HVAC system.
Such structural replacements that are made necessary by the passage of time
rather than by the negligence or misuse by a tenant are properly considered “wear
and tear” which is excluded from LabCorp’s repair responsibilities by the lease.
“The tenant is not, merely by relationship bound to make substantial and lasting
repairs such as putting on a new roof; . . . neither is he liable for mere wear and
tear of the premises nor bound to replace any portion thereof worn out by time.”
Nixon v. Gammon, 229 S.W. 75, 78 (Ky. 1921). The exception to this rule applied
in the Illinois cases, see Rexam Bev. Can Co. v. Bolger, 620 F.3d 718, 726 (7th
Cir. 2010); Chi. Title Land Trust Co. v. Fifth Third Bank, No. 11 C 1914, 2011
U.S. Dist. LEXIS 139172 at *9 (N.D. Ill. Dec. 5, 2011), that provides for a tenant
to be liable for such repairs where they are foreseeable upon the commencement of
the lease due to the length of the lease term, has not been applied in Kentucky and
was applied in Illinois to leases of substantially longer terms than the potential
thirty-year term of the lease in the present case.
1651’s other repair claims, such as those concerning the parking lot and the
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exterior brick work, fail because 1651 has not provided admissible evidence
regarding those claims. 1651’s repair claims are grounded in the PCR issued by
AEI Consultants. The parties have provided multiple drafts of the PCR to the court;
the first was issued on July 6, 2011, and the third and final draft was issued on
February 16, 2012. The first draft provides that the investigation was undertaken
“to assist in the underwriting of a proposed mortgage loan of the real property” and
that “[t]he report has been prepared only for the purpose of securing mortgage
financing/re-financing and/or loan securitization.” R. 18-23 at 9. Furthermore, it
attempts to prohibit other uses due to the nature of the underlying investigation:
This report is intended to be utilized by lenders for the purpose of
evaluating the general overall physical condition of the property for the
purposes of securing the debt created through the financing of the
subject property. It is not intended to be used by the owner or borrower,
or any other party for the purpose of evaluating specific building
components and systems, nor is it intended to be used as an instrument
in the purchase negotiations related to the acquisition of real property.
The scope and purpose of such a report differs significantly, and may be
considerably more detailed and tailored to the specific requirements of
the client. This report will not [be] prepared to the level of detail typically
ascribed to engineering reports in the marketplace for real estate
acquisitions. Use of the report for any purpose other than evaluation of
the property as collateral for a proposed real estate loan is expressly
prohibited.
Id. (emphasis added). LabCorp argues that this language should prevent 1651 from
using the report to prove that LabCorp failed to undertake necessary repairs during
its tenancy. 1651 concedes that the first two drafts of the PCR “should be
excluded from evidence” and states that they “do not contain correct information
and do not accurately reflect AEI’s assessment of the property.” R. 27 at 8.
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However, 1651 argues, the February 2012 final draft does not contain such
limiting language; its stated purpose is to “determine the condition of the building
systems and components and note any deferred maintenance items.” Therefore,
1651 argues, this version of the report is admissible.
This argument fails because the modifications between the first and final
drafts of the PCR do not change the fact that the investigation underlying it was
not performed for the purpose of evaluating whether the tenant properly complied
with its obligations under the lease, but rather with the purpose of evaluating the
condition of the property for use in a property transaction. First, the only material
differences between the first draft and the final draft are in sections 5.1.4, 5.2.5,
and 5.4.2, which detail bids for the repair work for the pavement, roofing, and
HVAC system, respectively. The descriptions of the conditions of those aspects of
the property are not changed between the drafts. They do not account for any
further examination of the condition of the property by AEI or its agents. The only
other changes between the reports are the removal, in various sections, of the
limiting language described above; however, even in the final draft, this language
was not entirely excised. Section 3.7 provides that “[t]he investigation was
conducted on behalf of and for the exclusive use of Orion Investment &
Management LTD Corp. (Client), solely for use in a property condition evaluation of
the subject property. The report has been prepared only for the purpose of securing
mortgage financing/re-financing and/or loan securitization.” R. 24-17 at 13.
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The purpose of such an investigation as the one performed here is paramount
to whether the evidence is relevant and admissible. An investigation as to the
condition of the property for loan purposes is different from an investigation into
whether the property is in such a condition to indicate that the tenant complied
with its repair obligations under the lease. The former, while relevant, is not
probative of the issues at hand because it confuses those issues and is misleading
to the finder of fact, see Fed. R. Evid. 403; the latter, on the other hand, would be
probative. Removing the limiting language in the final draft of the PCR does not
convert it from the former to the latter, and 1651’s allegations concerning
LabCorp’s failure to make repairs are not supported by other evidence. Because the
PCR is therefore inadmissible, 1651 has failed to support its claims and LabCorp is
entitled to summary judgment. Furthermore, to the extent that the PCR is
inadmissible, the court will grant LabCorp’s motion in limine; however, the court
will deny the aspects of the motion regarding the proposed expert testimony of Mr.
Canino as moot.
Finally, as LabCorp properly terminated its month-to-month tenancy on
February 28, 2011, it was obligated by Paragraph 17 of the lease to pay for
insurance up to that date but had no further obligation to pay for insurance after it
terminated the lease. The court will thus grant summary judgment to LabCorp on
its counterclaim; as LabCorp pre-paid insurance premiums to 1651 through June
30, 2011, 1651 is liable to reimburse LabCorp for the overpaid insurance on the
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premises for the period after the termination of the lease.
Accordingly,
IT IS ORDERED that LabCorp’s motions for summary judgment (R. 18, 20)
are GRANTED and 1651’s motion for partial summary judgment (R. 21) is DENIED.
IT IS FURTHER ORDERED that LabCorp’s motion in limine (R. 19) is
GRANTED IN PART and DENIED IN PART. The PCR is inadmissible because it is
not probative pursuant to FRE 403, but summary judgment in favor of LabCorp
obviates the need to rule on the admissibility of Canino’s testimony.
A separate judgment will issue.

Signed on August 10, 2012

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