Care Realty, LLC et al v. Lakeview Neurorehabilitation Center, Inc. et al

Filing 65

ORDER re: Bench Trial. If either party believes this decision leaves specific, and pertinent, requests for findings of fact or rulings of law unaddressed, that party may, by pleading filed within fourteen (14) days of the date of this order, identify those specific requests. ( Notice of Compliance Deadline set for 4/12/2012.) So Ordered by Judge Steven J. McAuliffe.(jab)

UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Care Realty, LLC; and
THCI Company, LLC,
Plaintiffs
v.

Case No. 10-cv-95-SM
Opinion No. 2012 DNH 061

Lakeview Neurorehabilitation
Center, Inc.; Lakeview
Management, Inc.; and
Lakeview Neurorehab
Center Midwest, Inc.,
Defendants
O R D E R
This suit was brought to resolve an issue left unaddressed
in earlier litigation between the parties.

See Lakeview Mgmt.,

Inc. v. Care Realty, LLC, Case No. 07-cv-303-SM.

In the earlier

suit, the court determined that the defendants (collectively
referred to as

“Lakeview”) effectively exercised an option to

extend commercial leases on neurorehabilitative facilities it
operated in New Hampshire and Wisconsin.1

The court also found

that plaintiff (“THCI”) behaved inequitably and breached its
contractual obligation of good faith and fair dealing under the
lease, such that THCI was estopped from invoking a default
provision in the lease that otherwise might have precluded

1

The Amended Leases at issue are interrelated and
identical in every material respect. For ease of reference, the
parties, leases, and facilities will be referred to as if there
is a single plaintiff, defendant, and lease.

Lakeview’s ability to extend the lease term.

The parties now

return to resolve a dispute about the applicable “Base Rent” owed
under the lease during the extended term.

The case was tried to the court on two claims related to
determining the applicable Base Rent (Count I, seeking a
declaratory judgment, and Count II seeking specific performance)
while the remaining claims (related to damages) were reserved for
future resolution, if necessary.

Pertinent Facts
An extended recitation of facts previously found relevant to
this overall dispute appears in the court’s decision in the
earlier case.2

That factual record provides context for this

dispute, but the discussion here will focus on those facts
critical to resolving the pending issue - determining the
applicable Base Rent.

THCI purchased the leased premises and assumed the original
lessor’s rights and obligations under the lease.

After gaining

some experience administering the lease, THCI thought Lakeview
was improperly calculating one of the components of the total

2

Lakeview Mgmt., Inc. v. Care Realty, LLC, 2009 WL 903818
(D.N.H. March 30, 2009).
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rent due - referred to in the lease as “Additional Rent.”

THCI

so informed Lakeview, but Lakeview disagreed, contending that the
formula it was using to calculate Additional Rent was correct
(based upon a definitional modification alleged to have been
agreed to by the prior landlord, before THCI acquired the
property).

THCI did not formally press the matter and did not

notice a default under the lease.

Rather, it sat on its claim,

intending to bring it up only if Lakeview attempted to exercise
its option to extend the lease term (or after the period in which
Lakeview was required to exercise its option expired).

That is,

THCI determined not to put Lakeview on notice of a default
condition, at least not in a way that would permit Lakeview to
either cure the default or seek legal relief (to determine
whether a default condition actually existed), in time to
exercise its renewal option.

The lease was for a “Fixed Term” of ten years, terminating
on September 30, 2007, but subject to Lakeview’s unilateral right
to extend the term for three successive periods of five years
each.

Lakeview could exercise its option to extend the term by

giving THCI written notice “of each such extension” within a
defined time window - at least 180 days, but not more than 360
days, before expiration of the Fixed Term (or an extended term if
the option had previously been exercised).

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Lakeview’s option

rights are set out in Article 1.4 of the lease, which provides,
in pertinent part:
During each effective Extended Term, all of the terms
and conditions of this Lease shall continue in full
force and effect, except that the Base Rent for each
such Extended Term shall be the greater of (a) the fair
market value rent for the Leased Property performed by
an appraiser mutually acceptable to the Lessor and the
Lessee, as of the first day of each of the Extended
Terms or (b) The Base Rent in effect immediately prior
to the expiration of the preceding term. Said Base
Rent shall be determined concurrently with the Lessee’s
giving of the Extension Notice to the Lessor.
(emphasis added)
As the matter stands, then, Lakeview validly exercised its
option to extend the lease term on March 16, 2007, within the
described window.

THCI will not be heard to argue that the lease

could not be extended, or was not extended, because a default had
“occurred and was continuing.”

(Article 1.4)

That issue was

resolved against THCI in the earlier litigation.

In this litigation, the parties are at odds with respect to
what Base Rent applies during the extension period.

Lakeview

says the Base Rent is equivalent to the Base Rent in effect
immediately prior to expiration of the preceding term.

THCI, on

the other hand, claims that the appraisal process referred to in
Article 1.4 must be completed before the Base Rent can be
determined, since the Base Rent “shall be” the “greater of” fair

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market value rent as determined by a mutually agreed upon
appraiser, or the preceding term’s Base Rent.

Discussion
A lease is construed in accordance with familiar principles
applicable to contract construction.

Interpretation of a lease

is ultimately a question of law for the court, and the intent of
the parties to a lease is generally determined from the plain
meaning of the language used and the lease as a whole.

See

generally J.G.M.C.J. Corp. v. Sears, Roebuck & Co., 391 F.3d 364,
368 (1st Cir. 2004) (citing cases).

The applicable provisions of

Article 1.4 are generally straightforward.

The Base Rent due

during an extended term is the greater of:
a)

“The fair market value rent,”
“to be determined by an appraisal,”
“performed by an appraiser mutually acceptable to
the Lessor and Lessee.”
or

b)

“the Base Rent in effect immediately prior to the
expiration of the preceding term”
and

c)

“Said Base Rent shall be determined concurrently
with the Lessee’s giving of the Extension Notice
to the Lessor.” (emphasis added)

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Ordinarily, one would expect that, within a reasonable time
after Lakeview gave notice of its exercise of the option to
extend the lease term (March 16, 2007), the parties would have
had a discussion about either continuing the current Base Rent
into the extended term, or arranging for a mutually acceptable
appraiser to generate an appraisal to set the “fair market value
rent,” so a comparison could be made and the “greater” amount
determined.

That did not happen, of course, and it is clear why

it did not happen.

To be sure, the parties’ strained relationship, and THCI’s
penchant for obfuscation and avoidance muddied the factual
waters.

Nevertheless, it is clear, and I so find, that THCI’s

disregard of its contractual duties of good faith and fair
dealing, and its bad faith, animated its conduct from the time it
decided to refrain from giving Lakeview notice of the claimed
default condition until litigation began in the Fall of 2007.
THCI was determined not to proceed under the existing contractual
terms and endeavored to thwart Lakeview’s exercise of its option
to extend the lease term.

THCI was committed to restructuring

the relationship with Lakeview on decidedly more favorable terms,
or replacing Lakeview altogether.

It had no interest in

extending the then current lease, and no intent to acknowledge,

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even contingently, that the option to extend had been validly
exercised.

Lakeview exercised its option to extend the term, but THCI,
for reasons satisfactory to it, determined to follow a course of
action completely divorced from that called for under the lease.
First, it adopted the view, incorrectly as it turns out, that it
had succeeded in defeating the lease extension by invoking the
Additional Rent default after the option period expired.

But,

rather than declare the lease terminated as of the impending
expiration date, it merely “reserved its rights.”
WL 903818 at *15.

Lakeview, 2009

THCI then intentionally refused to address the

lease provisions related to setting the Base Rent for the
extended term.

THCI took the position that Lakeview was required

to enter into an entirely new contractual arrangement, or there
would be no relationship.

Lakeview, for its part, also hoped for a new agreement, but
one more favorable to it then the current arrangement.

As it

became increasingly clear after April of 2007 that THCI had no
intention of modifying the existing lease terms in a way more to
Lakeview’s liking, and was actually insisting upon an entirely
new lease, Lakeview requested that the appraisal process
contemplated by the lease be carried out:

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“. . . we need to move on getting fair market real
estate appraisals. We had hoped that we could avoid
the costly appraisal step. We have identified the
certified appraisers in both areas [NH and WI] and if
you could identify 5 that we could choose from we
should have a mutually agreed upon appraiser, attached
is the list,”
Ex. L875, Email from McDermott (Lakeview) to Torzelli (THCI),
dated May 2, 2007.

That email plainly invoked the Article 1.4

appraisal process.

McDermott referred to the need to get an

appraisal, to the “appraisal step” as a costly preexisting
obligation it hoped to avoid, and to the requirement that the
appraiser be “mutually agreed upon” - all of which tracks the
language of Article 1.4.

THCI understood that Lakeview was

invoking the Article 1.4 appraisal process for the purpose of
setting the Base Rent for the first extended term.

As THCI

concedes, it “did not accept [Lakeview’s] invitation to conduct a
fair market appraisal as set forth in [the] email.”
Trial Memorandum (document no. 60) at 8.

THCI’s Post-

Subsequently, in June

of 2007, Lakeview again sought to have THCI cooperate in having
an appraisal done, and again THCI refused.

On August 30, 2007, as expiration of the original term and
commencement of the extended term approached, Lakeview, through
counsel, put THCI on formal notice that it would pay the current
Base Rate in the extended term:

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[Lakeview] previously requested [THCI’s] cooperation in
selecting an appraiser to identify the current market
value of the Lease. To date, [THCI] has not responded
to [Lakeview’s] requests. Accordingly, unless or until
[Lakeview] receives a timely and appropriate response
to these requests it shall continue payment of the
current Base Rent.
Ex. 3F.

THCI, as was its apparent custom, did not respond.

The Base Rent adjustment provisions in Article 1.4 are
reasonably clear.

The language contemplates that Base Rent

during an extended term will either remain the same as in the
previous term or increase, if a fair market appraisal, performed
by an appraiser mutually agreed upon by the parties, supports a
higher rate.

In no event will the extended term’s Base Rent be

less than the current term’s Base Rent.

Therefore, since the

Base Rent can only increase as a result of the appraisal process,
that process can only benefit the lessor - THCI.

Here, THCI consciously decided not to avail itself of that
process, preferring instead to assume (or posture) that it was no
longer bound by the lease terms, because that position better
facilitated its demand that Lakeview agree to completely
different terms.

That position was consistent, as well, with its

intent not to continue under the existing lease unless compelled
to do so.

Not only did THCI not invoke the appraisal process

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that could only benefit THCI, but when the lessee sought to have
an appraisal done (which could only increase the Base Rent), THCI
still refused.

THCI’s argument to the effect that it wished to

avoid the costs of an appraisal while negotiating new terms rings
hollow - THCI never communicated that thought to Lakeview, and no
internal THCI documents support it.

Why THCI refused to

acknowledge or cooperate in the appraisal process is evident - it
simply was not interested in determining a fair market rate
adjustment in the context of the existing lease.

It wanted a

completely new deal, at a substantially higher rental rate,
without regard to what an appraised fair market value might
support.

THCI was perfectly willing to ignore the existing lease, or
perfectly willing to bank exclusively on the validity of its own
conclusion that the existing lease term had not been extended and
so it was relieved of its lease obligations with respect to an
extended term.

That position was, of course, based upon its

earlier inequitable conduct - THCI thought it had gotten away
with its “trump” of Lakeview’s right to exercise the option to
extend.

See Ex. L000754.

And, that position was wrong.

Needless to say, perhaps, but THCI cannot be heard to
complain about the absence of a fair market appraisal where the

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lease it spurned provided for one, and when it could very well
have had one for the asking, but neither asked, nor agreed to
cooperate in that process when Lakeview asked.

THCI staked out

its ground when it behaved inequitably, when it declined to
invoke the appraisal process itself, and when it refused the
appraisal process when it was offered.

Demanding that process

only after its rascality was established, its conclusions exposed
as erroneous, and well beyond any period that might conceivably
be called “contemporaneous” with Lakeview’s exercise of the
option to extend, is of course a meritless demand.

Although extensively discussed by the parties, resolution of
this dispute does not turn on whether THCI “waived” or
“forfeited” its right to invoke the appraisal process - at least
not in the classic sense.

Nothing in Article 1.4 suggests that

an appraisal is required.

Whether an appraisal is done or not

done is a matter committed, as a practical and common sense
matter, to the discretion of the lessor, THCI.

Because only THCI

stands to benefit from an appraisal relative to setting an
extended term’s Base Rent, and because such appraisals are not
inexpensive, THCI surely could not, under the provision, be
forced to undertake such a costly endeavor.

That would be

particularly so under circumstances in which THCI considered the

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current Base Rate not only satisfactory, but undoubtedly higher
than a fair market value appraisal might justify.

The parties’ intent is manifested by the plain meaning of
the escalation language used in Article 1.4, and that intent is
clear - the lessor is entitled to a Base Rate increase during an
extended term if a fair market appraisal, performed by a mutually
agreed-upon appraiser, supports a higher rate which is determined
concurrently with the lessee’s notice of extension.

But, the

lessor is not required to, and cannot be compelled to complete
the process if the lessor is satisfied with the then-current Base
Rent amount.

Article 1.4 permits the lessor to exercise its own

judgment about its own interests, and to decide not to exercise
its option to incur substantial costs associated with an
appraisal of doubtful potential value.

Indeed, the lessor may

exercise its discretion not to undergo an appraisal process for
any reason at all.

Making such a decision is not properly

described as a “waiver” or “forfeiture,” but rather, an election.

Judge (and Professor) Keeton explained the dispositive legal
point in Taylor v. Marsh, 624 F. Supp. 1042 (D. Ma. 1985):
A waiver is the intentional relinquishment of a
known right.
* * *

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Professor John Ewart in his writings on the
distinction between waiver and election identified
election as the choice of one of two or more courses
each of which has distinct legal consequences. J.
Ewart, Waiver Distributed Among the Departments:
Election, Estoppel, Contract, Release, 7–9, 84–87 (with
an Introduction by Roscoe Pound 1917). Having chosen a
particular course, a party is then foreclosed from
pursuing any other course, even if at the time of his
choice the party was not aware of the consequences.
Professor Ewart explained this aspect of election,
that a party is bound by the consequences of his choice
even though he may not have known them at the time the
choice was made, by means of the following example:
we may take as illustrative . . . the case of
a landlord who knew that a sub-lease had been
executed but was unaware that, for that
reason, he had a right to elect to terminate
the lease. If under those circumstances he
should receive, or demand, or distrain for
rent subsequently falling due, he would be
held to have elected to continue the tenancy;
and his election would be irreversible
notwithstanding his lack of knowledge.
Id. at 75.

See also id. at 85–86.

Although courts have not adopted Professor Ewart’s
terminology, his observation that waiver has been used
in very different senses is apt. Some confusion, which
may have affected the course of the present litigation,
may be avoided by distinguishing between “waiver” in
the sense of “voluntary relinquishment of known right”
(“strict waiver”) and “waiver” in the sense that
Professor Ewart calls “election” (“waiver by
election”).
Id. at 1044-45.
That is precisely what THCI did - it elected, for reasons
satisfactory to itself, to follow a different course and not
obtain an appraisal in accordance with Article 1.4.

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It was not

contractually obligated to obtain an appraisal, and failing to do
so visited no harm on the lessee.

After all, the lessee can

hardly complain about not being exposed to a process that could
only result in maintaining or increasing the current rent
structure.

Whether THCI’s reasons for following another course were
ill-advised, erroneous, contrary to its own economic interests,
or a consequence of its own misconduct or ignorance, is no more
relevant than if those reasons were sound, justified and
consistent with principles of good faith.

It matters only that

THCI, for reasons satisfactory to it, made the decision to follow
that course (declining the appraisal process), and that it was
not misled or wrongly induced to do so (it was not).

Having chosen its course, having decided to ignore the
appraisal process provision after Lakeview exercised its option,
having decided to bank on its own conclusions about the legal
enforceability of that option exercise, and having decided to
pursue an effort to obtain a restructuring of the commercial
relationship completely divorced from the existing lease, THCI is
foreclosed from revisiting those choices and making different
ones now.

Indeed, as a practical matter, THCI was likely

foreclosed well before October 1, 2007, when the extended term

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began, for at least two reasons beyond the fact that it declined
the appraisal process in May and June: 1) an appraisal process
begun in September would not likely allow for a determination of
Base Rent “concurrently” with Lakeview’s March notice of
extension; and 2) by that time, Lakeview undoubtedly was
prejudiced by THCI’s failure to invoke or participate in the
appraisal process, and/or its indifference to the process.

As

Ms. McDermott testified, these neurorehabilitative institutions
are highly regulated and complex operations.

Fundamental costs,

like Base Rent, must be determined in a timely manner to allow
other fiscal adjustments that are dependent in myriad ways on
that Base Rent (e.g., budgeted public reimbursement rates), all
of which is critical to the continued delivery of medical care to
needy patients.

Conclusion
For the above reasons, judgment shall enter in favor of
defendants on Count I (Declaratory Judgment) and Count III
(Breach of Contract - Specific Performance).

Counts II, IV, and

V all relate to damages claims that are dependent upon success on
Counts I or III.

Accordingly, those claims are dismissed.

This

decision shall constitute the court’s findings of fact and
rulings of law.

Fed. R. Civ. P. 52(a)(1).

If either party

believes this decision leaves specific, and pertinent, requests

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for findings of fact or rulings of law unaddressed, that party
may, by pleading filed within fourteen (14) days of the date of
this order, identify those specific requests and specific rulings
will be issued.

SO ORDERED.
____________________________
Steven J. McAuliffe
United States District Judge
March 29, 2012
cc:

Kristen R. Blanchette, Esq.
Christopher H. M. Carter, Esq.
Daniel M. Deschenes, Esq.
Ovide M. Lamontagne, Esq.
Jonathan M. Shirley, Esq.
Daniel E. Will, Esq.
Leigh S. Willey, Esq.

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