Ross Dress For Less, Inc. v. Makarios-Oregon, LLC et al

Filing 213

Findings of Fact and Conclusions of Law - Based on the evidence presented at the Phase I trial and the record in this case, the Court DENIES IN PART AND GRANTS IN PART the requests for declaratory relief of Ross, Makarios, and Walker Place. Although Ross's modified plans to separate and surrender thebuildings are insufficient to meet the requirements of the two leases at issue, Ross is not obligated to perform the full scope of work that Defendants demand. The Court retains jurisdiction to address in Phase II of these proceedings any matters that may still require resolution by the Court. Signed on 6/10/2016 by Judge Michael H. Simon. (mja)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON

ROSS DRESS FOR LESS, INC.,
Plaintiff,

Case No. 3:14-cv-1971-SI
FINDINGS OF FACT AND
CONCLUSIONS OF LAW

v.
MAKARIOS-OREGON, LLC, and
WALKER PLACE, LLC,
Defendants.
Thomas V. Dulcich and Rebecca A. Boyette, SCHWABE WILLIAMSON & WYATT, PC, 1211 S.W.
Fifth Avenue, Suite 1900, Portland, OR 97204; Gregory D. Call and Tracy E. Reichmuth,
CROWELL & MORING, LLP, 275 Battery Street, 23rd Floor, San Francisco, CA 94111. Of
Attorneys for Plaintiff.
Jeffrey M. Edelson and Molly K. Honoré, MARKOWITZ HERBOLD, PC, 1211 S.W. Fifth Avenue,
Suite 3000, Portland, OR 97204. Of Attorneys for Defendant Makarios-Oregon, LLC.
Darian A. Stanford and Keith A. Pitt, SLINDE NELSON STANFORD, 111 S.W. Fifth Avenue, Suite
1940, Portland, OR 97204. Of Attorneys for Defendant Walker Place, LLC.
Michael H. Simon, District Judge.
This case involves a dispute over a lessee’s obligations upon the expiration of two
leases—negotiated with two separate landlords for two conjoined buildings—that have spanned
more than 50 years. Plaintiff Ross Dress For Less, Inc. (“Ross” or “Plaintiff”) is the successor in

PAGE 1 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

interest to the original lessee. Defendant Makarios-Oregon, LLC (“Makarios”) and Walker Place,
LLC (“Walker Place”) (collectively “Defendants”) are the successors in interest to the original
lessors. Ross brings this action against Defendants, seeking a judicial declaration that Ross’s
proposed end-of-lease plans satisfy Ross’s obligations under the relevant leases. Makarios and
Walker Place both assert counterclaims for a judicial declaration clarifying the extent of Ross’s
end-of-lease obligations and breach of contract. The parties agreed to bifurcate their declaratory
actions (“Phase I”) from Defendants’ breach of contract claims for damages (“Phase II”).
To address the matters at issue in Phase I, the Court held a bench trial from May 2 to
May 13, 2016. Having weighed and evaluated all of the evidence in the same manner that it
would instruct a jury to do and having fully considered the legal arguments of counsel, the Court
makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil
Procedure 52(a) and DENIES IN PART AND GRANTS IN PART all three parties’ requests for
declaratory relief.
FINDINGS OF FACT
The Court finds the following facts by a preponderance of the evidence.
A. Stipulated Facts
1. Ross
1.

Ross is a Virginia corporation that operates discount retail department stores

across the country.
2.

Ross is currently a tenant in two attached buildings in downtown Portland located

at 618 SW Fifth Avenue (the “Richmond Building”) and 620 SW Fifth Avenue (the “Failing
Building”).
3.

Ross leases a portion of the Failing Building (specifically, the basement, first, and

second floors) and the entirety of the Richmond Building.
PAGE 2 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

4.

Ross operated a “Ross Dress for Less” store at the location from 1996 until the

summer of 2014. Ross has operated a “dd’s Discounts” store at the location from the summer of
2014 through the present.
2. The Richmond Building
5.

The Richmond Building is owned by defendant Makarios. Makarios is an Oregon

limited liability company, owned by members of the Calomiris family.
6.

The Richmond Building was constructed in its present form between 1951 and

1953 and consists of five floors and a mezzanine.
7.

Persons related to Makarios purchased the Richmond Building from New York

Life Insurance Company (“New York Life”) in approximately 1986.1
8.

New York Life owned the Richmond Building from approximately 1956 to 1986.

J.J. Newberry Company (“Newberry”), the original lessee, owned the Richmond Building for a
brief period in 1956.
9.

From completion of construction in 1953 until the transfer of ownership to

Newberry, the Richmond Building was owned by a series of related entities that the parties refer
to as the “Failings.”
10.

The predecessor to the Richmond Building (also known as the “Richmond

Building”) was also owned by the Failings from its original construction until it was razed
sometime before 1951.

1

Members of the Calomiris family acquired the Richmond Building in 1986. In
approximately 2011, Makarios, organized by members of the Calomiris family, acquired the
building.
PAGE 3 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

3. The Failing Building
11.

The Failing Building, which is also sometimes referred to as the “620 Building,”

is owned by defendant Walker Place, an Oregon LLC.
12.

The Failing Building was originally constructed in approximately 1907 as a six-

story building. An additional six floors were added in 1913.
13.

The Failing Building today consists of twelve floors and is listed on the National

Register of Historic Buildings.
14.

The Failings owned the Failing Building from 1907 until 1976, when it was

purchased by Henry A. Miller, who operated the building as “Pacific 620.”
15.

On February 1, 1997, Pacific 620 sold the Failing Building to 620 Associates.

16.

Walker Place purchased the Richmond Building from 620 Associates on

December 1, 2006.
4. Newberry
17.

Newberry was a national retail chain operating “variety” stores across the country.

It operated a store in downtown Portland, Oregon, from 1927 to 1996.
18.

Newberry’s parent corporation, McCrory Corporation, filed for Chapter 11

bankruptcy in 1992, which resulted in Newberry’s closure of the Portland store in 1996.
19.

Newberry and Ross negotiated the terms of a Lease Assignment and Assumption

Agreement (“Assignment”), dated January 25, 1996, assigning Ross all of Newberry’s rights and
obligations under the respective leases. The bankruptcy court then approved the assignment.
5. The Leases
20.

On August 20, 1946, at a time when the Failings owned both the Failing Building

and the original Richmond Building, the Failings entered into a lease with Newberry (the
“1946 Lease”).
PAGE 4 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

21.

The 1946 Lease (Ex. 8 and Ex. 301A)2 called for Newberry to raze the original

Richmond Building and construct a new Richmond Building consistent with various design
mandates.
22.

Newberry razed the original Richmond Building sometime before 1951 and

oversaw the construction of the new Richmond Building, which was completed and dedicated
in 1953.
23.

The basement, first, and second floors of the Failing Building connected

seamlessly with the basement, first, and second floors of the adjacent new Richmond Building.
Those combined floors spanning the buildings created Newberry’s retail space.
24.

The 1946 Lease was amended twice, in ways not related to this lawsuit. The first

amendment occurred on April 5, 1954 (Ex. 532), and the second took place on June 23, 1955
(Ex. 533).
25.

In August 1956, the Failings sold the new Richmond Building to Newberry

(Ex. 107). In September 1956, Newberry sold the Richmond Building to New York Life
(Ex. 108).3
26.

Newberry entered into a lease for the Richmond Building with New York Life on

September 24, 1956 (the “1956 Richmond Lease,” Ex. 1 and Ex. 301C).

2

Exhibits received in evidence at trial are referred to as “Ex.” followed by the number of
the exhibit and, if applicable, a specific page number. Docket entries in the court record are
referred to as “Dkt.”
3

The parties stipulated that the sale to New York Life occurred in October 1956. The
undisputed evidence, including Exhibit 108, establishes, however, that the sale occurred in
September 1956. The Court therefore assumes that the parties’ stipulation included a scrivener’s
error.
PAGE 5 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

27.

On August 31, 1956, approximately a month before the 1956 Richmond Lease,

the Failings entered into a new lease with Newberry for the Failing Building (the “1956 Failing
Lease,” Ex. 91 and Ex. 301B).
28.

The 1956 Failing Lease was amended five additional times: on

September 30, 1983 (the “Fourth Amendment,” Ex. 92 and Ex. 301D); on February 21, 1990 (the
“Fifth Amendment,” Ex. 93 and Ex. 301E); on March 1, 1996 (the “Sixth Amendment,” Ex. 94
and Ex. 301F); on October 20, 2006 (the “Seventh Amendment,” Ex. 95 and Ex. 301G); and on
May 6, 2009 (the “Eighth Amendment,” Ex. 96 and Ex. 301H).
29.

The Fourth Amendment in 1983 and the Fifth Amendment in 1990 were between

the Failings and Newberry.
30.

The Sixth Amendment in 1996 was between Pacific 620 and Ross.

31.

The Seventh Amendment in 2006 was between 620 Associates and Ross.

32.

The Eighth Amendment in 2009 was between Walker Place and Ross.

33.

Both the 1956 Richmond Lease and the 1956 Failing Lease expire on

September 30, 2016.
B. Facts the Court Finds Established at Trial4
1. The Richmond Building Construction and Failing Building Remodel
34.

To accomplish the connection between the Richmond Building and the Failing

Building at the basement, first, and second floors, Newberry perfectly aligned the Richmond
Building’s floor structure with the existing floor structure of the Failing Building at those levels.

4

The Court’s findings of fact regarding the physical appearance, layout, and conditions
of the Richmond Building and the Failing Building are based on, in addition to the evidence
received at trial, a judicial site visit to the two buildings that took place on May 10, 2016.
Representatives and counsel for the three parties were present for the entirety of the judicial site
visit and documented the visit with photographs.
PAGE 6 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

After aligning the floors, Newberry poured new concrete slab floors that cross from one building
to the next and span the gap between the buildings’ steel framing. The concrete slabs are four to
six inches thick on each floor.
35.

In contrast to the basement, first, and second floors of the Richmond Building, the

third, fourth, fifth, and mezzanine floors of the Richmond Building are not connected to the
Failing Building. The third floor of the Richmond Building directly touches, or abuts, the Failing
Building. At the fourth floor and above, however, the Richmond Building “steps back” from the
Failing Building. Thus, although the buildings abut at the northwest stair tower all the way to
roofline of the Richmond Building, the Richmond Building does not abut against the Failing
Building along most of the fourth, fifth, and mezzanine floors.
36.

At the basement, first, and second floors of the buildings, there are six columns on

each side of the property line. At the basement level, the columns in the Richmond Building are
separated from the columns in the Failing Building by 28 inches. On the first and second floors,
the columns on each side of the property line are separated by 19 inches. The twelve columns on
each floor are encased in concrete “fireproofing” such that the columns of the buildings are
connected and the space between the two sets of columns is not visible.5
37.

Newberry built escalators between the basement, first, and second floors of the two

buildings. The escalators—including escalator beams also encased in concrete fireproofing—
crossed the property line. If the beams, which still cross the property line today, were to be
severed, the beams would require additional support in each building.

5

The stated distances between the columns are per the 1951 plans. Because the columns
are encased in concrete fireproofing, the actual distances between the columns cannot be
confirmed without destructive testing. No such destructive testing has taken place.
PAGE 7 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

38.

At the end of construction, the Richmond Building had three elevators (two freight

elevators and one passenger elevator) serving all of the floors, including the basement. As part of
the 1951-53 construction, Newberry did not add or remove any elevators in the Failing Building.
The Failing Building continued to have a separate lobby and elevator bank, with service to the
basement and office space on the third floors and above, which Newberry did not lease. The
Failing Building did not have its own set of elevators for service between Newberry’s retail
floors.
39.

Several staircases, including a “Grand Staircase” in the Failing Building,

connected the basement, first, and second floors of the Richmond Building and the Failing
Building.
40.

Both buildings had restrooms that customers could access in the basements and on

the second floors. There were also restrooms on the third, fourth, and fifth floors of the
Richmond Building.
41.

Both before and after the 1951 construction, the Failing Building did not have its

own loading door or street loading area. Retail loading occurred through the Richmond Building.
42.

On the Failing Building side, the basement extended under the sidewalk. Newberry

had access to the area under the sidewalks, referred to as the “sidewalk vaults.”
43.

Also on the Failing Building side, Newberry had access to a steel exhaust stack,

referred to as the “vent stack,” that predates the 1951 construction. The vent stack is supported
by the second floor of the Failing Building and penetrates the second floor ceiling. Where the
vent stack penetrates the second floor ceiling, the first and second floors of the Failing Building
jut out from the rest of the building such that part of the Failing Building’s second floor has its
own roof that is exposed to the elements. The vent stack extends through this second floor roof

PAGE 8 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

and continues up the southeast corner of exterior façade, past the parapet on the twelfth floor.
Newberry used the vent stack to vent exhaust from restrooms and the hood of a lunch counter in
the store. The Failing Building landlord could not have sealed off, severed, or otherwise
decommissioned the upper levels of the vent stack without interfering with Newberry’s use of
the vent stack. No other tenant in the Failing Building used the vent stack.
44.

The Richmond Building’s exterior walls directly abut against the adjacent Caplan

Building, a building on the same block that was built in approximately 1910. The Failing
Building’s exterior walls directly abut against the adjacent Kress Building, another building on
the same block that predates the construction of the Richmond Building.
2. The Leases and Deeds
a. The Richmond Building
45.

In August 1956, the Failing Landlords deeded the Richmond Building to

Newberry. According to the deed (the “Newberry Deed”), “the foundations and footings” of the
Richmond Building and the Failing Building “shall be and remain common foundations and
footings for the mutual use and benefit of the parties hereto, their heirs, successors and assigns,
so long as said foundations and footings shall stand, and this agreement shall be deemed a
covenant running with the land.”6
46.

Notwithstanding the common foundations and footings, the Newberry Deed also

created an easement allowing the parties to enter each other’s property, exercisable at the time
Newberry or its successors ceased to occupy the Richmond Building or Newberry’s leased space
in the Failing Building,
to the extent reasonably required to remove the escalators crossing
the property line and properly close up the openings in the floors
6

Ex. 107 at 1.

PAGE 9 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

which accommodate such escalators, construct such good and
sufficient masonry curtain walls along the property line between
the Failing Building and the premises hereby conveyed as may be
required to physically separate said structures, and make such
alterations and changes in and to the electrical, plumbing and other
systems and apparatuses as may be necessary to completely
separate said buildings.7
47.

In September 1956, Newberry entered into a “sale lease-back” transaction with

New York Life. On the same day, Newberry both deeded the Richmond Building to New York
Life and signed the 1956 Richmond Lease with New York Life.
48.

Similar to the Newberry deed, the deed to New York Life (the “New York Life

Deed”) required that the foundations and footings of the Richmond Building and the Failing
Building remain in common “so long as such foundations and footings shall stand.”8
49.

Further, the New York Life Deed echoed the Newberry Deed’s easement

provision, granting New York Life an easement to enter the Failing Building, exercisable at the
time the grantor or its successors should cease to occupy the Richmond Building or leased space
in the Failing Building,
to the extent reasonably required to remove the escalators crossing
the property line and properly close up the openings in the floors
which accommodate such escalators, construct such good and
sufficient masonry curtain walls along the property line between
said ‘Failing Building’ and [the Richmond Building] as may be
required to physically separate said structures, and make such
alterations and changes in and to the electrical, plumbing and other
systems and apparatuses as may be necessary to completely
separate said buildings.9

7

Ex. 107 at 2.

8

Ex. 108 at 1.

9

Ex. 108 at 1.

PAGE 10 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

50.

The 1956 Richmond Lease to Newberry also contained a provision for separating

the Richmond Building from the Failing Building at the end of the lease. In § 16.02, the 1956
Richmond Lease states:
The Tenant [Newberry] agrees that, prior to the expiration of this
lease or, in the event of termination of this lease for any reason
whatsoever, promptly after such termination, the Tenant, at the
Tenant’s sole cost and expense, shall make such alterations to
the building then erected on the demised premises as shall be
necessary to constitute such building an entirely independent and
self-sufficient structure. Such alterations shall include, without
in any way limiting the generality of the foregoing, the removal of
escalators, the construction of footings and a masonry curtain
wall along the westerly boundary line of the demised premises, the
removal of any facing encroaching upon adjoining premises, the
removal of signs, the relocation of plumbing, drain pipes,
sprinklers, electrical wiring, lighting fixtures and exhaust ducts, the
installation of a new soil connection to the city sewer, a new steam
connection and new electrical service conduits and equipment and
provision for a new toilet and rest room. The provisions of this
Section 16.02 shall survive the expiration or any termination of
this lease.10
51.

Additionally, the 1956 Richmond Lease contained provisions relating to the

condition in which Newberry promised to return the building. In § 16.01, the lease states:
The Tenant shall, upon the expiration or termination of this
lease for any reason whatsoever, surrender to the Landlord the
buildings, structures and building equipment then upon the
demised premises, together with all alterations and replacements
thereof then on the demised premises, in good order, condition
and repair, except for reasonable wear and tear; provided,
however, that if the Tenant shall have made any alteration or
alterations adapting the buildings, structures and building
equipment upon the demised premises for multiple occupancy,
then, in such event, prior to the expiration or termination of this
lease, the Tenant, at the Landlord’s request, shall restore said
buildings, structures and building equipment to the order and
condition which existed prior to such alteration or alterations.11
10

Ex. 1 at 42-43 (emphasis added).

11

Ex. 1 at 41 (emphasis added).

PAGE 11 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

52.

Newberry also agreed to several other provisions in the 1956 Richmond Lease

that are relevant to this lawsuit. In § 4.01, Newberry agreed that it would not, without the
landlord’s prior permission, use the Richmond Building “for any purpose other than mercantile
purposes.”12
53.

In § 4.02, Newberry agreed that it would, “throughout the demised term, and at no

expense whatsoever to the Landlord,” ensure that the condition of the Richmond Building
complied “with all laws and ordinances and the orders, rules, regulations and requirements of all
federal, state, county and municipal governments, and appropriate departments, commissions,
boards and officers thereof.”13 Newberry agreed to ensure compliance with all laws, ordinances,
rules, and regulations, both “foreseen and unforeseen, ordinary as well as extraordinary, and
whether or not the same shall presently be within the contemplation of the parties hereto or shall
involve any change of governmental policy or require structural or extraordinary repairs,
alterations or additions.”14 Moreover, Newberry agreed to ensure compliance “irrespective of the
cost thereof.”15
54.

Section 7.01 obligated Newberry to, “throughout the demised term, at no expense

whatsoever to the Landlord, take good care of the demised premises . . . and . . . not do or suffer
any waste with respect thereto.”16 This requirement meant that Newberry agreed to “promptly
make all repairs, interior and exterior, structural and non-structural, ordinary as well as

12

Ex. 1 at 9.

13

Ex. 1 at 9.

14

Ex. 1 at 9.

15

Ex. 1 at 9.

16

Ex. 1 at 15-16.

PAGE 12 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

extraordinary, foreseen as well as unforeseen, necessary to keep said buildings and
improvements in good and lawful order and condition.”17 The lease expressly defines “‘repairs’
as applied to building equipment” as including “replacements, restoration and/or renewals when
necessary.”18 The section further requires Newberry to “keep and maintain all portions of the
demised premises, including, without limitation, all building equipment, heating plant and
system, air conditioning plant and system, and the sidewalks adjoining the same, in a clean and
orderly condition, free of accumulation of dirt, rubbish, snow and ice.”19
55.

In § 9.01, the 1956 Richmond Lease requires Newberry to “make no structural

alterations to the building or buildings now or hereafter erected upon the demised premises.”20
Section 9.01 further requires Newberry to refrain from “mak[ing] any other alterations which
would change the character of said building or buildings, or which would weaken or impair the
structural integrity, or lessen the value of said building or buildings, without the prior written
consent of the Landlord, which consent shall not be unreasonably withheld.”21
56.

The 1956 Richmond Lease is a “triple-net lease,” meaning that the tenant is

responsible for taxes, insurance, and all other expenses for the operation, repair, and maintenance
of the leased premises.
57.

The Richmond Lease’s original term was for 30 years, expiring in

September 1986. The Richmond Lease provided, however, that Newberry had the option to

17

Ex. 1 at 16.

18

Ex. 1 at 16.

19

Ex. 1 at 16.

20

Ex. 1 at 20.

21

Ex. 1 at 20.

PAGE 13 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

exercise three ten-year extensions, with the term of the last extension expiring on September 30,
2016. Newberry and its successors could exercise these renewal options provided that the tenant
“shall not be in default, at the time when any such option shall be exercised by the Tenant
hereunder, or at the expiration of the current term of the lease.”22
b. The Failing Building
58.

The 1946 Failing Lease provided that the Richmond Building “shall be so

constructed that by the installation of partition walls between it and the Failing Building, it can
be used as a self contained [sic] building as regards plumbing, heating, wiring and vertical
transportation.”23
59.

On August 31, 1956, the Failing landlords and Newberry amended and restated the

1946 Failing Lease with the 1956 Failing Lease. This latter lease, among its many provisions,
stated that at the termination of Newberry’s tenancy in the Failing Building, Newberry would “at
[Newberry’s] sole cost and expense do and perform such work as shall be necessary to
physically separate, and constitute entirely independent and self-sufficient, the [Failing
Building] from the adjacent ‘Richmond Building’ premises.”24 The lease, “[w]ithout limiting
the generality of the foregoing,” stated that this work must include:
removal of the escalators and the closing in of the openings in the
floors and walls of the Failing Building which accommodate the
same; construction of footings and masonry curtain walls along the
easterly boundary line of the demised premises; and such
appropriate alterations, changes and relocations of portions of the
plumbing, electric, and other systems and apparatuses as may be
necessary to make the ‘Failing Building’ space independent of the
‘Richmond Building’. The material used in said work shall
22

§ 21.01 of the 1956 Richmond Lease, Ex. 1 at 46.

23

Ex. 8 at 17.

24

Ex. 301B at 4 (emphasis added).

PAGE 14 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

conform to the material of said Failing Building, and the work
shall be done in a good and workmanlike manner.25
60.

Among its other provisions, the 1956 Failing Lease contained requirements

relating to the condition in which Newberry covenanted to return the premises at the end of the
lease. Newberry agreed, among other things, to “at its own cost and expense keep the leased
premises in good condition and repair” during the term of the lease and, at the expiration of the
term of the lease, to “surrender the premises to the Lessors . . . in the same condition as that in
which the Lessee is, by the terms of this lease, obligated to put the premises, reasonable use and
wear thereof, . . . excepted.”26 Newberry also agreed “[n]ot to commit or suffer any strip or waste
of the leased premises.”27
61.

The 1956 Failing Lease further required Newberry to comply with, “at its own

expense,” all relevant federal, state, and city “laws, ordinances, rules and regulations . . .
pertaining to the leased premises, occasioned by or affecting the use of the leased premises by
Lessee.”28 Under the lease, however, Newberry was not responsible for compliance “in so far as
such laws, ordinances, rules and regulations may require structural changes in or additions or
improvements to the foundation, exterior walls, roof or sidewalks thereof.”29 The lease
prohibited Newberry from making alterations that “change the general structural character of the
building.”30
25

Ex. 301B at 4.

26

Ex. 301B at 8-9.

27

Ex. 301B at 9.

28

Ex. 301B at 9-10.

29

Ex. 301B at 10.

30

Ex. 301B at 6.

PAGE 15 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

62.

Under the Premises Clause of the Failing Lease, Newberry leased “certain space

in the building,” defined as:
All of the first or ground floor of [the Failing Building] except the
building entrance, elevator lobby, elevators and main stairway; all
of the basement under said building except the space occupied by
the heating plant and necessary space now used by Lessors in the
operation and management of said building . . . ; and all of the
second floor of said building except the portion thereof used for
elevators and stairways.31
63.
64.

The “heating plant” for the Failing Building is not located in the sidewalk vaults.
The 1956 Failing Lase also specifies:
The Lessors do not warrant to the Lessee a continued use of the
open space under the sidewalks adjoining the leased premises, but
the Lessee shall have the use of this space and shall enjoy all the
rights to such space as would accrue to the Lessors had they
remained in full possession of the premises.32

65.

The 1956 Failing Lease is a “triple-net lease,” meaning that the tenant is

responsible for taxes, insurance, and all other expenses for the operation, repair, and maintenance
of the leased premises.
66.

The 1956 Failing Lease’s original term was for 36 years, expiring in

February 1987. The lease was amended on or about September 30, 1983; February 21, 1990;
March 1, 1996; October 20, 2006; and May 6, 2009, giving the tenant the option to extend the
lease up to January 31, 2043. The current term is set to expire on September 30, 2016, and Ross
does not seek to extend the lease beyond that date.

31

Ex. 301B at 2.

32

Ex. 301B at 10-11.

PAGE 16 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

3. Ross’s Tenancy
a. Ross’s Acquisition of the Leasehold Rights and Obligations
67.

Newberry and Ross negotiated the terms of the Assignment, dated

January 25, 1996, and submitted that Assignment to the bankruptcy court for approval on
February 9, 1996.
68.

The Assignment provided that Ross would assume from Newberry “all of

Assignor’s leasehold estate and right, title, interest and obligations in, to and under [the 1946
Failing Lease as restated by the 1956 Failing Lease] and [1956 Richmond Lease] and [the
Failing Building] and [the Richmond Building] in their respective existing ‘AS IS’ physical
conditions.”33
69.

Under the Assignment, Ross, as the Assignee, retained the right to void the

Assignment on or before February 15, 1996, if Newberry did not satisfy a number of conditions
before closing the transaction. One of the conditions was “[i]nspection and approval by Assignee
of the physical condition of [the premises] including, without limitation, structural matters,
mechanical and utility systems, roof and drainage systems and environmental consideration.”34
70.

Another condition in the Assignment was the receipt by Ross of “[a]n estoppel

certificate, in a form satisfactory to Assignee, executed by each landlord/lessor in form
reasonably satisfactory to Assignee, verifying, among other things, that there are no defaults
under the respective Lease by Assignee and no circumstances which, if uncorrected, would
become a default, other than defaults which will be cured by Assignor at the close of escrow as a

33

Ex. 8 at 2 (emphasis in original).

34

Ex. 8 at 5.

PAGE 17 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

result of this Assignment.”35 Such certificates are commonly used in the industry to effect
waivers of lease rights.
71.

Newberry never obtained and, thus, never provided to Ross any estoppel

certificate from the landlords of either the Richmond Building or Failing Building as discussed in
the Assignment. Ross did not insist on receiving any estoppel certificate and accepted the rights
and obligations of the Assignment despite the failure of this condition.
72.

Ross took no steps to void the Assignment. On February 15, 1996, the bankruptcy

court approved the Assignment.
73.

On March 1, 1996, Ross entered into a Sixth Amendment to the Failing Lease.

Ross affirmed that it had assumed all of Newberry’s existing obligations, “including specifically,
but not by way of limitation, the obligation to physically separate and restore the premises at
the expiration or upon termination of the Lease, as described in the paragraph entitled
‘Severance’ on page 3 of the August 31, 1956 amendment and restatement of the Lease.”36
74.

The Sixth Amendment also gave Ross the right to remodel the Failing Building

after obtaining written approval of the plans from the landlord. “In altering or remodeling the
leased premises,” Ross agreed that it would “not injure or change the general structural character
of the leased premises or the building of which the premises are a part” and that Ross would do
all work “in full compliance with all federal, state and municipal laws and regulations.”37 Ross
further agreed that it would “bear any responsibility for costs and expenses associated with any
modifications to the building which, as a result of Lessee’s work or other activities in the

35

Ex. 8 at 6.

36

Ex. 94 at 1 (emphasis added).

37

Ex. 94 at 3.

PAGE 18 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

building, may be required by federal, state or local laws.”38 Such laws included but were “not
limited to the Americans with Disabilities Act, seismic laws, fire and life safety laws,
environmental or hazardous material laws and regulations.”39
b. Ross’s Modifications to and Use of the Buildings
75.

In June 1996, Ross submitted remodel plans to the City of Portland (“the City”).

Ross proposed renovating the two buildings’ first and second floors to make the new Ross store
look consistent with Ross’s other retail stores. Ross did not propose any renovations or repairs to
the upper floors of the Richmond Building. Plans for the remodel were publicly on file with the
City.
76.

As part of the remodel plans, Ross proposed removing one staircase and covering

the Grand Staircase between the first floor and the basement of the buildings. Ross wanted to
remove or close these staircases because Ross did not plan to use the basement space for retail
purposes.
77.

In its plans submitted to the City, Ross designated the unused area in the

basements as “VACANT NO OCCUPANCY – NO STORAGE SEPARATE PERMIT
REQUIRED FOR OCCUPANCY.”40 The “vacant” designation meant that Ross would not have
to meet certain code obligations required for areas with occupancy.41

38

Ex. 94 at 3.

39

Ex. 94 at 3.

40

Ex. 111 at 6 (emphasis in original).

41

As discussed in the Court’s Opinion and Order dated March 25, 2016 (Dkt. 99),
in 2004, the City added Chapter 24.85, Seismic Design Requirements for Existing Buildings
(“Title 24”), to the Portland City Code. See Dkt. 60-6. Title 24 establishes baseline occupancies
for all buildings based on the permit drawings on record with the City in 2004. If, after 2004, the
baseline occupancy increases by 150 occupants or more, Title 24 requires seismic upgrades so
that historical buildings meet current code standards. Because the 1996 remodel to the Richmond
PAGE 19 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

78.

The basements of the two buildings remained accessible by elevators and a small

staircase for storage and office space.
79.

The City approved Ross’s plans, and the Ross store opened for business on

October 17, 1996.
80.

During Ross’s tenancy, Ross elected to decommission or remove certain heating,

ventilation, and air conditioning (“HVAC”), electrical, and plumbing systems and building
equipment, particularly in the unused portions of the basements and in the third through
mezzanine floors of the Richmond Building. In the spaces that no long had heating, Ross
installed freeze-protection systems. These changes in the buildings were not shown in the plans
submitted to the City in 1996.
81.

Ross left systems, equipment, and other elements of the buildings that were

already decommissioned by Newberry or deteriorating (such as the restrooms on the unused
floors of the Richmond Building) in their then-existing state. As of May 12, 2016, the portions of
Failing Building leased by Ross had no working restrooms.
82.

Additionally, Ross decommissioned one of the freight elevators in the Richmond

Building. As the other two elevators in the Richmond Building wore down from use, Ross used
the decommissioned elevator for spare parts to repair the other two elevators.
83.

In 2004, with the knowledge and consent of the landlords, Ross removed most of

the escalator structures that spanned the property line. Ross did not remove the escalator beams.
These beams still cross the property line between the two buildings. Nothing in Ross’s

Building and the Failing Building basements decreased the allowable occupancy by more than
150 occupants, restoring the basements to the pre-1996 occupancy capacities would require
seismic upgrades.
PAGE 20 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

correspondence with the landlords indicates, one way or the other, whether the landlords
expected that Ross would remove or sever the escalator beams at the expiration of the leases.
84.

During its tenancy, Ross did not use the portions of the basements that it specified

as “vacant” in the plans submitted to the City. Ross did, however, occasionally use the sidewalk
vaults of the Failing Building for storage. Ross had continuous access to the sidewalk vaults.
85.

Ross did not use the third floor and above of the Richmond Building. Nor did

Ross use the vent stack in the Failing Building. Ross did, however, have unlimited access to all
floors of the Richmond Building. Ross also had access to the vent stack on the second floor of
the Failing Building, such that Ross could have chosen to make use of that apparatus.
86.

Separate gas meters for both buildings are located in the Richmond Building. The

Failing Building does not have its own gas meter.
c. Ross’s Communications with its Landlords Regarding Modifications and
Lease Obligations
i. Correspondence and Interactions with the Richmond Building
Landlords
87.

On February 5, 1997, Ross sent a letter to the Calomiris family’s representative,

Bradley Miller. The letter stated that Ross had previously “overlooked” any requirement to send
construction plans to the Richmond Building landlord.42 The letter added that Ross was sending
copies of the plans for the landlord’s records. The letter also stated that Ross would provide
copies of any certificate of occupancy when it became available. Makarios offers no evidence
that Ross failed to send to Mr. Miller the construction plans in February 1997, and the Court
finds that Mr. Miller, serving as the Calomiris family’s agent, did receive Ross’s construction
plans in February 1997.

42

Ex. 542 at 1.

PAGE 21 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

88.

On April 14, 1997, Mr. Miller notified Ross that the Calomiris family believed

that Ross had made unauthorized alterations to the Richmond Building basement that changed
the character of the building and decreased the building’s value. On April 23, 1997, Ross
responded to Mr. Miller, stating that the changes to the basement did not constitute structural
changes and did not decrease the value of the building.
89.

On April 17, 1998, Mr. Miller notified Ross that Ross needed to make repairs to

the Richmond Building because the Calomiris family “has a very serious concern regarding the
repair and maintenance of the Building, its condition and whether it is structurally sound.”43 The
letter stated that if Ross did not cure the lease violations, “the landlord will pursue its remedies
under the Lease.”44
90.

On December 22, 1998, Ross replied that it had hired structural engineers to

evaluate the building and that it “is in excellent conditions structurally.”45 Ross added that it
“consider[ed] this matter to be closed.”46 Between 1998 and the commencement of this litigation,
neither the Calomiris family nor Makarios notified Ross that any alterations to the Richmond
Building basement would still need to be remedied at the lease’s expiration or that the landlord
considered the matter still open. When the time came to renew Ross’s lease in 2006, the
Calomiris family allowed Ross to do so and did not mention this subject.

43

Ex. 45 at 3.

44

Ex. 45 at 3.

45

Ex. 46 at 2.

46

Ex. 46 at 3.

PAGE 22 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

ii. Correspondence and Interactions with the Failing Building
Landlords
91.

On June 20, 1996, Gary Brannan, Ross’s director of real estate, sent a letter to

Charles Fettig, the representative of the Failing Building landlord (Pacific 620 at the time). The
letter stated that Ross’s architect was delivering a set of plans to Mr. Fettig that day for the
proposed remodel and alterations to the Failing Building. Mr. Brannan requested that Mr. Fettig
contact the lessor and obtain approval of the plans. The letter further stated that Ross would
deem such plans approved if Mr. Fettig did not notify Ross of a reasonable basis for withholding
approval within ten days. The letter was faxed to Mr. Fettig, and a communication report
confirms receipt.47
92.

On July 16, 1996, Mr. Fettig responded to Mr. Brannan. Mr. Fettig stated,

“Enclosed are the construction drawings which have been approved by the ownership of the
620 Building.”48 The letter makes no mention of any plans that the landlord did not approve,
indicating that Pacific 620 approved the entirety of the construction plans that Ross submitted to
the City in June 1996. The Court draws the reasonable inference that the Failing Building
landlord approved the entirety of Ross’s submitted plans.
93.

Before Walker Place’s purchase of the Failing Building in 2006, Walker Place

undertook a due diligence process. As part of that process, Waterleaf Architects and T.M. Rippey
Consulting Engineers analyzed the building for Walker Place. Walker Place also hired a property
management group to do a “lease digest,” analyzing the leases of all tenants in the Failing
Building, including Ross.

47

See Ex. 266.

48

Ex. 267 at 1.

PAGE 23 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

94.

After this due diligence process, Walker Place undertook structural repairs to the

building. As part of the repairs, Walker Place installed a “shear wall” on the basement, first, and
second floors of the Failing Building. The shear wall is a load-bearing wall that provides seismic
support to the Failing Building. Because the concrete slab floors of the buildings are continuous
and the columns of the buildings are connected, the shear wall in the Failing Building also
provides some seismic support to the Richmond Building.
95.

At no time during the due diligence process or structural repairs did Walker Place

notify Ross that Ross would be required to restore the occupancy capacity of the basement to
pre-1996 levels.
96.

In October 2006, Ross and Walker Place’s predecessor in interest entered into a

Seventh Amendment to the 1956 Failing Lease. The Seventh Amendment stated, “Lease in Full
Force and Effect.”49 On May 6, 2009, Ross and Walker Place entered into an Eighth Amendment
to the Failing Lease. Again, the amendment stated, “Lease in Full Force and Effect.”50
97.

On May 17, 2013, Brandon Anderson, the principal of Walker Place, sent a letter

to Ross concerning Ross’s separation obligations. The letter listed concrete masonry unit
(“CMU”) walls at the basement, first, and second floors as a separation requirement. The letter
also discussed “[s]aw-cut[ting] and remov[ing] concrete slab-on-grade,”51 which is the concrete
floor at the basement level. This saw-cutting discussion was in the section of the letter in which
Mr. Anderson discussed the installation of a new elevator pit. Mr. Anderson made no indication
that he expected Ross to cut through the first and second floors in order to install a multi-story

49

Ex. 95 at 1.

50

Ex. 96 at 4.

51

Ex. 11 at 4.

PAGE 24 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

wall. The Court infers that Walker Place did not, in 2013, interpret the lease to require such a
wall or even desire such a wall.
4. Separating the Buildings
a. Ross’s Initial Separation Analysis
98.

In 2009, Ross began exploring how to comply with its separation obligations

under the leases. A contractor, Camco Construction (“Camco”), began analyzing what types of
walls Ross should construct. On March 16, 2009, Gen Grover of Camco sent an email to Ross’s
Vice President of Construction for the Portland area, Michael Post, stating, “I’m figuring double
masonry walls because, if separated, one future owner may have the option to demolish ‘his’
building without the whole thing coming down.”52 Camco also came up with a list of work
necessary to separate the Richmond Building from the Failing Building and an estimated cost for
each work item.
99.

On June 11, 2012, Mr. Post forwarded the March 16, 2009 email from Mr. Grover

to Ross’s new Portland-area Vice President of Construction, Benjamin Wheeler. Mr. Post
attached to the June 11, 2012 email the cost estimate that Camco had completed in 2009.
100.

On June 15, 2012, Dave Parry of Camco sent Mr. Wheeler an updated cost

estimate for separating the Richmond Building from the Failing Building. The cost estimate
included a masonry wall on both sides of the property line. The cost estimate also included a
“saw cut” of the concrete slab floors and removal of the section of the slabs between the
buildings. Camco estimated that cutting the concrete slabs would involve sawing through 400

52

Ex. 547 at 1.

PAGE 25 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

lateral feet of concrete. Both the sawing and removal of the concrete would cost an estimated
$2,500.53
101.

On June 19, 2012, Mr. Wheeler responded to Mr. Parry that he “need[ed] creative

ways (if they exist) to satisfy the lease but reduce the cost as much as possible.”54
102.

On July 19, 2012, Mr. Wheeler sent his boss, John Haskins, an email

summarizing the scope of work for separating the buildings. Mr. Wheeler stated that the work
“include[d] reinstallation of masonry walls.”55
103.

By the fall of 2013, Ross had stopped working with Camco in connection with the

Richmond Building and Failing Building project. Instead, Ross hired MCG Architects (“MCG”)
to come up with construction plans for separating the buildings.
104.

On September 4, 2013, Mr. Wheeler emailed Brian Bowles at MCG. Mr. Wheeler

explained that the Ross store in Portland “is specifically occupied in two separate buildings and
we have a lease obligation to do a demising wall and utility split to return the space to two
separate buildings.”56 Mr. Wheeler continued, “The wall is assumed to be a double masonry wall
but [we] are open to not doing that if code allows.”57
105.

On September 23, 2013, MCG completed a survey report describing an

alternative to masonry walls. MCG proposed constructing metal stud gypsum walls.

53

Ex. 548 at 1-2.

54

Ex. 30 at 2.

55

Ex. 551 at 1.

56

Ex. 101 at 1.

57

Ex. 101 at 1.

PAGE 26 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

b. The Parties’ Respective Separation Proposals
106.

MCG drew up a set of construction plans for Ross for separating the buildings.

The plans include metal stud gypsum walls between the Richmond Building and the Failing
Building instead of masonry walls. The plans do not include any provisions for severing the
continuous concrete slab floors or removing or cutting the escalator beams. Ross submitted the
plans to Defendants as Ross’s proposal for separating the buildings.
107.

As an alternative to its metal stud gypsum walls, Ross now proposes metal stud

gypsum walls with masonry veneer. A metal stud gypsum wall with a masonry veneer would not
have masonry as the primary construction material.
108.

Defendants have proposed their own walls. Catena Consulting Engineers, an

engineering firm hired by Defendants, came up with several options for separating the buildings.
“Option A” is equivalent to the metal stud gypsum wall proposed by Ross but also involves
severing the escalator beams that cross the property line. “Option B” calls for a masonry wall on
both sides of the property line with severed escalator beams and a reinforced concrete shear wall
that provides seismic support for the Richmond Building, similar to the shear wall in the Failing
Building. “Option C” provides for the same features as Option B, but, in addition, Option C
involves cutting through the concrete slab floors and columns, removing the concrete between
the buildings, and thereby creating a 12- to 18-inch gap, or “seismic joint,” between the
Richmond Building and the Failing Building to ensure that the buildings meet current seismic
code requirements. Options A, B, and C all call for three one-story walls at the basement, first,
and second floor levels, rather than a single, continuous multi-story wall on both sides of the
property line.
109.

In April 2016, Waterleaf Architects, the architecture firm hired by Defendants,

came up with another option for separating the buildings. This option reflects the “best guess” of
PAGE 27 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

architect William Bailey, Defendants’ expert, of what the parties to the 1956 leases meant by
“masonry curtain walls.” At trial, the parties referred to this option as the “1956 Fit” Option. The
1956 Fit Option entails cutting through the concrete slab floors and installing a single, multistory masonry wall on both sides of the property line. Each wall would pass through the severed
floors and would be positioned outside the steel framing of the buildings in the 19- to 28-inch
gap between the buildings’ columns.
110.

Mr. Bailey also discussed a “1956 Fit Plus” Option that would have all the

features of the 1956 Fit Option plus severed escalator beams and a shear wall built in the
Richmond Building. At trial, Defendants argued that the leases require this 1956 Fit Plus Option.
c. Comparison of the Proposals
111.

“Masonry” consists of modular block, such as brick or concrete masonry units

(CMU), held together by mortar.
112.

Masonry walls have several advantages over light-weight, metal stud gypsum

walls. First, masonry resists water intrusion better than gypsum board. The material on the
outside of gypsum board is paper, which is subject to mold and decay. Masonry is not subject to
such problems. Second, masonry is more secure than gypsum board. Unlike masonry, gypsum
board can be penetrated with an inexpensive, hand-held jab saw. Third, masonry generally has
superior acoustical properties to gypsum board, providing more sound-protection.
113.

Even when a metal stud gypsum wall receives a waterproofing finish, such as

masonry veneer, that wall still does not have the same level of water resistance as a wall
constructed entirely of masonry.
114.

Cutting the concrete slab floors is not a prohibitively expensive activity. Cutting

the concrete floors could cost as little as $2,500. Such cutting could be done if and when either
the Richmond Building or the Failing Building is demolished.
PAGE 28 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

115.

Defendants’ structural engineering expert, Christopher Thompson, testified that

with the exception of separating the seismic loads of the buildings, cutting through the floors of
the buildings offers no structural benefits.
116.

Both a multi-story, non-load-bearing, or non-structural, wall and a single-story,

non-load-bearing wall may require footings where the wall reaches the grade, or the soil.
“Footings” are features that support walls and keep the walls from sinking. A multi-story, nonload-bearing wall would require footings to support its weight. A series of single-story, nonload-bearing walls might or might not require footings depending on whether the walls are light
enough for the floor plates to support the weight of the walls. Such a series of walls would
require footings in the basement if the weight of the upper-story walls and construction design
(such as the omission of deflection heads that prevent the structure above from putting a load on
the non-structural wall) caused the weight to be transferred through the floor beams down to the
wall in the basement. The installation of footings would require cutting the concrete slab floors at
the basement level.
d. The Meaning of “Curtain Wall” in 1956
117.

In 1956, architects and engineers had the technology to construct both masonry

and light-weight metal stud walls that are equivalent to modern metal stud gypsum walls.
In 1956, architects and engineers also would have known the technology of veneers on the
outside of walls.
118.

One of Ross’s expert witnesses, Kevin Kaplan, testified that a curtain wall is an

exterior wall that keeps the elements out of a building and the occupants in the building.
Additionally, Mr. Kaplan testified that a curtain wall is a non-load-bearing wall. Another expert
for Ross, Brian Bowles, also testified that a curtain wall is an exterior wall. Defendants’ expert

PAGE 29 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

witnesses, Mr. Bailey and Mr. Thompson, agreed that a curtain wall is an exterior, non-loadbearing wall.
119.

The 1942 Building Code of the City of Portland (“1942 Code”) governed the

construction of the Richmond Building and was in effect at the time the two 1956 leases were
signed. The 1942 Code defines “curtain wall” as “a wall running between columns which carries
its own weight but no other loads and extends through more than one story.”58
120.

The Fifth Edition of Architectural Graphic Standards from 1956 depicts a curtain

wall as an exterior outer-most wall extending through multiple stories. The curtain wall is wider
at the base in order to accommodate the increasingly heavier load of the wall as it extends past
multiple floors.59
121.

The Architectural and Building Trades Dictionary, published in 1950, defines

“curtain wall” as “[a] thin wall, supported by the structural steel or concrete frame of the
building, independent of the wall below.”60 This definition does not require that a curtain wall
extend multiple stories.
122.

The Dictionary of Architecture, published in 1952, defines “curtain wall” as “a

wall supporting no more than its own weight, the roof or floor above being carried by the
framework of the structure.”61 This definition does not require that a curtain wall extend multiple
stories.

58

Ex. 169 at 6.

59

Ex. 580 at 3.

60

Ex. 279 at 4.

61

Ex. 280 at 3.

PAGE 30 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

123.

The preponderance of the evidence supports the conclusion that in 1956, the term

“curtain wall” meant simply an exterior, non-structural wall that supports only its own weight. In
1956, a curtain wall could either be multi-story or single story. Both types of curtain walls may
require footings at the basement level.
5. The May 2015 State Court Forcible Entry and Detainer (“FED”) Action
124.

In January 2015, Makarios served Ross with a notice of default, and in May 2015,

Makarios commenced eviction proceedings in Oregon state court. Makarios’s notice to Ross
invoked Makarios’s rights under § 7.01 of the 1956 Richmond Lease.
125.

The parties tried the case before Multnomah County Circuit Judge Jerry B.

Hodson, and the trial lasted approximately six days. At trial, Makarios presented evidence of the
condition of the Richmond Building.
126.

At the conclusion of trial on July 29, 2015, Judge Hodson determined that

Makarios was not entitled to evict Ross and that Ross was entitled to retain possession of the
Richmond Building until the end of the 1956 Richmond Lease.
6. Procedural Background
127.

Ross, Makarios, and Walker Place all filed motions for partial summary judgment

in this case. The motions focused on Ross’s separation obligations, including whether the
severance provisions require “moving” the buildings apart and complying with current seismic
codes, whether the judgment in the FED proceeding bars Makarios’s § 16.01 claims based on
issue or claim preclusion, whether Ross is obligated to restore allowable occupancy levels to the
buildings’ basements, and whether Ross has any evidence to support its affirmative defenses of
waiver, laches, breach of contract, estoppel, and unclean hands.
128.

Regarding Ross’s separation obligations, Defendants argued that the current

Portland Building Code requires Ross to construct a seismic joint between the Richmond
PAGE 31 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

Building and the Failing Building to ensure that the buildings meet current seismic requirements.
According to Defendants, creating the joint would require Ross to sever and move existing
columns and beams in the Richmond Building away from the Failing Building, such that when
two masonry curtain walls are constructed in the space between the buildings, there is an
additional 12 inches of space between the buildings.
129.

After hearing argument from the parties, the Court determined that the original

parties to the 1956 leases intended that the buildings be separated by abutting masonry curtain
walls that physically touch each other. The Court therefore granted Ross’s motion on separation
insofar as the leases do not require the elimination of shared lateral forces or the creation of a
new joint or gap between the buildings.
130.

The Court ruled against Ross on its preclusion arguments. The Court held that the

§ 16.01 obligations are distinct from the § 7.01 obligations and therefore are not the same claim
that Makarios pursued in the FED action. The Court also held that issue preclusion does not
apply because the FED court did not rule on Ross’s duties under § 16.01. Further, the Court
determined that the FED action was limited to addressing the tenant’s right to possession and did
not fully address issues relevant to damages.
131.

The Court also determined that no statute of limitations bars Defendants’

surrender claims because surrender obligations do not arise until the end of the respective leases.
132.

Additionally, the Court determined that Defendants consented to Ross’s

alterations to the basement that reduce the allowable level of occupancy and that such alterations
do not constitute statutory waste.
133.

The Court ruled in favor of Defendants on all of Ross’s affirmative defenses with

the exception of waiver. The Court determined that Ross did not present evidence to support its

PAGE 32 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

defenses of laches, estoppel, breach of contract, and unclean hands. In contrast, the Court held
that a genuine issue of material fact existed regarding Ross’s affirmative defense of waiver.
134.

The parties proceeded to Phase I of the bifurcated trial to determine the extent of

Ross’s obligations under the separation provisions of the 1956 leases, including, among other
things, (1) whether Ross’s proposed walls are abutting masonry curtain walls with footings; and
(2) whether Ross correctly interprets the scope of its obligation to surrender the premises in
“good order, condition, and repair, except for reasonable wear and tear,” as required by the
leases.
CONCLUSIONS OF LAW62
A. Contract Interpretation Under Oregon Law
1.

In this case based on diversity jurisdiction, Oregon’s substantive law governs. See

Getlin v. Maryland Cas. Co., 196 F.2d 249, 250 (9th Cir. 1952) (“The case is in federal court by
diversity of citizenship only. The law of the state in which the court sits must apply.”); Snook v.
St. Paul Fire & Marine Ins. Co., 220 F. Supp. 314, 316-17 (D. Or. 1963) (“This being a diversity
case, jurisdiction is grounded on that fact and the [insurance] policy must be interpreted and
construed in accordance with the Laws of Oregon, the place where the contract was made.”).
2.

Because the resolution of the parties’ dispute turns upon the interpretation of a

phrase in the parties’ leases, ordinary principles of contract interpretation apply. Harold
Schnitzer Props. v. Tradewell Grp., Inc., 104 Or. App. 19, 23 (1990) (“Oregon treats a
commercial lease as a contract and, in the absence of a provision in the lease to the contrary,

62

There can, at times, be a fine line between findings of fact and conclusions of law. A
court makes a conclusion of law whenever the trial court arrives at its conclusion by “the
selection and application of a rule of law to the established facts.” United States v. One Twin
Engine Beech Airplane, 533 F.2d 1106, 1108 (9th Cir. 1976). “[T]he trial court’s ‘conclusions of
law’ stand or fall according to legal rules.” Id.
PAGE 33 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

ordinary contract principles apply.”). Under Oregon law, the “central issue” in interpreting a
lease is “the intent of the parties at the time of the execution of the lease.” Stark St. Props., Inc.
v. Teufel, 277 Or. 649, 658 (1977) (emphasis added). In addition, the Ninth Circuit recently
confirmed that the “‘fundamental goal of contract interpretation is to give effect to the mutual
intent of the parties as it existed at the time of contracting.’ This fundamental axiom is widely
accepted and uncontested.” Pauma Band of Luiseno Mission Indians of Pauma & Yuima
Reservation v. California, 813 F.3d 1155, 1165 (9th Cir. 2015) (citation omitted) (emphasis in
original).
3.

The leading Oregon case on contract interpretation is Yogman v. Parrott,

325 Or. 358 (1997). In Yogman, the Oregon Supreme Court established a three-step process for
interpreting a disputed contractual provision. First, the court must determine whether, as a matter
of law, the relevant provision is ambiguous. Id. at 361. A contractual provision is ambiguous if it
can “reasonably be given more than one plausible interpretation.” Williams v. RJ Reynolds
Tobacco Co., 351 Or. 368, 379 (2011). “The court must, if possible, construe the contract so as
to give effect to all of its provisions.” Id. Further, when construing a contract provision, the court
is “not to insert what has been omitted, or to omit what has been inserted.” Or. Rev. Stats.
(“ORS”) § 42.230; see also Yogman, 325 Or. at 361 (citing ORS § 42.230 at step one of the
analysis).
4.

The analysis ends if the meaning of the provision is clear from the text and

context of the contract. Williams, 351 Or. at 379-80. The court then applies the contractual term
to the facts. See Yogman, 325 Or. at 361. If the provision is ambiguous, however, the court
proceeds to the second step. Id. at 363. At the second step, the trier of fact examines extrinsic
evidence of the contracting parties’ intent and construes the contractual provision consistent with

PAGE 34 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

that intent, if such a resolution can be determined. Id. Oregon follows the objective theory of
contracts, and relevant evidence at step two may include actual “manifestations of intent, as
evidenced by the parties’ communications and acts.” Holdner v. Holdner, 176 Or. App. 111, 120
(2001) (quotation marks omitted). If, after examining extrinsic evidence, the “provision remains
ambiguous,” the court applies appropriate maxims of construction at the third step. Yogman,
325 Or. at 364.
B. Physical Separation of the Buildings at Surrender
1. Construction of “Masonry Curtain Walls”
5.

Both 1956 leases call for “masonry curtain walls” or “a masonry curtain wall”

with footings at the time of separation. Both 1956 leases also call for making the buildings
“entirely independent and self-sufficient.” Ross argues that at the time of separation, the parties
to the 1956 leases intended “masonry curtain wall” to mean a light-weight exterior wall, possibly
covered with masonry veneer, that extends from the floor to the ceiling on each floor.
Defendants argue that the parties intended exterior masonry walls, built entirely of brick or
CMU, that are multi-story, extending continuously from the basement to the third floor.
6.

The Court begins at Yogman step one to determine whether the phrase “footings

and masonry curtain wall(s)” is ambiguous. Other than calling for “entirely independent and selfsufficient” buildings, the leases offer no definition of the term “masonry curtain wall.” The term
“footings” also is left undefined. Because the text and context of the leases offer no further
clarification of the meaning of “masonry curtain wall(s)” with footings and both sides offer
reasonable interpretations, the Court finds that the lease provisions are ambiguous at Yogman
step one.63

63

In the Court’s ruling at summary judgment, the parties called on the Court to interpret
the terms “independent,” “self-sufficient,” and “structure” as used in the 1956 leases. To do so,
PAGE 35 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

7.

The Court proceeds to step two of the Yogman analysis and examines extrinsic

evidence of the original parties’ intent. As discussed in the Court’s Findings of Fact, the extrinsic
evidence shows that in 1956, several different architectural definitions of “curtain wall” existed,
such that a “curtain wall” could mean either a multi-story wall or several single-story walls. In
1956, however, a curtain wall had to be an exterior, non-structural wall that supports only its
own weight. In the leases, although the original parties specified other types of work that they
intended the tenant to do at separation, they did not specify what type of curtain wall they meant
or wanted. Moreover, Defendants’ course of dealing with Ross, as established through Catena’s
analysis, Mr. Bailey’s reports, and Mr. Anderson’s correspondence with Ross, indicates that
Defendants did not understand the term “masonry curtain wall” in the leases to require a multistory wall rather than a series of single-story walls, until litigation commenced.
8.

Defendants now argue that the original parties could not have intended a series of

single-story walls because the leases call for a wall or walls with footings. According to
Defendants, only a multi-story wall would require footings. As discussed in the Court’s Findings
of Fact, however, a series of single-story walls may require footings, which are elements of a
building that support a wall at grade-level, depending on the weight and design of the walls.
Further, regardless of whether a curtain wall is multi-story or one-story, footings provide
additional support to the wall at the basement level.
9.

Defendants also argue that the leases require a single, multi-story wall for each

building because the 1956 Richmond Lease requires a singular “masonry curtain wall.”

the Court considered common dictionary definitions of the words from around the time the leases
were signed at Yogman step one. See Dkt. 99 at 18-19. Here, because “footings” and “curtain
wall” are more technical terms without ordinary meaning, the Court considers architectural
dictionary definitions as extrinsic evidence at Yogman step two, rather than as part of the analysis
of the text and context of the leases at Yogman step one.
PAGE 36 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

According to Defendants, the use of the plural “walls” in the 1956 Failing Building Lease, which
governed both properties at the time of execution, underscores that the tenant, Newberry, always
understood that the Richmond Building and the Failing Building would each have its own curtain
wall. In contrast, the 1956 Richmond Lease, executed after the 1956 Failing Lease and the sale
of the Richmond Building to New York Life, concerned only one property and provides that the
tenant must build one multi-story wall for an individual building. Defendants’ argument is
unpersuasive, however, because both the Newberry Deed and New York Life Deed use the plural
term “curtain walls.” Further, a wall system comprised of multiple floor-to-ceiling walls between
two buildings could be described as a single “wall.” Therefore, the Court concludes that the use
of the singular term “curtain wall” in the 1956 Richmond Lease does not resolve the dispute.
10.

In light of the extrinsic evidence, the Court concludes that the parties intended a

“masonry curtain wall” to be either a multi-story exterior, non-loadbearing wall or a series of
single-story exterior, non-loadbearing walls on each floor, but constructed of masonry.64 Use of
the word “footings” indicates the parties’ intent to ensure that the walls are sufficiently supported
so as not to sink or put excessive weight on the buildings’ framing. Footings can be used to
support a series of single-story exterior, non-loadbearing walls at the basement level, and thus,
the requirement that the tenant construct footings is consistent with either alternative. Because
the Court concludes that the extrinsic evidence establishes that “curtain wall” includes both

64

This definition is consistent with the definition relied upon by a New York court in
112 W. 34th St. Associates, LLC v. 112-1400 Trade Properties LLC, 944 N.Y.S.2d 68 (N.Y.
App. Div. 2012). There, the court used the following definition of curtain wall: “a non-load
bearing building wall, in skeleton frame construction attached and supported to the structure
at every floor or other periodic locations. Assemblies may include glass, metal, precast concrete
or masonry elements arranged so as not to exert common action underload and to move
independently of each other and the supporting structure.” Id. at 73 (quoting NY City Building
Code [Administrative Code of City of NY] § 1402.1) (emphasis added).
PAGE 37 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

multi-story and single-story exterior walls with footings, the Court does not proceed to step three
of Yogman to apply maxims of construction.
11.

The Court also examines extrinsic evidence regarding the meaning of “masonry.”

As discussed in the Court’s Findings of Fact, “masonry” could mean brick, CMU, or brick
veneer. Brick and CMU, however, are more weather-resistant, durable, secure, and sound-proof
than even brick veneer. In light of the leases’ specification that the buildings must be “entirely
independent and self-sufficient,” the Court concludes that the original parties intended the
curtain walls to be constructed of the most weather-resistant, durable, secure, sound-proof
material reasonably available, i.e., masonry in the form of brick or CMU. A metal stud gypsum
wall is not the modern equivalent of a masonry wall, nor is a metal stud gypsum wall with brick
veneer. Moreover, Camco’s initial separation analysis and Mr. Wheeler’s emails indicate that
Ross initially understood that a “masonry” wall meant a wall made entirely of masonry. The
proposal for a gypsum wall was a cost-cutting measure that does not comply with the
requirement for masonry curtain walls as provided for in the two leases. Based on this extrinsic
evidence, the Court concludes that “masonry” means brick or CMU, but not brick veneer. Thus,
the Court does not proceed to step three of Yogman to apply maxims of construction.
2. The Concrete Slab Floors and Columns
12.

In § 16.02, the 1956 Richmond Lease requires the tenant to render the Richmond

Building “an entirely independent and self-sufficient structure.”65 The Severance Clause of the
Failing Lease also requires the tenant to render the Failing Building “entirely independent and
self-sufficient.”66 Ross argues that in order to render the buildings entirely independent and self-

65

Ex. 1 at 42.

66

Ex. 301B at 4.

PAGE 38 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

sufficient, Ross need only construct exterior walls without severing the concrete slab floors at the
property line. Defendants argue that in order to render the buildings entirely independent and
self-sufficient, Ross must sever the concrete slab floors at the property line, remove the concrete
between the buildings, cut the concrete fireproofing around the buildings’ columns, and remove
the 19 to 28 inches of concrete fireproofing between the columns.
13.

At summary judgment, the Court determined that the text “entirely independent

and self-sufficient” is unambiguous in the following respects: Ross must “separate” the buildings
such that different owners may separately exercise complete control over each building. The
term “entirely independent and self-sufficient” does not mean that that Ross must create a “joint”
or gap between the buildings, must ensure that the Richmond Building and the Failing Building
do not “touch,” or must add lateral (horizontal) support sufficient to comply with current seismic
regulations applicable to new construction.67 The Court did not determine at summary judgment
whether “entirely independent and self-sufficient” is unambiguous regarding the severing of the
floors and the columns. That question must be addressed now.
14.

The Court again begins at step one of the Yogman analysis. The 1956 Failing

Lease gives a non-exclusive list of work that must be done to render the building independent
and self-sufficient. The list includes:
removal of the escalators and the closing in of the openings in the
floors and walls of the Failing Building which accommodate the
same; construction of footings and masonry curtain walls along the
easterly boundary line of the demised premises; and such
appropriate alterations, changes and relocations of portions of the
plumbing, electric, and other systems and apparatuses as may be
necessary to make the “Failing Building” space independent of the
“Richmond Building”.68
67

See Dkt. 99 at 20.

68

Ex. 301B at 4.

PAGE 39 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

15.

The 1956 Richmond Lease gives a similar non-exclusive list of work that must be

done, stating that is necessary for the tenant to complete:
the removal of escalators, the construction of footings and a
masonry curtain wall along the westerly boundary line of the
demised premises, the removal of any facing encroaching upon
adjoining premises, the removal of signs, the relocation of
plumbing, drain pipes, sprinklers, electrical wiring, lighting
fixtures and exhaust ducts, the installation of a new soil connection
to the city sewer, a new steam connection and new electrical
service conduits and equipment and provision for a new toilet and
rest room.69
16.

Although the list of work that must be done in order to make the buildings

“entirely independent and self-sufficient” is explicitly non-exhaustive, the examples given
indicate the type of work that the parties envisioned would be necessary to “separate” the
buildings. The examples primarily concern the buildings’ systems, such as the plumbing and
electrical systems. Some of the items are mainly cosmetic in nature, such as “the removal of
signs.” The 1956 Failing Lease also states that the “space” of the two buildings must be
“independent.” In addition, in § 9.01, the 1956 Richmond Lease required Newberry to “make no
structural alterations to the building or buildings now or hereafter erected upon the demised
premises.”70
17.

The text and context of the leases and the terms used by the parties establish that

the parties intended both the Richmond Building and the Failing Building to allow separate
owners to exercise all the ordinary incidents of separate ownership. Such incidents of ownership
would require separate heating, plumbing, and electrical systems, separate ingress and egress,
and access to each floor via the building’s own stairways or elevators. The requirement to have a

69

Ex. 1 at 42-43.

70

Ex. 1 at 20.

PAGE 40 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

masonry curtain wall or walls indicates that each building must have its own functional space
such that one building’s exterior boundary clearly ends that building and the other building’s
boundary clearly begins. The text and context of the leases do not make clear, however, whether
the ordinary incidents of separate ownership would include buildings that are disconnected or
that do not share floors or any other structural features. Therefore, the Court concludes that the
lease provisions are ambiguous regarding whether rendering the buildings “entirely independent
and self-sufficient” requires severing the floors and columns and removing concrete between the
buildings. The Court therefore proceeds to step two of the Yogman analysis to determine what
the leases require.
18.

At Yogman step two, the Court examines the extrinsic evidence regarding whether

the original parties intended that the buildings be severed, as Defendants urge.71 Both parties to
the 1956 Failing Lease negotiated the Newberry Deed. Both parties to the 1956 Richmond Lease
negotiated the New York Life Deed. Because the deeds were negotiated at approximately the
same time that the original parties negotiated the leases, the deeds provide some extrinsic
guidance as to what the original parties intended by “entirely independent and self-sufficient.”
The deeds call for Newberry and its successors to ensure “completely separate buildings.”72
Despite this requirement, both deeds also provide for “common” foundations and footings “so

71

The parties’ course of dealings reveals little regarding whether they expected that the
leases would require severing the floors. Mr. Anderson’s correspondence with Ross on
May 17, 2013, indicates that Walker Place did not, in 2013, contemplate saw-cutting the floors at
all levels as a lease requirement. On the other hand, Camco’s estimates for Ross and
correspondence with Mr. Post and Mr. Wheeler suggest that Camco and Ross thought the leases
might require saw-cutting portions of the floors. This evidence shows only mutual confusion
about what the leases require.
72

Ex. 107 at 2; Ex. 108 at 1.

PAGE 41 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

long as [said] foundations and footings shall stand.”73 Further, the deeds expressly reserve
easements for crossing the property lines to remove the escalators and the electrical, plumbing,
and other systems, but do not allow for the removal of the common foundations or footings.
19.

Because the deeds call for the buildings to be completely separated and yet also

allow for shared foundations and footings in perpetuity, the deeds indicate that achievement of
complete physical separation does not preclude continuing to have shared features such as
foundations and footings. If the buildings could share foundations and footings despite being
physically separate, it is reasonable to infer that the buildings also could have continuous floors
and still be separate. Moreover, despite reserving an easement for specific work such as
removing the escalators that cross the property line, the deeds do not grant an easement for the
specific work of severing the common floors.74 This also is consistent with the 1956 leases’
prohibition on any structural alterations to the building because cutting through a concrete floor
would be a structural alteration.
20.

Additionally, Mr. Thompson testified that severing the floors of the buildings

would confer no benefits beyond making the buildings independent for purposes of lateral
(horizontal or seismic) support. As discussed in the Court’s March 25, 2016 Opinion and Order,

73

Ex. 107 at 1; Ex. 108 at 1.

74

Conversely, the deeds do not grant an easement for the continued sharing of floors.
Defendants argue that because the deeds do not grant such an easement, the deeds establish that
the parties to the 1956 leases intended the floors to be separated. The deeds, however, concern
what the original parties affirmatively wanted. The parties wanted the foundations and footings
to remain in common, and the easements allow for this. At the end of Newberry or its
successors’ occupancy of the buildings, the parties wanted to have work such as the removal of
the escalators completed, and the easements allow for this. The omission of any provision
concerning the shared floors is consistent with the conclusion that the original parties neither
affirmatively wanted the floors separated nor affirmatively wanted the floors to remain in
common. The original parties were neutral on this matter and therefore left the building owners
the option of either severing the floors or allowing the floors to stay connected.
PAGE 42 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

however, in 1956, the original parties would have had no understanding of lateral forces.75 The
construction of the neighboring Caplan Building and Kress Building, which physically abut
against the Richmond Building and the Failing Building, respectively, confirm that in 1956, the
original parties would have had no objection to buildings having points of physical contact such
that, in modern terms, the buildings are not “laterally” independent.
21.

The extrinsic evidence thus establishes that in 1956, the parties did not intend that

“entirely independent and self-sufficient” would include severing floors and columns and
removing the concrete between the buildings. With sufficiently durable exterior walls separating
the buildings, the buildings may continue to have conjoined features and yet comply with the
intent of the original parties. Accordingly, the Court concludes that the 1956 leases do not
require Ross to slice the floors and columns and remove the 19 to 28 inches of concrete between
the buildings.76
3. The Escalator Beams
22.

Both 1956 leases expressly require the tenant to remove the escalators that cross

the property lines as part of the separation obligations. Both the Newberry Deed and the New
York Life Deed reserve easements for the parties to remove the escalators. Ross argues that the
requirements to remove the escalators and separate the buildings do not include removing the

75

See Dkt. 99 at 19-23.

76

Slicing the floors between the buildings is not currently a prohibitively expensive task.
It could cost as little as $2,500. If Ross erects masonry curtain walls, however, slicing the floors
will become impossible to complete without first tearing down the walls. Therefore, based on the
implied covenant of good faith and fair dealing, Ross must give Defendants the option of
severing the floors themselves before Ross constructs the required masonry curtain walls. If,
however, Defendants elect to sever the floors before Ross constructs masonry curtain walls with
footings, Defendants must bear the burden of any further regulatory requirements imposed by the
City arising out of that decision by Defendants.
PAGE 43 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

escalator beams. Defendants argue the opposite but would allow Ross to sever and support the
beams instead of removing the beams entirely.
23.

Beginning at step one of Yogman, the Court examines the text of the leases.

Nothing in the leases indicates that the beams supporting the escalators are separate and distinct
from the rest of the escalators. A term is ambiguous only “if it is capable of more than one
sensible and reasonable interpretation; it is unambiguous if its meaning is so clear as to preclude
doubt by a reasonable person.” Deerfield Commodities, Ltd. v. Nerco, Inc., 72 Or. App. 305, 317
(1985). Under a plain reading of the leases, Ross’s interpretation of the leases is not sensible or
reasonable. A reasonable person would have no doubt that “removal of escalators” would include
removal of the escalator beams. The Court concludes that the term “escalator” unambiguously
includes the escalator beams and thus does not reach Yogman step two.77
24.

In the alternative, Ross argues that Defendants have waived the requirement that

the tenant remove or sever the escalator beams. A waiver requires “the intentional
relinquishment or abandonment of a known right.” Ionian Corp. v. Country Mut. Ins. Corp., 88
F. Supp. 3d 1187, 1199 (D. Or. 2015). A party’s conduct may imply a waiver, but there must be
77

Ross urges the Court to reach Yogman step two and consider extrinsic evidence of the
parties’ course of dealing. This extrinsic evidence consists of letters that Ross sent the landlords.
According to Ross, the letters show that the parties did not consider the escalator beams part of
the escalators. In a November 23, 2003 letter to the Calomiris family, Ross states that “Ross
Stores is considering removing the escalators from the Richmond Building next year.” Ex. 275
at 1. The letter does not specifically mention the escalator beams. Approximately five months
later, the Calomiris family approved plans to “remove the escalator” by signing and returning a
letter from Ross concerning “interior improvements that involve removal of the escalators.”
Ex. 277 at 2. A letter from Ross to the Failing Building landlord on February 18, 2004, also
confirms that the Failing Building landlord knew that Ross was “completing improvements that
involve removal of the escalator.” Ex. 274. This extrinsic evidence does not, however, establish
whether the parties had any further expectations about the removal of escalator beams twelve
years later at the expiration of the leases on September 30, 2016. Moreover, the letters from Ross
in 2004 state that Ross’s work will “involve removal of the escalators,” not that Ross considers
the work to entail the complete removal of the entire escalator structures. Therefore, the extrinsic
evidence does not support a different conclusion than the Court reaches at Yogman step one.
PAGE 44 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

a “clear, unequivocal, and decisive act.” Brown v. Portland Sch. Dist. No. 1, 291 Or. 77, 84
(1981) (quoting Waterway Terminals v. P. S. Lord, 242 Or. 1, 26-27 (1965); see also Bank of E.
Or. v. Griffith, 101 Or. App. 528, 536 (1990) (“[T]he intention to waive must clearly appear; it
will not be inferred, except from a clear and unequivocal act manifesting an intent to waive.”).
25.

Ross removed the majority of the escalator structures in 2004. At that time, Ross

informed the landlords of its plans. The landlords did not object. The communications between
Ross and the landlords do not, however, indicate, one way or the other, whether the landlords
expected Ross to complete the removal of the escalators at the time of separation. If Ross
remained uncertain of its obligations under the separation provisions, it could have asked and
gained clarity, but it did not. The landlords’ approval of part of Ross’s end-of-lease obligations
in 2004—specifically, the removal of the majority of the escalator structures—does not
constitute unequivocal relinquishment of any other obligations under the 1956 leases, including
removing the remaining parts of the escalator structures.78 Accordingly, the landlords have not
waived the requirement to remove or sever and support the escalator beams.
26.

At a minimum, the 1956 leases require removing the connection between the

escalator beams that span the property line. To the extent that severing the escalator beams
requires supporting the severed beams in order to ensure the structural integrity of the buildings,
the leases require the tenant to complete that work.

78

As discussed in more detail below, a tenant does not breach and a landlord cannot sue
to enforce an end-of-lease obligation until the actual or anticipatory breach of that obligation.
See, e.g., Cote v. A. J. Bayless Mkts., Inc., 128 Ariz. 438, 443 (Ct. App. 1981) (holding that a
“covenant to surrender the premises in good repair at the end of the term could not be breached
until the term ended”).
PAGE 45 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

4. Summary and Remainder of Ross’s Separation Obligations
27.

The 1956 leases require Ross physically to separate the Richmond Building from

the Failing Building at the time of surrender by constructing either multi-story exterior, nonloadbearing walls on both sides of the property line or single-story exterior, non-loadbearing
walls at the basement, first, and second floors on both sides of the property line. Further, these
exterior curtain walls must be built entirely of brick or CMU and include footings at the
basement level. Other than what may be necessary to install the footings at the basement level,
the leases do not require Ross to sever the concrete slab floors or columns or to remove the
concrete between the buildings. Ross must however, remove or sever and then provide adequate
support for the escalator beams that cross the property line.
28.

Walker Place argues that “an entirely independent and self-sufficient” building

also requires Ross to create a loading zone and a separate elevator bank for retail use in the
basement, first, and second floors of the Failing Building. The Severance Clause of the 1956
Failing Lease does not, however, state that Ross must return a space or structure that satisfies all
the needs of a future retail tenant.79 Nor does the Severance Clause of the 1956 Failing Lease
state that the space leased by the Ross in the Failing Building must be independent of other areas
in the Failing Building, such as the elevator lobby, for purposes of vertical ingress and egress.
Additionally, the evidence shows that the Failing Building did not, at the time of Newberry’s
construction in 1951, have its own loading zone and separate elevator bank for retail use on the

79

The 1956 Failing Lease requires that the tenant use the Failing Building exclusively for
“the sale of merchandise.” Ex. 301B at 9. All improvements that the tenant makes must “befit a
high-grade retail store.” Ex. 301B at 6. The lease says nothing regarding whether the space that
the tenant returns to the landlord at the end of the lease term must be suitable in every way for a
future retail tenant once the space is made separate and independent from the Richmond
Building.
PAGE 46 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

basement, first, and second floors.80 The 1956 leases thus do not require Ross to make these
improvements to the Failing Building.
29.

The plain text of the 1956 leases requires the complete separation of all HVAC,

electrical, gas, plumbing, and other systems in the two buildings. This means that each building
must have functioning HVAC, electrical, gas, and plumbing systems that do not rely on the other
building.
30.

The 1956 leases require Ross to do whatever “shall be necessary” to complete the

above requirements for separating the buildings.81 Section 4.02 of the 1956 Richmond Lease
requires Ross to “cause compliance, with all laws and ordinances and the orders, rules,
regulations and requirements of all federal, state, county and municipal governments . . . which
may be applicable to the demised premises.”82 The 1956 Failing Lease requires Ross:
to comply with and observe . . . all laws, ordinances, rules and
regulations . . . pertaining to the leased premises, occasioned by or
affecting the use of the leased premises by Lessee, except in so far
as such laws, ordinances, rules and regulations may require
structural changes in or additions or improvements to the
foundation, exterior walls, roof or sidewalks thereof.83

80

Walker Place argues that the 1946 Lease’s use of the term “sidewalk elevator”
establishes that the Failing Building had a loading zone in 1946. Ex. 301A at 1. The 1946 Lease,
however, concerned both the original Richmond Building and the Failing Building, meaning that
the term “sidewalk elevators” could refer to a loading area on either the original Richmond
Building or Failing Building side of the property. Further, the parties do not dispute that at the
time of the Failing Building renovation in 1951, the Failing Building did not have its own
loading zone separate from the Failing Building. Regarding elevators, Mr. Bailey testified that in
the early 1950s and when the original parties signed the 1956 Failing Lease, there was no
elevator in the portion of the Failing Building leased by Newberry.
81

Ex. 1 at 42; Ex. 301B at 4.

82

Ex. 1 at 9.

83

Ex. 301B at 9-10.

PAGE 47 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

It is possible that the City, in order to ensure compliance with current laws, ordinances, and
regulations, may require additional work either before Ross can complete its separation
obligations or as a result of the steps Ross takes to comply with its obligations. The text of the
leases puts the burden of such compliance on Ross. Therefore, if the City—for reasons including
insufficient restrooms, insufficient ingress or egress between floors, or seismic issues—will not
approve separation plans that comply with the Court’s Opinion and Order, Ross must satisfy the
City’s requirements in order actually to achieve the scope of work required by the 1956 leases.
C.

Good Order, Condition, and Repair Obligations at Surrender84
1. When the Obligations Arise and May Be Enforced
31.

As discussed in the Court’s March 25, 2016 Opinion and Order,85 in general, a

lessor can enforce an obligation to surrender the leased premises in good order, condition, and
repair only when the obligation becomes due, which is at the end of the lease term.86 See, e.g.,
Cote v. A. J. Bayless Mkts., Inc., 128 Ariz. 438, 443 (Ct. App. 1981) (holding that a “covenant to
surrender the premises in good repair at the end of the term could not be breached until the term
ended”); Primock v. Jew, 680 P.2d 1347, 1348 (Colo. App. 1984) (“The covenant to surrender

84

Oregon appellate courts and the Ninth Circuit have not had many occasions to address
the meaning of “good order, condition, and repair,” “reasonable wear and tear,” and “alterations”
in the context of landlord-tenant disputes. In the absence of case law from Oregon and the Ninth
Circuit, the Court considers the law of other jurisdictions for guidance in reaching its conclusions
in Part C.
85

See Dkt. 99 at 25-28.

86

A party may also bring a claim for anticipatory breach of contract if the other “party to
a contract clearly and unequivocally signifies before his performance is due that he will not
perform.” Jitner v. Gersch Dev. Co., 101 Or. App. 220, 224 (1990). At that time, “the second
party has the option of treating the contract as breached and bringing an action, without tendering
performance or awaiting the time that the first party’s performance would be due.” Id. The
parties have agreed that the doctrine of anticipatory breach does not apply in this case, and that
portion of Defendants’ counterclaims is dismissed.
PAGE 48 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

the premises in good condition cannot be breached until the end of the term. Therefore, no action
will lie against lessee until that time.”); Kantor v. Boise Cascade Corp., 75 Or. App. 698, 703
(1985) (“A cause of action for breach of contract accrues when the contract is breached.”); City
Hotel Co. v. Aumont Hotel Co., 107 S.W.2d 1094, 1095 (Tex. Civ. App. 1937) (“[O]n a covenant
to leave the premises in as good condition as he found them, no action will lie against the lessee
until the end of the term, for obvious reasons.”). Therefore, Ross’s obligations to surrender the
premises in good order, condition, and repair arise only at the end of the lease terms.
32.

Ross argues that by bringing the FED action, Makarios elected to pursue its

remedies under § 7.01 of the 1956 Richmond Lease, relating to the conditions of the building
during Ross’s tenancy, and thus cannot now pursue a remedy under § 16.01 of the lease, which
governs Ross’s surrender obligations. Election of remedies applies to “the situation in which a
plaintiff who has two or more available avenues to the same general relief pursues one to
judgment.” Ladd v. Gen. Ins. Co., 236 Or. 260, 264 (1963). In such a situation, a plaintiff may
thereafter be precluded from pursuing the other remedies. Id. Election of remedies bars
subsequent litigation only in these situations “where initially there were two efficacious
remedies.” Id. Here, at the time of the FED action in 2015, the 1956 Richmond Lease had not
expired, and therefore, Makarios could only pursue its remedy under § 7.01. The end-of-lease
obligation to surrender the premises in good order, condition, and repair had not yet arisen.
Accordingly, at the time of the FED action, Makarios did not have “two efficacious remedies,”
and the election of remedies doctrine therefore does not apply.87

87

Ross argues that the FED action and the declaratory action in this Court constitute “two
efficacious remedies.” In support of its argument, Ross cites City of Glenn Heights v. Sheffield
Development Company, 55 S.W.3d 158 (Tex. App. 2001). There, the court applied the election
of remedies doctrine and held that the plaintiff could not recover both a judgment for monetary
damages and a later declaratory judgment. Id. at 165. According to the court, the election of
PAGE 49 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

2. Scope of the Obligations
a. Whether the 1956 Richmond Lease Requires Ross to Maintain the Third
through Fifth Mezzanine Floors in Good Order, Condition, and Repair
33.

Ross argues that although the original parties to the 1956 Richmond Lease

intended the tenant to return the third through fifth mezzanine floors in good order, condition,
and repair, Makarios and its predecessors in interest have waived that requirement. According to
Ross, waiver occurred because the Richmond landlords knew or should have known that Ross
was neither using nor maintaining the third through fifth mezzanine floors and yet took no action
against Ross before the 2015 FED lawsuit. Regardless of whether Defendants waived any
covenants to keep the leased premises in good order, condition, and repair during the term of the
lease, covenants to surrender leased premises in good order, condition, and repair are separate
and distinct contractual obligations. See Cote, 128 Ariz. at 442 (“Where the lease contains a
covenant to repair and a covenant to leave in repair, the covenants are generally treated as
independent covenants[.]” (quoting 49 Am. Jur. 2d Landlord and Tenant § 949 at 925 (1970));
City Hotel, 107 S.W.2d at 1095 (“The courts have uniformly observed a distinction between a
covenant upon the part of a lessee to keep leased premises in repair, and a covenant to deliver up

remedies barred the plaintiffs’ suit because the remedies sought were “inconsistent.” Id. The
plaintiff sought both damages from the City of Glenn Heights resulting from the City’s passage
of a new ordinance and a declaratory judgment permanently enjoining the City from enforcing
that ordinance against the defendant’s property. Id. The Court explained that these remedies were
inconsistent in the same way that “the remedies of monetary damages for loss of property and
restoration of full property rights are inconsistent.” Id. (citing Bayou Terrace Inv. Corp. v. Lyles,
881 S.W.2d 810, 816-17 (Tex. App. 1994)). In contrast, the FED action and this declaratory
action are not inconsistent. The FED action had the potential to give Makarios possession of the
Richmond Building through the enforcement of § 7.01 of the 1956 Richmond Lease. In contrast,
this declaratory action (and the remaining Phase II breach of contract action) redresses
Makarios’s separate and distinct rights under § 16.01 of the lease. The doctrine of election of
remedies thus does not apply to Makarios as it did to the plaintiff in Glenn Heights.
PAGE 50 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

the premises at the expiration of the term in as good condition of repair as they were at the
beginning of the term.”). The waiver of one covenant is not sufficient to waive the other.
34.

Further, as previously discussed, waiver requires “the intentional relinquishment

or abandonment of a known right.” Ionian Corp., 88 F. Supp. 3d at 1199. In a landlord-tenant
dispute, inaction by either party “does not constitute the unequivocal manifestation required by
the rule [of waiver]” when the inaction “can reasonably be attributed to other motivations as well
as to a purpose to relinquish [the party’s] legal right to object to [a violation of the lease].”
Guardian Mgmt., LLC ex rel. Villa v. Zamiello, 194 Or. App. 524, 529 (2004). Here, Makarios’s
failure to notify Ross that it did not consider the building in good order, condition, or repair can
reasonably be attributed to an intent to wait until the lease’s end and require Ross to restore the
premises under § 16.01.
35.

Ross also argues that waiver occurred because the lessors allowed Ross to renew

its lease in 2006. Ross points to § 21.01 of the 1956 Richmond Lease as evidence that by
renewing Ross’s lease, the Richmond Building landlords waived any claim that the building is
not currently in good order, condition, and repair. Section 21.01 allows the tenant to renew the
lease if the tenant is not in default. Section 21.01 does not bar the landlord from waiving any
default under § 7.01 and renewing the lease for reasons such as Ross timely pays its rent. Such a
waiver, if it occurred, does not indicate that Ross will one day be in full compliance with its
separate obligation to surrender the building in good order, condition, and repair. Therefore, the
text of § 21.01 does not establish that Makarios relieved Ross of any surrender obligations by
renewing the lease. Renewal of Ross’s lease in 2006 indicates nothing about the landlord’s intent
to enforce § 16.01 on September 30, 2016, the date the last renewal expires. If Ross wanted to
gain clarity about the implications of the 2006 renewal, it could have asked the landlord or

PAGE 51 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

negotiated for a signed release of any claims. Ross instead chose to stay silent. As Ross’s Group
Senior Vice President of Property Development, Gregg McGillis, acknowledged during his
testimony, “If you have an issue with anything, speak up, make your claim. Silence is not your
friend.”
36.

Additionally, Ross argues that Makarios has waived the requirement to surrender

the premises in good order, condition, and repair because Makarios’s predecessor did not raise
any issues or advise Ross of any defaults during the 1996 bankruptcy proceedings. During the
bankruptcy proceedings, however, Ross had the option of requiring Newberry to obtain an
estoppel certificate from the landlords effecting a waiver of end-of-lease rights. Ross did not
require such a certificate. Ross’s own silence during the bankruptcy proceedings and failure to
require an estoppel certificate cannot serve to prove that the lessor waived the § 16.01 surrender
obligations. In many instances in this case, silence was nobody’s friend.
37.

For these reasons, Makarios and its predecessors have not waived the requirement

under § 16.01 of the 1956 Richmond Lease that Ross return the third through fifth mezzanine
floors in good order, condition, and repair, reasonable wear and tear excepted.
b. Whether the 1956 Failing Lease Requires Ross to Maintain the Sidewalk
Vaults and Vent Stack in Good Order, Condition, and Repair
38.

Ross asserts that under the 1956 Failing Lease, the leased premises do not include the

sidewalk vaults or the vent stack, and therefore, Ross has no obligation to maintain these items or
to surrender them in good condition. The 1956 Failing Lease defines the “premises” as “certain
space in the building known as the Failing Building.”88 Specifically, the lease specifies that the
“premises” consists of:

88

Ex. 301B at 2.

PAGE 52 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

All of the first or ground floor of said building except the building
entrance, elevator lobby, elevators and main stairway; all of the
basement under said building except the space occupied by the
heating plant and necessary space now used by Lessors in the
operation and management of said building . . . ; and all of the
second floor of said building except the portion thereof used for
elevators and stairways.89
The lease further states that the tenant covenants to maintain and surrender the “leased premises
in good condition.”90 The 1956 Failing Lease also provides:
The Lessors do not warrant to the Lessee a continued use of the
open space under the sidewalks adjoining the leased premises,
but the Lessee shall have the use of this space and shall enjoy all
the rights to such space as would accrue to the Lessors had they
remained in full possession of the premises.91
39.

In its March 25, 2016 Opinion and Order, the Court concluded that the text of the

1956 Failing Lease was ambiguous concerning whether the “leased premises” includes the

89

Ex. 301B at 2.

90

Ex. 301B at 8-9.

91

Ex. 301B at 9-10 (emphasis added). Under the rule of the last antecedent, “a limiting
clause or phrase . . . should ordinarily be read as modifying only the noun or phrase that it
immediately follows.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003). This grammatical “rule is
not an absolute and can assuredly be overcome by other indicia of meaning.” Id. But the
Supreme Court finds it “quite sensible as a matter of grammar.” Id. (quoting Nobelman v.
American Savings Bank, 508 U.S. 324, 330 (1993)). Here, the limiting clause or phrase is
“adjoining the leased premises.” This limiting clause or phrase could modify either the noun
immediately preceding it, which is “sidewalks,” or the immediately preceding phrase, which is
“the open space under the sidewalks.” If only the sidewalks are “adjoining the leased premises,”
then the open space under the sidewalks (also known as the sidewalk vaults) may still be part of
“the leased premises.” On the other hand, if “the open space under the sidewalks” is “adjoining
the leased premises,” then the sidewalk vaults would not be part of the leased premises. Other
than the landlord’s grant of any use of the open space that the landlord would itself have, the
1956 Failing Lease contains no further indicia of whether the open space under the sidewalks, to
which the tenant has access for retail or storage purposes, is included in “leased premises.”
Because the rule of the last antecedent could be used to interpret this lease provision in multiple
ways, the term “the open space under the sidewalks adjoining the leased premises” is of little
assistance to the Court in deciding whether the parties intended “leased premises” to include the
sidewalk vaults.
PAGE 53 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

sidewalk vaults and the vent stack. At summary judgment, the parties disputed the extrinsic
evidence, and the Court thus denied summary judgment and reserved these matters for trial.92
Therefore, at this stage, the Court continues its analysis at Yogman step two and examines the
extrinsic evidence introduced at trial to interpret what the original parties meant by “leased
premises.”
40.

The evidence establishes that Ross has had continuous access to the sidewalk

vaults through the basement. Ross has also used the sidewalk vaults for storage. No barrier or
demarcation separates the sidewalk vaults from the rest of the basement. Nor is the heating plant
located in the sidewalk vaults. Although the sidewalk vaults are geospatially located under the
sidewalks rather than the building, for all practical purposes, including Ross’s use of that area,
the sidewalk vaults are part of the basement. The Court therefore concludes that the parties to the
1956 Richmond Lease intended “all of the basement under said building” to include the sidewalk
vaults that could be accessed through and used as part of the basement. See Tarlow v. Arntson,
264 Or. 294, 300 (1973) (“How the original parties and their successors conducted themselves in
relation to the agreement is instructive in our determination of what must have been intended.”).
Accordingly, Ross is obligated to return the sidewalk vaults in good order, condition, and repair,
reasonable wear and tear excepted. Because the Court concludes at Yogman step two that the
“leased premises” includes the sidewalk vaults, the Court does not reach Yogman step three.
41.

Regarding the vent stack, the evidence establishes that Ross’s predecessor,

Newberry, used the vent stack, which originates on the second floor, to vent exhaust from a
lunch counter and several restrooms. No other tenant in the Failing Building, or any lessor at any
time in the building’s history, used the vent stack. Ross therefore concedes that it is obligated to
92

See Dkt. 99 at 42-45.

PAGE 54 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

return the portion of the vent stack on the second floor in good order, condition, and repair,
reasonable wear and tear excepted. Ross argues, however, that the “leased premises,” defined as
“certain space in the building,” cannot include the portion of the vent stack that extends through
the roof of the second floor and up the exterior of the building.
42.

Ross interprets “leased premises” as including only the interior space of the

basement, first, and second floors, while Walker Place interprets “leased premises” to include all
the equipment that originates on these floors and that the tenant exclusively used. Although the
text of the lease is unclear, the extrinsic evidence sheds light upon the meaning of the “leased
premises.” The vent stack existed in 1951 when Newberry began renovating the Failing Building
and continued to exist in the same form in 1956 when the parties negotiated the 1956 Failing
Lease. Despite the existence of the vent stack, which extended up the Failing Building’s exterior,
the parties defined the leased premises as only “certain space in the building.”93 In light of the
vent stack’s existence in 1956, the omission from the lease of any discussion of equipment or
areas outside the building is significant. The omission indicates that the parties did not intend
that the leased premises include the part of the vent stack that is not physically located within the
second floor of the Failing Building.
43.

Additionally, nothing in the parties’ course of dealing suggests that the tenant had

an obligation to repair the vent stack if the exterior vent stack was damaged at the third-floor
level or above. The Failing Building landlords never requested repairs during Newberry’s and
Ross’s tenancy. The tenant’s continued use of the vent stack appears to be entirely optional, and,
indeed, Ross never used the vent stack for any purpose. Therefore, the Court concludes at
Yogman step two that the term “leased premises” does not include the external portion of the
93

Ex. 301B at 2 (emphasis added).

PAGE 55 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

vent stack above the second floor. Therefore, Ross is obligated to surrender only that internal
portion of the vent stack within the second floor of the Failing Building in good order, condition,
and repair, reasonable wear and tear excepted. The remaining portion of the vent stack is not part
of the leased premises, and Ross has no obligation with regard to that portion.94 Because the
intent of the parties is clear at Yogman step two, the Court does not proceed to Yogman step three
to apply relevant maxims of construction.
44.

For the same reasons that Ross has not shown that Makarios waived any surrender

obligations, Ross has not shown that Walker Place waived any surrender obligations. These
obligations include returning the sidewalk vaults and the portion of the vent stack on the Failing
Building’s second floor in good order, condition, and repair. Specifically, Ross has not presented
sufficient evidence that Walker Place intentionally relinquished any of its rights. That the lessors
allowed Ross to renew or amend the lease does not indicate that Walker Place or its predecessors
intended to relieve Ross of any obligations on September 30, 2016, the date on which Ross must
return the building. Additionally, just as Ross failed to obtain an estoppel certificate from the
Richmond Building landlords, Ross failed to obtain such a certificate from the Failing Building

94

Walker Place also argues that restoring the vent stack is part of Ross’s obligations
under the Severance Clause of the 1956 Failing Lease. The Severance Clause states that the
tenant must “do and perform such work as shall be necessary to physically separate, and
constitute entirely independent and self-sufficient,” the Failing Building from the Richmond
Building. This work includes “changes and relocations of portions of the plumbing, electric, and
other systems and apparatuses as may be necessary to make the ‘Failing Building’ space
independent of the ‘Richmond Building.’” Ex. 301B at 4. According to Walker Place, a vent
stack in good condition is an “apparatus” that is necessary for the Failing Building to be an
independent space. The vent stack, however, vented exhaust from the lunch counter and
restrooms in the 1950s. Modern buildings, including the Richmond Building, do not require such
a 12-story vent stack in order to function as independent spaces. Therefore, the Severance Clause
does not obligate Ross to restore the portion of the vent stack on the exterior of the building
above the second floor.
PAGE 56 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

landlords. Ross’s own failure to discuss its end-of-lease obligations with the lessors does not
prove that the lessors waived those obligations.
c. Whether Decommissioned and Abandoned Portions of the Premises
Constitute “Alterations” that Are Exempt from the Good Order,
Condition, and Repair Requirements
45.

Ross argues that it is not required to restore alterations to which Defendants

impliedly consented. According to Ross, these alterations include decommissioning a freight
elevator in the Richmond Building and using it for spare parts, decommissioning the HVAC
system in the upper floors of the Richmond Building, decommissioning restrooms, and otherwise
abandoning the upper floors of the Richmond Building. “An alteration . . . denotes a substantial
change” in the leased premises, Ten-Six Olive, Inc. v. Curby, 208 F.2d 117, 122 (8th Cir. 1953),
or “a substantial change therein varying or changing the form or nature of such building without
destroying its identity,” Leong Won v. Snyder, 94 N.Y.S.2d 247, 249 (Sup. Ct. 1949). Courts
have also defined “alteration” as a change in the “structural quality” of a building. City of Le
Mars v. Fisch, 251 Iowa 149, 151 (1959). “In short, for a change in a building to constitute an
alteration, the change must be substantial, not trifling. It must be one that alters the nature and
character of the building.” Select Mgmt. Res., LLC v. Runnymede Corp., 273 Va. 710, 714
(2007).95

95

In Select Management, 273 Va. 710, the Virginia Supreme Court expressly retreated
from its opinion in Bolin v. Laderberg, 207 Va. 795 (1967). In Bolin, the court held that
“alteration,” when given its usual meaning and viewed in the context in which it is used in the
lease, “can mean only something changed about the premises.” Id. at 801. In contrast, the court
in Select Management gave “alteration” a more narrow legal meaning that ordinarily excludes
changes that are “merely cosmetic in nature.” 273 Va. at 714. The Select Management court
noted that the Bolin decision “provide[s] only limited assistance in defining the term
‘alteration.’” Id. at 713. Ross cites the Bolin opinion in support of a broad definition of
“alteration” without acknowledging the effect of Select Management.
PAGE 57 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

46.

Installing air conditioning in a building does not constitute an alteration, Leong

Won, 94 N.Y.S.2d at 249. Installing carpet and moving heating ducts also do not constitute
alterations. Le Mars, 251 Iowa at 151. On the other hand, painting natural stone a bright yellow
may be classified as an alteration. Select Mgmt., 273 Va. at 712-15.
47.

Here, the purported “alterations” do not constitute substantial changes that vary

the form or nature of the buildings. Instead, these more minor changes—including the decisions
to decommission certain equipment and use it for spare parts—constitute only neglect and a
failure to maintain and repair the premises as the leases require. That Ross did not include these
changes to the buildings in the plans submitted to the City in 1996 confirms that these changes
do not rise to the level of alterations.
48.

Ross had the option to defer maintenance through neglect, abandonment, or

decommissioning equipment because the lessors did not insist on the tenant’s continuing
maintenance and repair. Now, however, Ross must comply with its independent surrender
obligations to restore all floors and equipment of the leased premises to good order, condition,
and repair, except for reasonable wear and tear. Ross cannot escape these obligations by arguing
that its lack of conscientious stewardship constitutes an “alteration” to which the landlords
impliedly consented.
49.

In its March 25, 2016 Order and Opinion, the Court found, in contrast, that zoning

portions of the basements for “no occupancy” constituted an alteration to which the landlords
expressly or impliedly consented.96 The “no occupancy” designation was expressly shown on the
plans that Ross submitted to the City during the 1996 remodel. Evidence introduced at trial
further confirms that the landlords expressly or impliedly consented to the alterations.
96

Dkt. 99 at 28-34.

PAGE 58 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

50.

The evidence establishes that Walker Place’s predecessor received copies of

Ross’s remodel plans in 1996 and approved them, thereby expressly consenting to that alteration.
Because the 1956 Failing Lease does not require Ross to remove alterations to which the
landlord consented, Ross is not obligated to restore the allowable occupancy level in the Failing
Building basement. See Fairway Outdoor Advert. v. Edwards, 197 N.C. App. 650, 660 (2009)
(“The lessee is not required to remove improvements made by him or her with the consent of the
landlord or under authority of the lease, unless the lease so provides. . . .” (quoting 52A C.J.S.
Landlord and Tenant § 884 (2003))).
51.

On the other hand, evidence introduced at trial shows that Makarios’s predecessor

did not receive copies of the plans or approve the plans during the 1996 remodel. When a tenant
makes alterations to which the landlord consents, “the general rule is that in absence of a specific
lease provision directing otherwise, a tenant has the right, but not the obligation, to restore the
leased property to its original condition.” Fairway, 197 N.C. App. at 660. The 1956 Richmond
Lease does not expressly obligate Ross to restore alterations other than those that adapt the
building for multiple occupancy.97 Nonetheless, Makarios argues that because it never authorized
alterations to the allowable occupancy level in the basement, Ross must restore the allowable
occupancy level before surrendering the building. See Trick v. Eckhouse, 82 Ind. App. 196, 145
(1924) (holding that a tenant is liable for any damages caused by alterations to which the
landlord did not consent); Leventhal v. 128 W. 30th St. Corp., 158 N.Y.S.2d 398, 402 (Sup.
Ct. 1956) (requiring the tenant to restore and reinstall the original light fixtures before
surrendering the leased premises because the tenant made the alterations without the landlord’s
consent).
97

Makarios does not argue that the alterations to the Richmond Building adapted the
building for multiple occupancy.
PAGE 59 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

52.

The evidence establishes, however, that the Calomiris family had access to the

building and to the publicly-filed plans and could have objected to the “no occupancy”
designation at any time during the 1996 remodel. The Calomiris family did not object in 1996
despite this access, suggesting implied consent. “The cases generally hold that where, as here,
the alterations were made with the landlord’s knowledge and implied consent, the tenant has no
implied obligation to restore the leased premises at the end of the term.” Lamonica v. Bosenberg,
73 N.M. 452, 455 (collecting cases).
53.

Makarios argues that the implied consent cases are distinguishable because the

Richmond Building landlord was located on the East Coast and did not have contemporaneous
knowledge of the alterations. This case, however, closely resembles that of Petrelli v. Kagel, 235
N.Y.S.2d 383, 387 (Civ. Ct. 1962), where the court found implied consent even in the absence of
evidence that the landlord knew about the alterations as they occurred. There, the court looked to
the landlord’s long silence and concluded:
In view of the fact that some of the alterations were made at the
commencement of the occupancy twenty-one years before and that
the balance were made some seven years ago, and in the absence
of any evidence of any action by the landlords or their predecessor
to prevent them, either by remonstrance or legal action, there was
at least an implied consent, which precludes any claim to
restoration in the absence of any affirmative covenant.
Id. (citation omitted).
54.

Here, the Calomiris family had actual knowledge of the change in occupancy by

at least 1997, as established by communications between the family’s representative and Ross.
After receiving notice that Ross considered the matter resolved in 1998, the Calomiris family
remained silent regarding the occupancy issue until this litigation. Importantly, this silence was
unbroken in 2004, when the City added Title 24 to the Code. The Calomiris family said nothing
to Ross about the effect of Title 24 on Ross’s surrender obligations or the lessor’s expectation
PAGE 60 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

that Ross would restore the pre-1996 occupancy capacity of the basement by completing seismic
upgrades. If not before, Makarios’s predecessor impliedly consented to the basement alterations
by silently standing by after 1998, as the Code significantly changed in 2004, and for the
remaining decade until Ross brought this declaratory action. Just as silence did not aid Ross,
silence worked against Makarios. Therefore, Ross is not obligated to restore the occupancy level
of the basement, but “implied consent by the landlord, . . . although excusing the tenant from any
requirement to restore, does not excuse the tenant from leaving the premises in good order and
condition, reasonable wear and tear and damage from the elements excepted.” Id.
55.

For the same reasons as discussed above, Defendants have not waived the

requirement to surrender any neglected or decommissioned portions of the premises in good
order, condition, and repair, except for reasonable wear and tear.
3. Meaning of “Good Order, Condition, and Repair, Except for Reasonable Wear
and Tear”
56.

Both 1956 leases are triple-net leases that require the tenant, not the landlord, to

bear “responsibility for taxes, insurance, and maintenance of the property.” Swenson v. Mills,
198 Or. App. 236, 239 (2005). The 1956 leases also require the tenant to surrender the buildings
in good order, condition, and repair, except for reasonable wear and tear.98 A “wear and tear”
provision contemplates some deterioration over time and does not require that a tenant to return
premises in a like-new or nearly-new condition. Capitol Funds, Inc. v. Arlen Realty, Inc., 755
F.2d 1544, 1549 (11th Cir. 1985). Provisions relating to maintenance and restoration also “must
take into account not only the age of the property but the nature of it,” such as whether the
property is “constantly exposed to the elements and subjected to heavy and daily blows.” Black
& Yates, Inc. v. A. R. Fuels, Inc., 210 N.Y.S.2d 171, 173 (1960).
98

See Ex. 1 at 41; Ex. 301B at 8-9.

PAGE 61 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

57.

Nonetheless, the line between reasonable wear and tear and damages that a tenant

must remedy is crossed “[w]hen an older property is neglected” such that “problems soon
escalate out of control.” In re Evergreen Ventures, 147 B.R. 751, 760 (Bankr. D. Ariz. 1992). In
these circumstance, “‘[m]ere wear and tear’ proliferates into vast problems requiring hundreds of
thousands of dollars to cure,” and the tenant can be held liable for these problems. Id.99
58.

Here, the surrender provisions, taken together with the other lease provisions,

require Ross to return the buildings in as good a condition as they would have been in, taking
into account their age, but for the tenant’s failure to perform the regularly-scheduled
maintenance, repairs, and replacements reasonably required by the leases throughout the sixtyyear terms. See Fisher Props., Inc. v. Arden-Mayfair, Inc., 106 Wash. 2d 826, 838-41 (1986)
(affirming a trial court’s determination that surrendering leased premises in “as good state and
condition as reasonable use and wear and damage by fire will permit” means that “no component
or element of the building which was required to be returned at the termination of the Lease be in
a state or condition beyond (substandard to) its normal maintenance cycle”).100
99

Ross argues that this case is distinguishable because it involved a lease for an
apartment complex that was not fully depreciated. These facts do not, however, meaningfully
distinguish the case from the circumstances surrounding Ross’s tenancy. Ross, like the tenant in
Evergreen, is liable for any damage to the premises that exceeds reasonable wear and tear, or
that could have been avoided by conscientious and reasonable maintenance and repair.
100

Ordinarily, a covenant relating to good order, condition, and repair “does not include
the restoration of a part of a building which has become so run-down that it cannot be repaired.”
Scott v. Prazma, 555 P.2d 571, 579 (Wyo. 1976) (involving a ten-year lease that had
approximately seven and a half years to run at the time the tenant quit the premises). This general
rule, however, does not apply in the case of a long-term commercial lease that contains
covenants relating to good order, condition, and repair. Such a lease incorporates an
understanding that the leased premises will be kept or returned in a “serviceable” condition.
Capitol Funds, 755 F.2d at 1549 (quoting the trial court opinion). Keeping or returning the
leased premises in a “serviceable” condition after decades of use means that the tenant
“assume[s] the risk under the contract that major elements of the premises, such as the roof,
would require replacement—rather than repair—before the term of the lease expired.” Id. Here,
the 1956 Richmond Lease was for a term of 30 years, renewable. Ex. 1 at 2. The 1956 Failing
PAGE 62 – FINDINGS OF FACT AND CONCLUSIONS OF LAW

59.

Ross had the option to put off regularly-scheduled maintenance. Ross had this

option because the lessors did not insist on enforcing the obligation to maintain the premises in
good order, condition, and repair during the lease terms. Reasonable wear and tear, however,
does not include deterioration that results from deferred maintenance. Although Ross had the
option of when to perform its obligations, “Time will have his fancy / To-morrow or to-day.”101
CONCLUSION
Based on the evidence presented at the Phase I trial and the record in this case, the Court
DENIES IN PART AND GRANTS IN PART the requests for declaratory relief of Ross,
Makarios, and Walker Place. Although Ross’s modified plans to separate and surrender the
buildings are insufficient to meet the requirements of the two leases at issue, Ross is not
obligated to perform the full scope of work that Defendants demand. The Court retains
jurisdiction to address in Phase II of these proceedings any matters that may still require
resolution by the Court.
IT IS SO ORDERED.
DATED this 10th day of June, 2016.
/s/ Michael H. Simon
Michael H. Simon
United States District Judge

Lease was for a term of 36 years, renewable. Ex. 301B at 3. Accordingly, because Ross entered
into long-term commercial leases containing covenants to return the buildings in good order,
condition, and repair, expect for reasonable wear and tear, Ross must, as part of its surrender
obligations, replace items that have become so run-down that they cannot be repaired.
101

W.H. Auden, As I Walked Out One Evening (1940).

PAGE 63 – FINDINGS OF FACT AND CONCLUSIONS OF LAW