Northstar Partners v. Marsh Supermarkets, Inc. ( 2005 )

UNPUBLISHED ORDER
Not to be cited per Circuit Rule 53
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued September 28, 2005
Decided December 14, 2005
Before
Hon. Joel M. Flaum, Chief Judge
Hon. Daniel A. Manion, Circuit Judge
Hon. Terence T. Evans, Circuit Judge
No. 04-3305 Appeal from the United States
District Court for the Southern
Northstar Partners, District of Indiana, Indianapolis
Plaintiff-Appellant, Division
v. No. 03 C 127
Marsh Supermarkets, Inc., David F. Hamilton, Judge.
Defendant-Appellee.
ORDER
Northstar Partners sued its tenant Marsh Supermarkets, LLC, contesting
the amount of rent due under the lease. Northstar Partners contends that Marsh
Supermarkets owes additional rent based on an expansion of the storeroom. The
district court concluded that, under the terms of the lease, the expansion of the
storeroom did not change the amount of rent due. We affirm.
I.
In 1977, Marsh Supermarkets, LLC (“Marsh”) entered into a lease with
Northstar Partners (“Northstar”), in which Marsh agreed to rent space as the
No. 04-3305 Page 2
anchor tenant in a shopping center owned by Northstar.1 The lease provided for
an initial term of twenty years, with Marsh holding the option to extend the lease
for an additional five years, up to four times.
Marsh expanded the storeroom in 1991, adding 12,824 square feet at a cost
exceeding $1.5 million. The lease anticipated the expansion, and provided that
“[n]o such addition, alteration, or remodeling shall be cause for the modification of
any of the terms and provisions hereof.” The lease further provided that at the
expiration of the lease, Northstar will take possession of the expanded structure.
After the expansion, in 1997, Marsh exercised its first option to extend the
lease. Throughout the initial twenty-year term and the first optional term, the lease
required Marsh to pay $11,122.75 in monthly rent. The parties performed the lease,
apparently without incident, for those first twenty-five years.
On May 15, 2002, Marsh exercised its second option to extend the terms of
the lease, thereby extending the lease until November 30, 2007. Under the terms of
the lease, the rent due changed after the initial and first optional terms, thus
precipitating the present dispute. Specifically, the lease provided that the rent
“shall be $3.00 per square foot” in the second, third, and fourth optional terms.
After Marsh exercised the second option, Northstar informed Marsh that it owed
rent based on the expanded square footage. While Marsh continued to pay rent on
the original square footage, Marsh refused to pay rent on the expanded square
footage. Marsh claimed that the expansion did not change any terms of the lease,
including the rental calculation, and therefore no additional rent is due for the
expanded square footage.
To resolve this issue, Northstar sued Marsh, seeking a declaratory judgment
regarding the amount of rent due and claiming a breach of contract for the allegedly
unpaid rent on the expanded square footage. The parties both moved for summary
judgment. The district court examined “the four corners of the lease document,
seasoned by a little common sense.” Reasoning that the parties did not intend to
change the terms of the lease and that changing the square footage would constitute
a change in the terms, the district court granted summary judgment to Marsh.
According to the district court, this determination was “the most natural reading” of
the lease. The district court considered it “improbable” that Marsh would build a
1
Marsh and Northstar are both successors-in-interest to the original parties to the lease,
Marsh Supermarket, Incorporated and Speedway Plaza Associates. For simplicity, we refer to
Marsh and Northstar as the parties throughout this opinion.
No. 04-3305 Page 3
$1.5 million expansion that would belong to Northstar at the end of the lease, and
also agree to pay rent on the additional space. The district court therefore
concluded that Northstar could collect rent based only on the original square
footage, not the expanded square footage. Northstar appeals.
II.
We review a district court’s grant of summary judgment de novo. Isbell v.
Allstate Ins. Co., 418 F.3d 788, 793 (7th Cir. 2005) (citation omitted). Summary
judgment is appropriate if “‘the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.’” Id. (quoting Fed. R. Civ. P. 56(c)). In this diversity
case, the parties agree that Indiana law applies.
To determine what evidence may be considered in analyzing this dispute, we
must first determine whether the lease is ambiguous. Under Indiana law, “[t]he
determination of whether a contract is ambiguous is a question of law for the court.”
Art Country Squire v. Inland Mortgage Corp., 745 N.E.2d 885, 889 (Ind. Ct. App.
2001). To analyze ambiguity, Indiana courts consider “whether reasonable men
would find the contract subject to more than one construction.” Keithley’s Auction
Serv. v. Wright, 579 N.E.2d 657, 659 (Ind. Ct. App. 1991) (citing Ebert v. Grain
Dealers Mut. Ins. Co., 303 N.E.2d 693, 698 (Ind. Ct. App. 1973)). Indiana courts
have also cautioned that “the terms of a contract are not ambiguous simply because
a controversy exists between the parties concerning the proper interpretation of
terms.” Dick Corp. v. Geiger, 783 N.E.2d 368, 374 (Ind. Ct. App. 2003) (citing
Ostrander v. Bd. of Dirs. of Porter County Educ. Interlocal, 650 N.E.2d 1192, 1196
(Ind. Ct. App. 1995)). Additionally, Indiana courts advise that,
In most cases, the intent of the parties to a contract is to be determined by
the “four corners” of the contract. [If] the language of an instrument is
unambiguous, we give effect to the intentions of the parties as expressed in
the four corners of the document. Clear, plain, unambiguous terms are
conclusive of that intent.
Id. (internal citations omitted).
Applying this standard, we examine whether the language in dispute is
ambiguous. The critical passage at issue states: “the rental provided for in Section
IV A shall be $3.00 per square foot for the 2nd, 3rd and 4th option terms.” Lease §
III(B). This section contains “clear” and “plain” terms. Dick Corp., 783 N.E.2d at
No. 04-3305 Page 4
374. The question is how to interpret the term “square foot.” This question can be
resolved through an interpretation of the lease and, as discussed below, reasonable
individuals would not consider the term “subject to more than one construction.”
Keithley’s Auction Serv., 579 N.E.2d at 659. Even though the parties disagree
whether this term refers to the original or expanded square footage, the term is not
ambiguous when read in the context of the lease.
Since the lease is not ambiguous, we limit our review to the language of the
lease. Dick Corp., 783 N.E.2d at 374 (“Absent an ambiguity . . . we look only to the
instrument to ascertain the parties’ intent.” (citation omitted)); see also Art Country
Squire, 745 N.E.2d at 889 (“In interpreting an unambiguous contract, we give effect
to the intentions of the parties as expressed in the four corners of the document.”).
Furthermore, since the language is unambiguous, the court does not construe the
lease language against either party. See Keithley’s Auction Serv., 579 N.E.2d at 659(“An ambiguous contract is construed against the party who furnished and drafted
the agreement.” (emphasis added, citation omitted)).
Turning to the language of the lease, we interpret the provisions involving
rent. During the initial term and the first optional term, the lease provides that:
[Marsh] shall pay to [Northstar] as the monthly base rental hereunder, the
sum of [ ] ($11,122.75) representing an annual rate of [ ] ($133,473.00) or 3.73
Dollars per square foot on 35,760 square feet of storeroom, in advance, on or
before the first day of each calendar month, by check . . .
Lease § IV(A). If Marsh elects to extend the lease for the second, third, and fourth
optional terms, the lease provides
for an additional term of sixty (60) months upon the same terms and
conditions as those herein stated, except that the rental provided for in
Section IV A hereof shall be $3.00 per square foot for the 2nd, 3rd and 4th
option terms, only if so exercised.
Lease § III(B) (emphasis added). The “except” clause in section III(B) demonstrates
that the only term that changes in the second, third, and fourth optional terms is
the rental rate, and not the square footage. In fact, section III(B) explicitly refers to
section IV(A) of the lease, which addressed the square footage. Reading the new
rate provided in section III(B) with the language in section IV(A), the combined
language would provide that:
No. 04-3305 Page 5
[Marsh] shall pay to [Northstar] as the monthly base rental hereunder, $3.00
per square foot on 35,760 square feet of storeroom, in advance, on or before
the first day of each calendar month, by check . . .
Lease § III(B); IV(A). Thus, by making the only change that the lease itself
authorizes for the second, third, and fourth optional terms, the square footage does
not change. The lease does not entitle Northstar to additional rent on the expanded
square footage.
In response, Northstar argues that because section III(B) did not define
square footage as the “35,760 square feet of storeroom,” the plain language of “per
square foot” in Section III(B) must refer to the expanded square footage. The fact
that the initial rental rate was a sum certain of $11,122.75 per month, and not
based on square footage, bolsters this argument. The sum certain was modified by
the phrase “representing an annual rate of [ ] ($133,473.00) or 3.73 Dollars per
square foot on 35,760 square feet of storeroom,” but that modifying phrase was not
the basis of the monthly rent amount.2 This, Northstar argues, entails that the
entire modifying phrase, including the critical “on 35,760 square feet of storeroom,”
should be disregarded in considering the new rental rate. Without this modifying
phrase, Northstar concludes that the square footage in section III(B) refers to the
actual, expanded square footage.
Northstar’s argument fails for two reasons. First, as discussed above, section
III(B), which sets forth the new rental rate, explicitly refers to section IV(A), which
specifies that the rent is calculated “on 35,760 square feet of storeroom.” Thus, it
would be improper to interpret III(B) without reference to section IV(A) or to omit
the designated square footage, which may sensibly be read with the new rental rate.
Second, the lease emphasizes that the terms of the lease will not change in the
event of an expansion. The section that permits expansion of the storeroom states
that “[n]o such addition, alteration, or remodeling shall be cause for the
2
The fact that “3.73 Dollars per square foot” is a description of the rental rate and not the
basis for the calculation of the rate is evident by arithmetic, as Northstar illustrates in its brief.
Multiplying the $3.73 rate by 35,760 square feet does not equal the annual rent of $133,473.00,
to which the parties agreed (35,760 x $3.73 = $133,384.80). Instead, the calculation yields an
annual rent $88.20 less than the agreed upon amount ($133,473.00 - $133,384.80 = $88.20). To
obtain the actual figures in the lease agreement, one must divide the annual rent by the square
footage and then round the rental rate to the hundredths ($133,473.00 ÷ 35,760 = $3.7324664).
This suggests that the parties agreed to an annual rent for the initial term and then calculated the
rental rate per square foot.
No. 04-3305 Page 6
modification of any of the terms and provisions hereof.” Lease § VIII. Applying the
new rental rate to the expanded square footage would constitute a modification of
the terms in violation of section VIII. Therefore, we conclude that without a more
explicit provision referring to “existing” or “expanded” or even “all” square footage,
the optional term rental rate refers to the original 35,760 square feet of storeroom
referenced in section IV(A).
Northstar further argues that other sections of the lease use the term “square
foot” to refer to the expanded square footage. In particular, Northstar argues that
the common area maintenance charges are based on the expanded square footage,
just as the new rental rate should be based on the expanded square footage. This
argument fails, however, because the language of the lease involving the
maintenance charges uses different terms. Specifically, the lease requires Marsh to
pay its “proportionate share” of tax and maintenance expenses. Lease §§ IV(B),
VI(B). This proportionate share is based on “demised footage,” which the lease
defines as “[t]he square footage of the demised storeroom.” Lease § IV(B). The
“square footage” in section III(B), however, does not refer to the demised footage.
Instead, as discussed above, section III(B) explicitly refers to section IV(A), which in
turn describes rent based on 35,760 square feet of storeroom. The use of “square
footage” in the rental rate section is therefore distinguishable from the demised
footage used to calculate the maintenance charges.
The conclusion that the rental rate is based on the original square footage
comports with common sense. The parties bargained for a decrease in the rental
rate after the initial twenty-five years. This reduction is reasonable, considering
that the construction would be fully amortized after that period, resulting in greater
net income for Northstar. Requiring Marsh to pay additional rent on an expansion
that it built at a cost exceeding $1.5 million, and which will remain part of the
premises for Northstar to rent in the future, is economically unbalanced. As the
district court noted, “[t]hat result is so improbable that it would require much more
specific language to compel it.” Northstar Partners v. Marsh Supermarkets, No. 03-
C-127, 2004 WL 1784903 at *4 (S.D. Ind. Aug. 2, 2004) (citing Rhode Island
Charities Trust v. Englehard Corp., 267 F.3d 3, 7 (1st Cir. 2001) (“Parties can
contract for preposterous terms. If contract language is crystal clear or there is
independent extrinsic evidence that something silly was actually intended, a party
may be held to its bargain, absent some specialized defense.”) (emphasis omitted)).
Northstar fails to show that the parties intended such an economically lopsided
lease agreement. Accordingly, we will not sanction a strained reading of the lease
that defies common sense.
III.
No. 04-3305 Page 7
We note that the original parties to this lease could have precluded this
dispute by more careful drafting. Regardless, the reasonable interpretation of the
lease is to calculate the optional term rent based on the original square footage.
Northstar’s arguments to the contrary are unavailing. During the second, third,
and fourth optional terms of the lease, we interpret the lease as providing a rental
rate of $3.00 per square foot based on the original 35,760 square feet of the
storeroom. The expansion of the storeroom does not alter the calculation of the
rent. Accordingly, we AFFIRM the judgment of the district court.