Kd1 Development, Inc. v. General Service Admin. ( 2012 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals
for the Federal Circuit
__________________________
KD1 DEVELOPMENT, INC.
Appellant,
v.
MARTHA N. JOHNSON, ADMINISTRATOR,
GENERAL SERVICES ADMINISTRATION,
Appellee.
__________________________
2012-1160
__________________________
Appeal from the Civilian Board of Contract Appeals in
No. 2075, Administrative Judge Joseph A. Vergilio.
___________________________
Decided: October 23, 2012
___________________________
DOUGLAS C. LASOTA, Dickie, McCamey & Chilcote,
P.C., of Pittsburgh, Pennsylvania, argued for the appel-
lant. With him on the brief was BRETT W. FARRAR.
MICHAEL N. O’CONNELL, Trial Attorney, Commercial
Litigation Branch, Civil Division, United States Depart-
ment of Justice, of Washington, DC, argued for appellee.
With him on the brief were STUART F. DELERY, Acting
KD1 DEVELOPMENT v. GSA 2
Assistant Attorney General, JEANNE E. DAVIDSON, Direc-
tor, and HAROLD D. LESTER, JR., Assistant Director.
__________________________
Before DYK, CLEVENGER, and WALLACH, Circuit Judges.
WALLACH, Circuit Judge.
The Civilian Board of Contract Appeals (“Board”) de-
nied a claim by KD1 Development, Inc. (“KD1”) asserting
that under its lease, GS-03B-700591 with the General
Services Administration (“GSA”), it is entitled to the sum
of the rental rate and the operating costs rate (annually
adjusted) and held that GSA was entitled to recover
$216,762.00 in overpayments. KD1 Dev., Inc., v. Gen.
Servs. Admin., CBCA 2075, 11-2 BCA ¶ 34,843 (Sept. 20,
2011) (“CBCA Op.”). Because the Board erred in inter-
preting the lease at issue and KD1, rather than GSA, is
entitled to the compensation it seeks, we reverse and
remand.
BACKGROUND
GSA sought to lease space in southwestern Pennsyl-
vania for use by the Mine Safety and Health Administra-
tion. Accordingly, GSA issued a public solicitation, SFO
No. MPA96182, that included a clause that specifies
offerors must submit offers with the total gross annual
price and a breakout of the base price and operating
expenses:
(a) if annual CPI [Consumer Price Index] adjust-
ments in operating expenses are included, Offer-
ors are required to submit their offers with the
1 There is at least one other lease agreement be-
tween KD1 and the General Services Administration
(“GSA”) that it not at issue on this appeal. See Joint
Appendix (“J.A.”) at 1.
3 KD1 DEVELOPMENT v. GSA
total “gross” annual price per rentable square foot
and a breakout of the “base” price per rentable
square foot for services and utilities (operating
expenses) to be provided by the Lessor. The
“gross” price shall include the “base” price.
....
(c) If the offer includes annual adjustments in op-
erating expenses, the base price per occupiable
square foot from which adjustments are made will
be the base price for the term of the lease, includ-
ing any option periods.
Joint Appendix (“J.A.”) 185-186 ¶ 1.10. Offerors wishing
to receive annual adjustments in operating costs were
instructed to submit GSA Form 1217, which was used to
determine the “base rate” for subsequent adjustments.
J.A.190 ¶ 3.5. The solicitation further stated: “The base
for the operating costs adjustment will be established
during negotiations based upon occupiable square feet.”
Id. at ¶ 3.6.
In its initial and second offer KD1 indicated a total
rate per square foot and submitted its operating costs on
GSA Form 1217. The parties then agreed upon an annual
operating cost base of $3.97 per square foot. In its third
revised offer, KD1 listed the occupiable square footage,
price per square foot, and total amount per year for the
lease term; it also referenced the earlier submission for
operating costs. “In its ultimate best and final offer, . . .
[KD1] stated the occupiable square footage (9100 square
feet), price per square foot ($17.47), and the total amount
per year for the lease term ($159,000).” CBCA Op. at ¶ 4.
GSA and KD1 executed a lease agreement drafted by
GSA. The lease provisions included the following perti-
nent parts:
KD1 DEVELOPMENT v. GSA 4
3. The Government shall pay the Lessor annual
rent of $ (SEE LEASE RIDER PARA[G]RAPH 13)
at the rate of $ (SEE LEASE RIDER
PARAGRAPH 13 per month in arrears. Rent for a
lessor period shall be prorated.
6. The Lessor shall furnish to the Government as
part of the rental consideration, the following:
A. All services, maintenance, repairs, utilities,
alterations and other considerations as set
forth in the lease.
B. The provisions of SFO [solicitation for of-
fers] #MPA96182 are to be provided without
modification
Id. at ¶ 6. A supplement to the lease (“Lease Rider”)
contains additional terms. Paragraph eleven of the Lease
Rider stated that the base rate for future adjustments to
the operating cost is $3.97 per occupiable square foot.
Paragraph thirteen of the Lease Rider provided that, after
acceptance, the building would be measured as described
in the solicitation and rent would be paid at $17.47 per
occupiable square foot per year.
From the first payment in September 1998 through
March 2006, GSA paid KD1 rent equal to the sum of the
annual rent and operating cost base. As a result, GSA
was paying an annual base rent of $158,977.00 per year
(at a cost of $17.47 per square foot for 9100 square feet)
and an annual operating rent of $36,127.00 (at a base cost
of $3.47 per square foot for 9100 square feet) subject to
escalation (for total annual rent of: $158,977.00 +
$36,127.00 = $195,104.00).
In a letter dated March 16, 2006, a GSA officer sent
KD1 a supplemental lease agreement, effective August
11, 1998, specifying an annual rate of $158,977.00 at the
5 KD1 DEVELOPMENT v. GSA
rate of $13,248.08 per month in arrears. GSA followed
with another letter dated April 5, 2006, explaining that
there was an erroneous overpayment and requesting
$272,969.26 in repayment (the amount of operating costs
believed to have been double paid since August 1998).
KD1 responded by letter dated April 26, 2006, stating
that there was no such overpayment because all parties
understood that the $3.97 for operating costs was in-
tended to be paid in addition to the base rent.
Beginning April 2006, GSA made payments consistent
with the total rental rate inclusive of operating costs, plus
the escalation to the operating costs base ($122,850.00 +
$36,127.00 = $158,977.00). After a series of correspon-
dence, KD1 submitted a claim, on December 22, 2009, to
the contracting officer contending that the operating rent
was properly considered as an addition to the base rent.
Additionally, KD1 requested payment of $110,000.00, the
difference between the amount GSA paid beginning April
2006 through the end of the lease in August 2008 and the
amount owed when the operating cost is considered an
addition to the base rent. Furthermore, KD1 challenged
GSA’s right to recover $272,969.26 in overpayments. The
contracting officer denied the claim in its entirety and
reiterated GSA’s right to recover $272,969.26 in overpay-
ments from KD1 either directly, or by offsetting payments
thereafter.
KD1 appealed to the Board. “In resolving cross-
motions for summary relief, the Board held that the
language of the lease supports [GSA’s] interpretation, not
that of [KD1], and that [GSA] could offset amounts due
under the first lease against amounts payable under the
second lease.” CBCA Op. at 1. The Board allowed for
further development of the record and then determined
that “factually and legally” the written lease must be
enforced such that the total lease rate and annual rent
KD1 DEVELOPMENT v. GSA 6
includes operating costs, and the agreed upon operating
costs base is used for annual adjustment purposes. Id. at
2. However, the Board determined the applicable statute
of limitations confined GSA’s recovery to those claims
accruing within six years of when GSA first notified KD1
of its claim. Therefore, GSA’s recovery was limited to
$216,762.00 ($36,127.00 * 6 = $216,762.00), the amount of
the duplicative operating cost payments made over six
years. This timely appeal followed.
DISCUSSION
We have jurisdiction over an appeal from a decision of
a board of contract appeals under 28 U.S.C. § 1295(a)(10).
We review the Board’s findings of fact under a deferential
standard; they will not be set aside unless they are
fraudulent, arbitrary, capricious, rendered in bad faith, or
not supported by substantial evidence. 41 U.S.C. § 7107(b)
(2006); see Gardiner, Kamya & Assocs., P.C. v. Jackson,
369 F.3d 1318, 1322 (Fed. Cir. 2004). The Board’s conclu-
sions of law are reviewed de novo. Andersen Consulting v.
United States, 959 F.2d 929, 932 (Fed. Cir. 1992).
The interpretation of a contract is a question of law,
and we determine without deference whether there is
ambiguity in the language. States Roofing Corp. v. Winter,
587 F.3d 1364, 1368 (Fed. Cir. 2009). We begin by exam-
ining the plain language of the contract and determining
if it can reasonably be interpreted in more than one way;
if so, an ambiguity exists. LAI Servs., Inc. v. Gates, 573
F.3d 1306, 1314 (Fed. Cir. 2009). “[W]hether ambiguities
are latent or patent and whether the contractor’s inter-
pretation thereof is reasonable are also questions of law
subject to de novo review.” Interwest Constr. v. Brown, 29
F.3d 611, 614 (Fed. Cir. 1994).
We first determine whether the lease is susceptible to
more than one reasonable meaning and is therefore
7 KD1 DEVELOPMENT v. GSA
ambiguous. “To show an ambiguity it is not enough that
the parties differ in their respective interpretations of a
contract term. Rather, both interpretations must fall
within a ‘zone of reasonableness.’” Metric Constructors,
Inc. v. Nat’l Aeronautics & Space Admin, 169 F.3d 747,
751 (Fed. Cir. 1999) (quoting WPC Enters., Inc. v. United
States, 323 F.2d 874, 876 (Ct. Cl. 1963).
The parties dispute whether, under the lease, the
base rental rate of $17.47 per square foot is inclusive of
operating costs of $3.97 per square foot. The relevant
provisions of the lease and the lease rider specifies the
annual rent, applicable rates, and incorporated unit costs.
Paragraph three of the lease requires: “The Government
shall pay the Lessor annual rent of $ (SEE LEASE
RIDER PARA[G]RAPH 13) at the rate of $ (SEE LEASE
RIDER PARAGRAPH 13) per month in arrears. Rent for
a lessor period shall be prorated.” J.A.286. Paragraph
eleven of the Lease Rider provides: “For purposes of
determining the base rate for future adjustments to the
operating cost, the Government agrees that the base rate
quoted on the ‘Lessor’s Annual Cost Statement’ (GSA
Form 1217), dated March 5, 1997, at $3.97 per occupiable
square foot, is acceptable.” Id. at 288. Paragraph thirteen
of the Lease Rider states: “Upon acceptance of the leased
premises by the Government, the same shall be measured
and rental shall be paid, in accordance with Paragraph
3.7 of Solicitation MPA96182, ‘Occupiable Space’ and
Paragraph 22 of the General Clauses, GSA Form 3517,
‘Measurement for Payment’ at the rate of $17.47 per
occupiable square foot per year.” Id. at 289.
KD1 argues that the lease should be interpreted to
require a fixed base rent of $17.47 per square foot for a
ten-year term plus an additional $3.97 per square foot
annually adjustable operating cost. In particular, KD1
argues that Paragraph thirteen does not comply with the
KD1 DEVELOPMENT v. GSA 8
requirement of the lease at Paragraph three because it
does not state the annual and monthly rent rendering the
pertinent provisions of the lease ambiguous.
GSA disagrees, contending that the Board correctly
held that “[t]he lease rate is a total (or gross) rate inclu-
sive of operating costs.” CBCA Op. at 9. GSA asserts that
the plain language is unambiguous, citing to the solicita-
tion. The solicitation required offerors “to submit their
offers with the total ‘gross’ annual price per rentable
square foot and a breakout of the ‘base’ price per rentable
square foot for services and utilities (operating expenses)
to be provided by the Lessor. The ‘gross’ price shall
include the ‘base’ price.” J.A.185, ¶ 1.10(a).
Although the cited language from the solicitation sup-
ports GSA’s interpretation of the lease, it is not clearly
part of the lease entered into by the parties. Paragraph
six of the lease agreement refers to the provisions of the
solicitation (SFO #MPA96182): “The Lessor shall furnish
to the Government as part of the rental consideration, the
following: . . . . B. The provisions of SFO #MPA96182 are
to be provided without modification.” J.A.287. However,
Paragraph seven of the lease contradicts that provision,
stating: “The following are attached and made a part
hereof: . . . B. SFO #96182, as amended (26 pages)”2 Id.Attached to the lease however, and therefore incorporated
therein are paragraphs three through eight of the solicita-
tion. J.A.291-313. The language GSA cited from Para-
graph 1.10(a) of the solicitation is not incorporated into
the lease. Paragraph 1.10(a) is accordingly extrinsic
2 The pages attached are labeled “SFO
#MPA96182,” thus the omission of “MPA” in reference to
the solicitation in paragraph seven is assumed to be a
typographical error.
9 KD1 DEVELOPMENT v. GSA
evidence not considered when determining if the lease is
ambiguous.
The plain language of the lease is susceptible to more
than one meaning. Neither the lease nor the lease rider
states a total gross price. Paragraph thirteen of the lease
rider directs “Measurement for Payment” at the rate of
$17.47 per occupiable square foot per year, J.A.289, but
does not indicate whether the operating costs of $3.97 per
occupiable square foot, as set forth in paragraph eleven, is
included therein. While Paragraph thirteen states that
the $17.47 per square foot is payment “in accordance
with” the “occupiable space” paragraph of the solicitation,
it makes no mention of Paragraph 3.5 and 3.6 of the
solicitation, which concern payment for operating costs.
Because the lease does not specify a total gross rate, and
the rate of $17.47 per occupiable square foot may either
be inclusive or exclusive of operating costs, the lease is
ambiguous.
To aid in interpretation of an ambiguous lease one
looks to extrinsic evidence. Metro. Area Transit, Inc. v.
Nicholson, 463 F.3d 1256, 1260 (Fed. Cir. 2006). “[T]he
parties’ own course of performance is highly relevant to
contract interpretation.” Id. As noted, Paragraph 1.10(a)
of the solicitation indicates that the total gross price shall
include the base price, and tells offerors to breakout from
the total gross price a base price for operating costs.
KD1’s offer described $17.47 per occupiable square foot as
the “total” square foot rate per year and did not mention
operating costs. Additionally, GSA provided certification
of available funds for the first year of the lease in the
amount of $158,977.00, signed by the contracting officer
and a realty specialist. J.A.272. Those extrinsic facts
support GSA’s lease interpretation. However, at the time
of the first payment under the lease GSA’s own financial
and real estate management system was for a base rent of
KD1 DEVELOPMENT v. GSA 10
$158,977.00 and an additional operating rent of
$36,127.00. J.A.355. GSA made payments accordingly for
eight years. The parties’ course of performance reflects
KD1’s interpretation of the language of the lease. Be-
cause the specification and the parties’ course of perform-
ance support opposing and ambiguous interpretations, the
extrinsic evidence is of limited assistance in interpreta-
tion of the relevant lease provisions.
An ambiguity is either patent or latent. NVT Techs.,
Inc. v. United States, 370 F.3d 1153, 1162 (Fed. Cir.
2004). “A patent ambiguity does not exist where the
ambiguity is neither glaring nor substantial nor patently
obvious.” States Roofing, 587 F.3d at 1372 (internal
quotation marks omitted). “Where an ambiguity is not
sufficiently glaring to trigger the patent ambiguity excep-
tion, it is deemed latent and the general rule of contra
proferentem applies,” HPI/GSA-3C, LLC v. Perry, 364
F.3d 1327, 1334 (Fed. Cir. 2004), “which requires that a
contract be construed against the party who wrote it,”
Newsom v. United States, 676 F.2d 647, 649 (Ct. Cl. 1982).
Although contra proferentem is a rule of last resort,
Gardiner, Kamya & Assocs., P.C. v. Jackson, 467 F.3d
1348, 1352 (Fed. Cir. 2006), other interpretive approaches
do not resolve the ambiguity here. The ambiguity at issue
cannot be patent because GSA paid under the lease for
eight years before issuing a supplemental lease agree-
ment purporting to clarify the lease terms and annual
rent. See J.A.395-97 (“Paragraph 3 of Standard Form 2 of
the Lease is hereby amended by deleting the existing text
in its entirety and replacing with the following: ‘3. The
Government shall pay the Lessor annual rent of
$158,977.00 at the rate of $13,248.08 per month in ar-
rears.’”). Thus, the ambiguity is latent and the lease must
be construed against the GSA which drafted it. Accord-
ingly, the decision of the Board is erroneous.
11 KD1 DEVELOPMENT v. GSA
CONCLUSION
For the foregoing reasons, we conclude that the Board
erred in determining that the rate stated in Paragraph
thirteen of the lease rider was inclusive of the operating
costs specified in Paragraph eleven. Therefore, KD1 is
entitled to recover the payment withheld by the GSA, and
the GSA is not entitled to offset its alleged overpayments
by reducing its payments under the second lease. Accord-
ingly, we reverse the decision of the Board and remand
the case to the Board for a determination of the amount of
compensation to which KD1 is entitled.
REVERSED and REMANDED.
No costs.