TRO Avenue of the Arts v. The Art Institute ( 2014 )

J-A15017-14
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
TRO AVENUE OF THE ARTS, LP, IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
THE ART INSTITUTE OF PHILADELPHIA,
LLC,
Appellee Nos. 1670 EDA 2013
Appeal from the Judgment Entered May 6, 2013
In the Court of Common Pleas of Philadelphia County
Civil Division at No(s): 2305 August Term, 2009
BEFORE: PANELLA, J., LAZARUS, J., AND JENKINS, J.
MEMORANDUM BY: JENKINS, J. FILED AUGUST 22, 2014
This is a dispute over the interpretation of a commercial lease. In
occupy a commercial building in Center City Philadelphia for ten years with
an
Near the end of the original ten year term, Tenant timely renewed the lease,
but the parties disagreed on the amount of rent that Tenant owed for the
Renewal Term.
to pay the full amount of Renewal Term rent. Following lengthy pretrial
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calculations and entered findings of fact and conclusions of law determining
that the total amount of Renewal Term rent was $15,715,604.87. Landlord
filed timely post-
findings of fact and conclusions of law to award Landlord additional rent -- in
effect, a motion for judgment n.o.v. In the alternative, Landlord requested a
new trial on the basis of two evidentiary rulings during trial. The court
-trial motions, and on May 6, 2013, Landlord entered
judgment1 and filed a timely notice of appeal. Without requiring a statement
of matters on appeal, the court entered an opinion incorporating its findings
by reference.
After careful review, we hold that the trial court failed to award
Landlord the amount of Renewal Term rent that Landlord is entitled to
receive under the lease. We vacate the May 6, 2013 judgment and remand
to the trial court for proper computation of Renewal Term rent.
We first analyze the pertinent provisions of the lease, then describe
on appeal.
Pertinent Provisions Of The Lease. Landlord owns a commercial
building at 1346 Chestnut Street in Philadelphia. On April 16, 1999,
Landlord and Tenant entered into a lease giving Tenant the right to possess
1
R.R. 1139; see also Pa.R.Civ.P. 227.4(2) (permitting any party to enter
judgment when court denies post-trial relief but does not itself enter
judgment or order the prothonotary to do so).
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17 floors of the building for 10 years with an option to renew the lease for
an additional 5 years. Tenant, a college, utilized some floors in the building
for student housing and other floors for offices.
Paragraph 5 of the lease2
Tenant to pay $208,902.66 for year 1 of the Original Term and $217,236.00
for the second year, respectively. Paragraph 5(a)(iv) provides that at the
start of year 3, and on each anniversary for the rest of the Original Term,
monthly Rent shall be adjusted, but not decreased,
annually. Such adjustment shall result in a monthly
Rent equal to the monthly Rent payable for the then-
expiring twelve (12) months period, plus an amount
equal to such Rent multiplied by a percentage equal
period commencing with the "Old Base Month" (as
defined below) and ending with the "New Base
Month" (as defined below). In no event, however,
shall Rent ever be increased (due to an increase in
the Consumer Price Index) more than 3% per
annum.
rent steadily rose from year to year during the Original Term.
Paragraph 3(a) of the lease3 permits Tenant to renew the lease for one
its decision to renew 180 days or more before the end of the Original Term.
2
All references below to paragraph 5 derive from page 80 of the reproduced
record (R.R. 80).
3
All references below to paragraph 3 derive from R.R. 79.
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all
provisions of the lease will be equally applicable during the Renewal Term,
Paragraph 3(a)(2) defines the amount of rent that Tenant must pay
during the Renewal Term as follows:
The annual rent for the Renewal Term will be the
greater of (i) the annual rent payable for the
immediately preceding period or (ii) an amount
the Premises then being leased and occupied by
Tenant as of the start of the Renewal Term.
[Emphasis added].
during the tenth and final year of the Original Term, $3,187,563.00. We
defined in
paragraph 3(b):
Fair market rent a
new tenant of comparable net worth and
creditworthiness would pay for comparable space in
the building, or if no figures are available, then for
comparable space in a similar building in a similar
location in the City of Philadelphia, determined as set
fair
market rent
provisions of this lease, the determination shall also
be made as to the extent of tenant improvement
allowances, brokerage commissions, rent
abatements or concessions or other benefits which
would be made available to a new tenant under then
market conditions, all of which benefits shall also be
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made available to Tenant in connection with the
Fair Market
Rent
to the extent any such amounts are not actually paid
in connection with any such transaction, or Tenant
elects not to take advantage of all or any of such
Fair Market Rent for the applicable
transaction shall be reduced on an equitable basis to
reflect such facts.
[Emphasis added].
More simply stated, the calculation of fair market rent in paragraph
3(b) consists of three steps, -
(i) Determine the amount of rent a new tenant of
comparable net worth and creditworthiness would
pay for comparable space at the start of the Renewal
Term.
(ii) Calculate all amounts allocated for tenant
improvement allowances, brokerage commissions,
rent abatements, concessions or other benefits
made available to a new tenant under then market
conditions.
(iii) If Tenant does not actually spend these
allowances, fair market rent is reduced on an
equitable basis to reflect the unspent allowances.
Paragraph 3(c) provides that if the parties cannot reach agreement
arbitration panel of three licensed real estate brokers. Each panelist must
perform steps i-iii individually. The average of the two closest computations
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Two important points emerge from our summary of the lease. First,
during the Renewal Term, annual rent is the greater of the immediately
preceding rent of $3,187,563.00 or 90% of fair market rent after deduction
of allowances. Therefore, annual rent during the Renewal Term cannot be
less than $3,187,563.00.
Second, the CPI escalator does not apply to the Renewal Term. While
the CPI escalator is an integral component of paragraph 5, the rent formula
for the Original Term, it is omitted from Paragraph 3, the rent formula for
the Renew
indicates that the parties intended annual rent to remain constant
throughout the Renewal Term instead of increasing under a CPI escalator4.
Procedural History. In early 2009, Tenant timely renewed the lease,
2009, the parties submitted their dispute to an arbitration panel of real
estate brokers in accordance with paragraph 3(c) of the lease. The panel
determined that annual fair market rent before allowances was
$4,218,750.00. The panel further determined that the tenant improvement
allowance for the Renewal Term was $2,250,000.00, and brokerage
commissions for the Renewal Term were $843,750.00, making total
4
As noted above, paragraph 3(a)(3) states that all provisions of the lease
apply during the Renewal Ter
absence of the CPI escalator from the Renewal Term rent formula is one
such modification.
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allowances of $3,093,750.00 for the Renewal Term. The panel did not
decide what amount, if any, of unspent allowances that Tenant could deduct
under the final clause of paragraph 3(b).
On
announced that it would pay annual Renewal Term rent of $3,393,121.00, or
$282,760.00 per month.
determination of fair market rent. Tenant responded with a petition to
under the law governing judicial review of common law arbitration
proceedings.
Landlord filed two amended complaints asserting breach of contract
rent was binding, and dismissed the second amended complaint. Landlord
appealed to this Court.
unilaterally informed Landlord that it would reduce rental payments from the
monthly figure of $282,760.00 that it had been paying since July 29, 2009.
Tenant advised that for the next 20 months, it would pay $242,135.09 per
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month, the equivalent of $2,905,620.00 annually5. Then, for the following
21 months (until the end of the Renewal Term), it would pay $261,921.75
per month, the equivalent of $3,143,061.00 annually6. Tenant based this
payment schedule on the premises that (1) the paragraph 3(a)(2)
comparison of immediately preceding rent vs. fair market rent takes place
prior to deduction for allowances; and (2) following this comparison, Tenant
had the right to deduct 100% of the paragraph 3(b) allowances determined
by the arbitration panel, regardless of whether Tenant spent or did not
spend them.
In an unpublished memorandum dated May 23, 2011, this Court
7
affirmed th . We agreed
-allowance fair
market rent ($4,218,750.00) was not subject to judicial review. We held,
ionary calculations of the
adjustments, concessions and improvement allowances that it made to the
8
. We
ordered a remand for the trial court to determine the amount of allowances
that Tenant had the right to deduct from fair market rent9. We did not
address, however, whether the paragraph 3(a)(2) comparison of
5
R.R. 1870-71 (letter from Tenant to Landlord).
6
Id.
7
TRO Avenue of the Arts, LP v. The Art Institute of Philadelphia, LLC,
TRO I .
8
Id. at 21.
9
Id.
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immediately preceding rent vs. fair market rent must take place before or
after the deduction of the paragraph 3(b) allowances.
In January 2012, Landlord filed a third amended complaint alleging
Tenant breached the lease by paying insufficient rent10.
In December 2012, the trial court held a bench trial to determine
m
rent11
the tenant improvement allowance and brokerage commission. The court
determined that Tenant agreed to pay $282,760.00 per month in rent from
July 2009 until May 2011, $242,135.00 per month from May 2011 until
January 2013, and $261,921.75 per month for the remaining 21 months of
the Renewal Term12. This resulted in total rent of $15,715,604.87 and
annual rent of $3,143,120.97 a smaller annual amount than the
immediately preceding rent of $3,187,563.00.
Discussion.
Landlord divides this argument into four subparts:
A. The Trial Court Erred In Failing To Give Effect To The Lease's
Annual CPI Rent Escalation Provision And Apply It To The Renewal
Term.
10
R.R. 404-11.
11
TRO I, p. 21.
12
Trial Court Findings of Fact, pp. 5-8, ¶¶ 36-53.
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B. The Trial Court Erred In Failing To Give Effect To Paragraph
3(a)(2) Of The Lease And In Concluding That [Tenant] Should Pay Less
Rent During Each Of The Five Years Of The Renewal Term Than It Paid
In The Immediately Preceding Period.
C. The Trial Court Erred By Failing to Give Effect to The Critical
Words "On An Equitable Basis" in Paragraph 3(b) of The Lease.
D. The Trial Court Erred In Failing To Recognize That The Superior
Court Remanded The Case So That [Landlord] Could Challenge
Arbitration Pa
In effect, Landlord contends that the trial court erred in denying judgment
n.o.v. to Landlord on the amount of rent Tenant owes for the Renewal Term.
Landlord also seeks a new trial on the basis of two evidentiary rulings:
(1) the court improperly excluded evidence that would have showed that a
100% deduction of the tenant improvement allowance and brokerage
commission was inequitable; and (2) the court improperly quashed
subpoenas duces tecum issued t
award sufficient rent to Landlord under the terms of the lease. In an appeal
we must consider the evidence, together with all
favorable inferences drawn therefrom, in a light most
favorable to the verdict winner. Our standard of
review when considering motions for a directed
verdict and judgment notwithstanding the verdict are
identical. We will reverse a trial court's grant or
denial of a judgment notwithstanding the verdict
only when we find an abuse of discretion or an error
of law that controlled the outcome of the case.
Further, the standard of review for an appellate court
is the same as that for a trial court.
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There are two bases upon which a judgment n.o.v.
can be entered: one, the movant is entitled to
judgment as a matter of law and/or two, the
evidence is such that no two reasonable minds could
disagree that the outcome should have been
rendered in favor of the movant. With the first, the
court reviews the record and concludes that even
with all factual inferences decided adverse to the
movant the law nonetheless requires a verdict in his
favor, whereas with the second, the court reviews
the evidentiary record and concludes that the
evidence was such that a verdict for the movant was
beyond peradventure.
Polett v. Public Communications, Inc., 83 A.3d 205, 211-12
(Pa.Super.2013).
Applying this standard, we conclude that the trial court erred by failing
to find that rent for year 1 of the Renewal Term is at least $3,187,563.00.
Paragraph 3(a)(2) of the lease prescribes that annual rent for the Renewal
the greater of (i) the annual rent payable for the immediately
preceding period or (ii) an amount equal to ninety percent (90%) of the
words, annual rent must be the greater of the immediately preceding rent
of $3,187,563.00 or 90% of the fair market rent remaining after deduction
of allowances. Having found that 90% of fair market rent after deduction of
allowances was less than $3,187,563.00, the trial court should have ordered
Tenant to pay the immediately preceding rent of $3,187,563.00 annually
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during the Renewal Term13 requires
us to remand this case for entry of judgment in the proper amount.
The trial court reached the wrong result by performing the calculations
required under paragraph 3 of the lease in the wrong sequence. The trial
court used paragraph 3(a)(2) as the starting point for calculating year 1 rent
during the Renewal Term. The lease, however, required the trial court to
use paragraph 3(a)(2) as the end point. Landlord explains this point well in
its brief:
[P]aragraph 3(a)(2) did not provide a starting point
for calculating the first year annual rent but rather
the end point. The Lease directed that no matter
what the result of the Fair Market Rent
Determination process (including any reductio
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decision was binding as to the amount of Renewal Term rent. One of
-serving interpretation of
is bound by the lease and the determination forms of [the panel] but not to
Id. We do not interpret this to
amount of Renewal Term rent. At most, Landlord agreed that the trial court
rmination of fair market rent and maximum
deductible allowances when calculating Renewal Term rent under paragraph
consistent with its position throughout this case that the court is required
under paragraph 3(a)(2) to declare the greater of immediately preceding
rent or 90% of fair market rent after deductions as Renewal Term rent.
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Paragraph 3(a)(2) required the parties to reduce the
annual Fair Market Rent to 90% and compare that
amount to the annual rent for the immediately
preceding period to determine the annual Rent for
the first year of the Renewal Term. Any reduction
e
comparison required by Paragraph 3(a)(2), which
required [Tenant] to pay as rent for the first year of
the Renewal Term, the greater of (1) 90% of the
annual Fair Market Rent, after the reduction on an
equitable basis. . .or (2) $3,187,563, the annual rent
[Tenant] paid for the immediately preceding period.
-35.
The trial court reached the wrong result a finding that year 1 rent
was less than $3,187,563.00 -- by using the wrong sequence of steps.
Specifically, it:
1. annual fair
market rent before allowances ($4,218,750.00) as binding
(paragraph 3(c));
2. Calculated 90% of annual fair market rent before allowances
($3,796,875.00);
3. Selected the greater of $3,796,875.00 and the immediately
preceding rent of $3,187,563.00, i.e., $3,796,875.00;
4. Determined the total allowances that Tenant is permitted to deduct
from $3,796,875.00;
5. Subtracted total permissible allowances from $3,796,875; and
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6. Concluded that the remaining amount is year 1 rent during the
Renewal Term, even though this amount was less than
$3,187,563.00.
Paragraph 3 required the trial court to use a different sequence of steps. It
should have:
1. annual fair market
rent before allowances ($4,218,750.00) as binding (paragraph
3(c));
2. Calculated 90% of annual fair market rent before allowances
($3,796,875.00) (paragraph 3(b));
3. Determined the total allowances that Tenant is permitted to deduct
(paragraph 3(b));
4. Subtracted
5. Compared fair market rent after allowances with immediately
preceding rent of $3,187,563.00 (paragraph 3(a)(2)); and
6. Concluded that rent in Year 1 of the Renewal Term was the greater
of these two values (paragraph 3(a)(2)).
comparison in paragraph 3(a)(2) after performing all steps in paragraph 3(b)
(the calculation of 90% of fair market rent minus all permissible allowances).
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Applying the correct sequence of steps, we agree with Landlord that year 1
rent during the Renewal Term is at least $3,187,563.00.
2-5 under the CPI escalator. As explained on page 6 above, the CPI
escalator only applied during the Original Term; it does not apply during the
Renewal Term.
deduction of allowances exceeds the immediately preceding rent of
$3,187,563.00. The trial court permitted Tenant to deduct 100% of all
allowances, whether spent or unspent, in the course of calculating Renewal
Term rent. This was error, Landlord claimed, because paragraph 3(b) only
per
portion of unspent allowances, which would have made 90% of fair market
rent after allowances greater than immediately preceding rent.
This argument is unavailing. The trial court determined, and we
agree, that a 100% deduction of unspent allowances is equitable because it
benefits both parties:
The credible evidence in this case supports a finding
that a dollar-for-dollar deduction from Fair Market
Rent and application of an amortization rate was the
appropriate manner to account for unelected and
unpaid tenant concessions awarded to [Tenant] in
the [July 2009 arbitration] Proceeding. The dollar for
dollar deduction for unelected and unpaid tenant
concessions benefits the tenant and the landlord. It
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provides the tenant with an inducement to remain in
the property and to renew its lease at a market
competitive rent. The landlord eliminates the
problem of a costly vacancy and is not required to
pay for unneeded and/or unwanted improvements.
If no funds are expended by the landlord, it is only
fair that the tenant receives the full benefit of the
unspent funds by reducing its rent accordingly14.
Since a 100% deduction is proper, 90% of fair market rent after allowances
is lower than immediately preceding rent of $3,187,563.00, leaving
$3,187,563.00 as annual Renewal Term rent.
Landlord also seeks a new trial based on two evidentiary rulings. First,
Landlord argues that the court improperly excluded evidence that would
have shown that a 100% deduction of the tenant improvement allowance
and brokerage commission was inequitable. In particular, Landlord objects
to the exclusion of evidence of rents and profits that Tenant made by
subleasing space to its students.
of the trial court, and in reviewing a challenge to the admissibility of
evidence, we will only reverse a ruling by the trial court upon a showing that
B.K. v. J.K., 823
A.2d 987, 991 92 (Pa.Super.2003)
narrow.... To constitute reversible error, an evidentiary ruling must not only
14
-7.
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Hawkey v. Peirsel, 869 A.2d 983, 989 (Pa.Super.2005) (citing Turney
Media Fuel, Inc., v. Toll Bros., 725 A.2d 836, 839 (Pa.Super.1999)).
Assuming that the court improperly excluded evidence of rents that
Tenant obtained through subleases, Landlord fails to demonstrate that
admission of this evidence would have changed the outcome. The court
enjoyed broad discretion in deciding whether a 100% deduction of unspent
deduction benefited both Landlord and Tenant15. Further, Tenant correctly
notes that Landlord was able to introduce some of this evidence through
16
cross- .
Second, Landlord argues that the court improperly quashed subpoenas
l documents to trial
in their possession relating to rent rates Tenant charged its students for the
apartments it leased from Landlord; the percentage of occupancy of the
building; amendments and modifications to the Leases examined and relied
upon by Tena
apartments to its students; and comparable apartment building leases that
Tenant entered.
We review a challenge to an order quashing a subpoena for an abuse
of discretion. Slusaw v. Hoffman, 861 A.2d 269, 272 (Pa.Super.2005).
15
-7.
16
Brief for Tenant, p. 49.
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supporting it, and we will not substitute our judgment for the trial court. Id.We conclude that the court acted within its discretion by quashing the
subpoenas as untimely. Landlord issued these subpoenas immediately
voluminous materials that Landlord demanded. Moreover, this ruling caused
Landlord no discernible prejudice,
cross-
cannot demonstrate that production of the documents in question would
have changed the outcome of trial.
For the foregoing reasons, we vacate the judgment entered on May 6,
2013. We conclude that rent for each year in the Renewal Term is not less
than $3,187,563.00. We remand with directions that the trial court
determine the amount of rent Tenant has paid to date and order Tenant to
pay Landlord the difference between the amount Tenant has paid and the
amount owed consistent with our decision.
Order vacated, jurisdiction relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/22/2014
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