U Street Music Hall, LLC v. JRC Standards Prop., LLC

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DISTRICT OF COLUMBIA COURT OF APPEALS
Nos. 21-CV-416 & 21-CV-417
U STREET MUSIC HALL, LLC, APPELLANT,
V.
JRC STANDARD PROPERTIES, LLC, APPELLEE.
Appeal from the Superior Court
of the District of Columbia
(2020-CAB-851 & 2019-LTB-13318)
(Hon. Robert R. Rigsby & Hon. Gregory E. Mize, Trial Judges)
(Submitted September 14, 2022 Decided December 15, 2022)
Timothy R. Clinton was on the brief for appellant.
Stephen O. Hessler and Ian G. Thomas were on the brief for appellee.
Before BECKWITH, MCLEESE, and ALIKHAN, Associate Judges.
ALIKHAN, Associate Judge: Appellant, U Street Music Hall, LLC (“U Hall”),
appeals the Superior Court’s order granting appellee JRC Standard Properties,
LLC’s (“JRC”) motion for summary judgment and denying U Hall’s cross-motion
for summary judgment. In so ruling, the trial court held that the parties’ lease
agreement failed to adequately set out definite price terms. Because we (1) conclude
2
that the annual base rent set forth in the lease’s option clause is legally synonymous
with reasonable rent (and is thus enforceable under our prior decisions) and (2) adopt
a rule enforcing option contracts that leave the ultimate price to be agreed upon later,
we reverse and remand.
I. Factual Background and Procedural History
A. Lease Negotiations
In 2009, U Hall and JRC began negotiating a lease for real property located at
1115 U Street, NW. During these negotiations, the parties discussed an option
provision that would allow U Hall to renew the lease at the end of the original lease
term (“the Option”). JRC sent U Hall an early draft of the lease, which included the
following language under Section 2.02, entitled “Term Renewal Option”:
(a) Provided Tenant is not in default at time of exercise of
the Option and Tenant has not sublet its interest in the
Premises (further provided Landlord has consented to
same), and provided that this Lease shall not theretofore
have been terminated, Tenant shall have the option (the
“Option”) to extend the term of this Lease for two (2)
additional terms (“Option Term”) of Five (5) years each
(i.e. the total term of any extensions shall not exceed Ten
(10) years), commencing on the Tenth (10th) anniversary
of the Rent Commencement Date and ending on the date
no later than the Twentieth (20[th]) anniversary of the
Rent Commencement Date, upon the same terms and
conditions contained herein except that the Annual Base
Rent for the Option Term shall be as follows:
3
Below that provision, the draft depicted the following table with unfilled values for
the base rental price (“Annual Base Rent”) for each Option year:
Option Year Rent Annual Base Rent
1 $
2 $
3 $
4 $
5 $
6 $
7 $
8 $
9 $
10 $
The parties later circulated another draft with a similarly unfilled table (but limiting
the Option’s term to five years instead of ten).
B. Terms of the Final Lease
After further negotiations, the parties executed a lease to run from
September 1, 2009, to August 31, 2019. 1 They ultimately failed to agree on specific
dollar figures for any of the Option’s yearlong terms. Instead, Section 2.02 of the
lease reads:
(a) Provided Tenant is not in default at time of exercise of
the Option and Tenant has not sublet its interest in the
Premises (unless Landlord has expressly consented to such
1
The lease provides that it is to be governed by District of Columbia law. It
also contains integration and severability clauses.
4
assignment), and provided that this Lease shall not
theretofore have been terminated, Tenant shall have the
option (the “Option”) to extend the Term of this Lease for
one (1) additional term (“Option Term”) of Five (5) years.
The Annual Base Rent during any Option Term shall be
based on a Fair Market Value rental rate applicable at the
expiration of the initial Term. The Annual Base Rent
during any Option Terms shall escalate on an annual basis
at a rate agreed to by both the Landlord and Tenant.
(b) Tenant may exercise its Option only by delivering
binding written notice (“Tenant’s Option Notice”) to
Landlord of Tenant’s election to exercise the Option not
later than six (6) months prior to the Expiration Date of the
Term.
C. U Hall Attempts to Execute the Option
In 2018, a U Hall representative emailed JRC “in regard to the renewal of the
U Street Music Hall lease.” JRC responded, noting that the lease’s “initial term
expires [i]n Sept 2019,” that U Hall had “one five year option,” and that it “only
need[ed] to notify the Landlord to activate the Option Term.” U Hall replied that
“[t]he option is at Fair Market Value, which is open for discussion.” Around two
weeks later, after unproductive deliberations between the parties about what would
constitute “fair market value,” JRC reiterated that “[t]he lease has one five year
option,” and directed U Hall to “please . . . send a letter to” JRC’s representative
“[i]f the tenant would like to exercise [its] option.”
5
A few weeks later, U Hall emailed JRC that it “would like to formally exercise
[its] option to renew per the terms outlined in [its] current lease.” JRC then sent
U Hall a document titled “FIRST AMENDMENT TO LEASE AGREEMENT.”
This proposed amendment would have fixed the Option rent at specific dollar
figures, but the parties ultimately did not agree on these prices.
In February 2019—within the six-month window to exercise the Option—
U Hall sent JRC a “letter constitut[ing] formal and binding notice . . . of U Street
Music Hall, LLC’s exercise of its right to extend the lease for one additional term of
five years.”
D. Litigation Ensues
Independent of the brewing dispute about whether U Hall could properly
exercise the Option, JRC filed a complaint in Superior Court in June 2019, alleging
that U Hall had failed to pay approximately $122,000 in rent owed from
December 1, 2018 to June 30, 2019. The parties cross-filed motions for summary
judgment. The trial court denied JRC’s motion and partially granted U Hall’s,
finding, among other things, that U Hall was already “entitled to a credit in the
amount of $177,516.92 for improperly charged property management fees through
the end of 2018.”
6
In January 2020, JRC sent U Hall its annual “true up” billing statement as
permitted under the lease. In it, JRC claimed that the lease’s original term had
expired on August 31, 2019, and that JRC was deeming U Hall to be a holdover
tenant from September 2019 to January 2020. Accordingly, JRC charged U Hall
“200% of the Base Rent of the final month of the Lease Period.” 2
U Hall moved for partial summary judgment in the preexisting suit, arguing
that it had properly executed the Option. Two hours later, JRC brought a new suit
in Superior Court, seeking a declaration that U Hall had failed to exercise the
Option. 3 The parties cross-filed motions for summary judgment in the new case.
Granting JRC’s motion and denying U Hall’s, the trial court held that JRC had
properly considered U Hall a holdover tenant because the Option was not
2
Article 14 of the lease provides, in pertinent part:
If Tenant remains in possession after the expiration or
sooner termination of this Lease . . . without Landlord’s
written consent, Tenant shall pay Landlord . . . an amount
equal to the greater of (i) two hundred percent (200%) of
the Monthly Base Rent plus all additional rent payable for
the last month of the Term, and (ii) the fair market rental
value of the Premises, for each month or portion thereof
that Tenant remains in possession following the Expiration
Date . . . .
3
The trial court consolidated the two cases.
7
enforceable. In so ruling, the court mistakenly relied on the earlier draft of the lease
that included the unfilled Option rent chart. It reasoned:
That the Option states the Annual Base Rent will be “a rate
agreed to by both” Parties and is accompanied by an
unfilled chart for Annual Base Rent under the Option lends
to the conclusion that the Parties intended to revisit the
matter and determine [the] Property’s Fair Market Value.
In other words, the trial court held that the Option did not set sufficiently definite
price terms to be enforceable. U Hall moved for reconsideration based on the court’s
error, but it withdrew the motion after it was pending for 30 days and appealed to
this court.
II. Standard of Review
Our standard of review is the same whether we review one motion for
summary judgment or, as here, two cross-motions. See Fisher v. Gov’t Emps. Ins.
Co., 762 A.2d 35, 39 (D.C. 2000). “To prevail on a motion for summary judgment,
a party must demonstrate that there is no genuine issue of material fact and that it is
entitled to judgment as a matter of law.” Grant v. May Dep’t Stores Co., 786 A.2d
580, 583 (D.C. 2001). In determining whether a party has satisfied this standard, we
view the record in the light most favorable to the nonmoving party. Id. But where
“there is no dispute as to the relevant facts in th[e] case, we need only determine
8
whether the trial court properly applied the substantive law.” Fisher, 762 A.2d at
39. Ultimately, we review the grant or denial of summary judgment de novo. Id.III. Discussion
On appeal, U Hall argues that the Option is binding and enforceable. It first
contends that the Annual Base Rent, fixed at the “Fair Market Value rental rate
applicable at the expiration of the initial Term,” is “legally synonymous with
‘reasonable rent.’” And it further asserts that even “in the absence of agreement on
rent escalation,” the ultimate rental figure for the years subject to escalation should
be based on the same “Fair Market Value” rate set out for the Annual Base Rent.
JRC counters that “fair market value” is a “vague and indefinite term.” “But
even assuming arguendo that tying base rent to ‘fair market value’ for the first year
[of the Option term] was sufficiently definite,” in its view, the escalation clause
renders the Option void because the escalation rate is “not tied to any measuring
stick whatsoever.” 4
4
JRC does not dispute that, if the Option is valid and enforceable, U Hall
properly executed it. Although JRC does claim that U Hall’s February 4, 2019, letter
could not legally exercise the Option, in support thereof, JRC merely reiterates its
substantive arguments as to why the Option is invalid. It does not argue that U Hall
failed to employ the correct procedures to execute the Option. That is for good
reason—a review of the record confirms that U Hall clearly complied with the
Option’s execution procedures.
9
We agree with U Hall that both the Annual Base Rent and the escalation
clause are enforceable, and thus we reverse and remand.
A. Annual Base Rent
“Leases of real property are analyzed under established principles of contract
law.” 2301 M St. Coop. Ass’n v. Chromium LLC, 209 A.3d 82, 86 (D.C. 2019). “An
‘option’ is a type of unilateral contract.” Prison Health Servs., Inc. v. Baltimore
County, 912 A.2d 56, 61 (Md. Ct. Spec. App. 2006). As a general matter, for a
contract to be enforceable, its material terms—“e.g., subject matter, price, payment
terms, quantity, quality, and duration”—must be “sufficiently definite so that the
parties can be reasonably certain as to how they are to perform” and “clear
enough for the court to determine whether a breach has occurred and to identify an
appropriate remedy.” Eastbanc, Inc. v. Georgetown Park Assocs. II, L.P., 940 A.2d
996, 1002 (D.C. 2008) (first quoting Rosenthal v. Nat’l Produce Co., 573 A.2d 365,
370 (D.C. 1990); then quoting Duffy v. Duffy, 881 A.2d 630, 638 (D.C. 2005); and
then quoting Affordable Elegance Travel, Inc. v. Worldspan, L.P., 774 A.2d 320,
327 (D.C. 2001)). At the same time, “[t]he requirement of definiteness cannot be
pushed to extreme limits,” and inherent in all agreements is “some degree of
indefiniteness and some degree of uncertainty.” Rosenthal, 573 A.2d at 370.
10
Accordingly, we have held that an option’s price provision suffices if it
“clearly establishes a mode for ascertaining the future rent[] by employing words or
phrases which of themselves connote or are legally synonymous with ‘reasonable
rent.’” George Y. Worthington & Son Mgmt. Corp. v. Levy, 204 A.2d 334, 337
(D.C. 1964); see Groner v. Dryer, 256 A.2d 559, 560, 563 n.5 (D.C. 1969) (noting
that an option clause “provid[ing] for arbitration in the event the parties were unable
to agree on an adjusted rental” was enforceable). In Levy, the parties’ option was to
extend the lease for a five-year term “at a rental [price] to be agreed upon by both
parties, [with] such agreement to be based upon the prevailing fair rentals for similar
property at that time.” 204 A.2d at 335. We held that this language fixed the price
to “a definite criterion” and thereby “render[ed] the provision enforceable.” Id. at
337.
The present Option’s Annual Base Rent—“Fair Market Value . . . applicable
at the expiration of the initial Term”—provides a similarly definite criterion.
Although the Option does not set forth a specific dollar figure, its baseline price is
“synonymous with ‘reasonable rent’” and ties the base price to an ascertainable
figure. Id. On remand, the trial court can determine fair market value. See, e.g.,
Withers v. Wilson, 989 A.2d 1117, 1121 (D.C. 2010); Basiliko v. Pargo Corp., 532
A.2d 1346, 1350 (D.C. 1987).
11
B. Escalation Clause
Our inquiry does not end with the Annual Base Rent, however, because the
Option’s price provision also contains an escalation clause. That clause instructs
that the “Annual Base Rent during any Option Terms shall escalate on an annual
basis at a rate agreed to by both the Landlord and Tenant.” In other words, U Hall
was obligated to pay only “Fair Market Value” for the first year of the Option term.
But for the remainder of the term, it was obligated to pay “Fair Market Value” plus
an additional percentage that would increase each year at a rate the parties would
later agree to. The lease thus leaves the final rental prices for years two through five
of the Option term subject to future agreement. 5
Although we came close in Levy, we have never squarely opined on the
question before us today: whether an option that contains a price term “to be agreed
upon by the parties” at a later period is enforceable. Courts are split on this issue.
Some conclude that such language renders the option unenforceable. See, e.g.,
Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 417 N.E.2d 541, 544
(N.Y. 1981); Riis v. Day, 613 P.2d 696, 697-98 (Mont. 1980); Walker v. Keith, 382
S.W.2d 198, 204-05 (Ky. 1964); Slayter v. Pasley, 264 P.2d 444, 449-51 (Or. 1953);
5
We must determine the enforceability of the escalation clause because
U Hall remained on the premises for a portion of the Option’s second year-long term,
from September to October 2020.
12
Etco Corp. v. Hauer, 208 Cal. Rptr. 118, 120-23 (Ct. App. 1984); Phipps v. Storey,
601 S.W.2d 249, 251-52 (Ark. Ct. App. 1980); Rosenberg v. Gas Serv. Co., 363
S.W.2d 20, 26-27 (Mo. Ct. App. 1962). The reasoning of these cases, which JRC
urges us to adopt, is that future-agreement language “leave[s] no room for legal
construction or resolution of ambiguity” as to the price term. Schumacher, 417
N.E.2d at 544. There is thus a reluctance to “remake” parties’ contracts for them
and bind them to material terms to which they had not explicitly agreed. Slayter,
264 P.2d at 451.
Other courts adopt a more liberal view, as U Hall asks us to do, invoking
equitable principles to enforce options whose prices are to be fixed at a later date.
See, e.g., Moolenaar v. Co-Build Cos., 354 F. Supp. 980, 982-83 (D.V.I. 1973);
Fletcher v. Frisbee, 404 A.2d 1106, 1109-10 (N.H. 1979); Cassinari v. Mapes, 542
P.2d 1069, 1071 (Nev. 1975); Young v. Nelson, 209 P. 515, 517 (Wash. 1922);
Playmate Club, Inc. v. Country Clubs, Inc., 462 S.W.2d 890, 893-94 (Tenn. Ct.
App. 1970); see also Daniel E. Feld, Annotation, Validity and Enforceability of
Provision for Renewal of Lease at Rental to Be Fixed by Subsequent Agreement of
Parties, 58 A.L.R.3d 500 § 2[a] (1974) (labeling this view the “modern” trend).
Their reasoning is typically threefold. First, the option, “being for the benefit of the
lessee, forms a part of the consideration which induced the lessee to execute the
contract.” Playmate Club, 462 S.W.2d at 892. Next, implying a price term of
13
“‘reasonable’ rent . . . effectuate[s] the intent of the parties better than would striking
out the clause altogether.” Moolenaar, 354 F. Supp. at 982. Finally, “the policy of
construing ambiguities in lease agreements against the landlord” weighs against
allowing a landlord to eviscerate a renewal provision for which the tenant paid
consideration. Id. at 983.
We find this latter view—in favor of enforcing the Option—more persuasive.
Two of the rationales advanced by our sister courts are particularly relevant here.
First, we disfavor construing contracts in such a way as to permit “enrichment of the
landlord at the tenant’s expense by that portion of the rent” built into the original
lease’s term that presumptively served as the tenant’s consideration for the option.
1 Timothy Murray, Corbin on Contracts § 4.3 (rev. ed. 2022); see Allen v. Yates,
870 A.2d 39, 52 (D.C. 2005) (“Where the parties have entered into a contract, being
made whole means realizing the benefit of the bargain that they struck.”). Second,
JRC’s attempt to cancel the Option runs headlong into both parties’ clear intent—
expressed in the text of the lease—to permit U Hall to extend the term if it so
chooses. The Option provides that U Hall “shall have the option . . . to extend the
Term of this Lease for one (1) additional term . . . of Five (5) years.” The existence
of U Hall’s Option is plain on the face of the lease, and the parties manifested an
intent to be bound by that term by signing the document. To allow JRC to wholly
cancel certain years of the Option term would both deprive U Hall of a benefit for
14
which it has already paid consideration and fail to reflect these sophisticated parties’
intent at the time they signed the lease. We decline to adopt an approach that would
grant JRC such a windfall. 6
We also note that the view we implement conforms to the Uniform
Commercial Code, which provides that:
The parties if they so intend can conclude a contract for
sale even though the price is not settled. In such a case the
price is a reasonable price at the time for delivery if . . .
(b) the price is left to be agreed by the parties and they fail
to agree . . . .
D.C. Code § 28:2-305(1); see id. § 28:2-204(3) (“Even though one or more terms
are left open a contract for sale does not fail for indefiniteness if the parties have
intended to make a contract and there is a reasonably certain basis for giving an
appropriate remedy.”). While the Uniform Commercial Code pertains to the sale of
goods and not property leases, it is nevertheless additional persuasive authority for
the rule we adopt today.
6
The third rationale relied upon by our sister courts is the presumption of
construing a lease against a landlord. We have no occasion to address its potential
applicability in this case because the other rationales suffice to support the rule that
we adopt.
15
We thus hold that when a lease contains an option provision that leaves the
rental price for the option year(s) to be agreed upon at a later date, a court can infer
that the parties would have agreed on a reasonable rental price for each option term.
See Fletcher, 404 A.2d at 1109 (“When an option specifies that the new rent will be
mutually agreed upon, a reasonable figure is implied.”). As with the Annual Base
Rent, this figure “can be ascertained with reasonabl[e] certainty,” which renders the
Option “valid and enforceable.” Playmate Club, 462 S.W.2d at 894. 7
In so holding, we are mindful not to “mak[e] a new contract for the parties.”
Levy, 204 A.2d at 337. Instead, looking at the lease as a whole, we discern a manifest
intent to provide U Hall a renewal option. See id. We are especially confident in
this approach where, as here, “the agreement is a commercial one,” and “it can be
presumed that the parties, as actors in the market, intend a market or some other
reasonable price.” 1 Corbin on Contracts § 4.3. 8
7
Because we hold the entire Option valid, we need not address what effect
the lease’s severability clause would have on the Option’s enforceability.
8
JRC argues that the parties’ negotiation conduct—in particular, rejecting the
early drafts of the Option that would have set specific prices—evinces mutual intent
to leave the Option’s price terms open for negotiation and renders the Option
unenforceable. But even assuming, without deciding, that we are permitted to
consider such evidence in this case—given that the lease contains an integration
clause prohibiting this evidence in court proceedings—it would not benefit JRC.
The notion that the parties left the escalation clause open to later agreement is one
of the premises on which we base our present holding.
16
IV. Conclusion
For the foregoing reasons, the judgment of the Superior Court is reversed, and
this case is remanded for the trial court to determine the “Fair Market Value rental
rate applicable at the expiration of the initial term” for the Annual Base Rent, as well
as a “reasonable” escalation rate for September and October 2020.
So ordered.