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Care Realty, LLC; and Thci Company, LLC v. Lakeview Neurorehabilitation Center

March 29, 2012

CARE REALTY, LLC; AND THCI COMPANY, LLC, PLAINTIFFS
v.
LAKEVIEW NEUROREHABILITATION CENTER, INC.; LAKEVIEW MANAGEMENT, INC.; AND LAKEVIEW NEUROREHAB CENTER MIDWEST, INC., DEFENDANTS



The opinion of the court was delivered by: Steven J. McAuliffe United States District Judge

Opinion No. 2012 DNH 061

ORDER

This suit was brought to resolve an issue left unaddressed in earlier litigation between the parties. See Lakeview Mgmt., Inc. v. Care Realty, LLC, Case No. 07-cv-303-SM. In the earlier suit, the court determined that the defendants (collectively referred to as "Lakeview") effectively exercised an option to extend commercial leases on neurorehabilitative facilities it operated in New Hampshire and Wisconsin.*fn1 The court also found that plaintiff ("THCI") behaved inequitably and breached its contractual obligation of good faith and fair dealing under the lease, such that THCI was estopped from invoking a default provision in the lease that otherwise might have precluded Lakeview's ability to extend the lease term. The parties now return to resolve a dispute about the applicable "Base Rent" owed under the lease during the extended term.

The case was tried to the court on two claims related to determining the applicable Base Rent (Count I, seeking a declaratory judgment, and Count II seeking specific performance) while the remaining claims (related to damages) were reserved for future resolution, if necessary.

Pertinent Facts

An extended recitation of facts previously found relevant to this overall dispute appears in the court's decision in the earlier case.*fn2 That factual record provides context for this dispute, but the discussion here will focus on those facts critical to resolving the pending issue - determining the applicable Base Rent.

THCI purchased the leased premises and assumed the original lessor's rights and obligations under the lease. After gaining some experience administering the lease, THCI thought Lakeview was improperly calculating one of the components of the total rent due - referred to in the lease as "Additional Rent." THCI so informed Lakeview, but Lakeview disagreed, contending that the formula it was using to calculate Additional Rent was correct (based upon a definitional modification alleged to have been agreed to by the prior landlord, before THCI acquired the property). THCI did not formally press the matter and did not notice a default under the lease. Rather, it sat on its claim, intending to bring it up only if Lakeview attempted to exercise its option to extend the lease term (or after the period in which Lakeview was required to exercise its option expired). That is, THCI determined not to put Lakeview on notice of a default condition, at least not in a way that would permit Lakeview to either cure the default or seek legal relief (to determine whether a default condition actually existed), in time to exercise its renewal option.

The lease was for a "Fixed Term" of ten years, terminating on September 30, 2007, but subject to Lakeview's unilateral right to extend the term for three successive periods of five years each. Lakeview could exercise its option to extend the term by giving THCI written notice "of each such extension" within a defined time window - at least 180 days, but not more than 360 days, before expiration of the Fixed Term (or an extended term if the option had previously been exercised). Lakeview's option rights are set out in Article 1.4 of the lease, which provides, in pertinent part:

During each effective Extended Term, all of the terms and conditions of this Lease shall continue in full force and effect, except that the Base Rent for each such Extended Term shall be the greater of (a) the fair market value rent for the Leased Property performed by an appraiser mutually acceptable to the Lessor and the Lessee, as of the first day of each of the Extended Terms or (b) The Base Rent in effect immediately prior to the expiration of the preceding term. Said Base Rent shall be determined concurrently with the Lessee's giving of the Extension Notice to the Lessor. (emphasis added)

As the matter stands, then, Lakeview validly exercised its option to extend the lease term on March 16, 2007, within the described window. THCI will not be heard to argue that the lease could not be extended, or was not extended, because a default had "occurred and was continuing." (Article 1.4) That issue was resolved against THCI in the earlier litigation.

In this litigation, the parties are at odds with respect to what Base Rent applies during the extension period. Lakeview says the Base Rent is equivalent to the Base Rent in effect immediately prior to expiration of the preceding term. THCI, on the other hand, claims that the appraisal process referred to in Article 1.4 must be completed before the Base Rent can be determined, since the Base Rent "shall be" the "greater of" fair market value rent as determined by a mutually agreed upon appraiser, or the preceding term's Base Rent.

Discussion

A lease is construed in accordance with familiar principles applicable to contract construction. Interpretation of a lease is ultimately a question of law for the court, and the intent of the parties to a lease is generally determined from the plain meaning of the language used and the lease as a whole. See generally J.G.M.C.J. Corp. v. Sears, Roebuck & Co., 391 F.3d 364, 368 (1st Cir. 2004) (citing cases). The applicable provisions of Article 1.4 are generally straightforward. The Base Rent due during an extended term is the greater of:

a) "The fair market value rent," "to be determined by an appraisal," "performed by an appraiser mutually ...


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