The opinion of the court was delivered by: WERKER
These two consolidated actions arise from the Internal Revenue Service's (the "IRS") occupancy of a 21-story office building located at 120 Church Street owned by the defendant Bedford Associates.
The plaintiff-intervenor Bowery Savings Bank ("Bowery") is the holder of a consolidated first mortgage on the premises. These actions having been tried on the merits before the Court on March 17-20 and 24-26, 1980, and all of the evidence having been duly considered, judgment is rendered in favor of Bedford in action no. 79 Civ. 1522 and in favor of Bowery in action no. 79 Civ. 1482. Pursuant to Fed.R.Civ.P. 52(a), my findings of fact and conclusions of law follow.
In 1962, the United States General Services Administration ("GSA") executed a lease of the premises with Bedford for a ten-year term commencing on November 1, 1963, with two five-year renewal options. The IRS remained in continuous occupancy of the building for the initial ten-year period. On October 25, 1973, the Government exercised its first renewal, subject to the approval of Congress, which was obtained for both the first and second renewal options in December 1973. The IRS remained in continuous occupancy under the first renewal option through October 31, 1978. The Government did not exercise its second renewal option, and the lease expired on October 31, 1978. PTO, Agreed Findings 4-6.
A. The Solicitation for Offers
During the course of the first five-year renewal period, the Government determined that 120 Church Street no longer met the needs of the IRS and determined to lease improved space. PTO, Agreed Finding 6. After conducting market surveys, on June 28, 1977 GSA sent a Solicitation For Offers (the "Solicitation") to 12 prospective lessors, including Bedford. The Solicitation provided, inter alia, that all offers with an annual rent in excess of $ 500,000 were required to remain open for 240 days from the last date of receipt of offers by GSA. PTO, Agreed Finding 7; HX 12 (A. 722). The Solicitation called for offers of 317,000 net usable square feet, plus an option on an additional 8,000 net usable square feet, which space was to be contiguous. HX 12 (A. 734). A method for computing net usable square feet was set forth in the Solicitation. Id. (A. 788).
On August 15, 1977, the last date for receipt of offers, GSA received three offers in response to the Solicitation, one of which was from Bedford. PTO, Agreed Finding 8. The other two offers were submitted by the Port Authority of New York and New Jersey (the "Port Authority") for space in the World Trade Center and by the Prudential Insurance Company of America ("Prudential") for space at 100 Church Street. See HX 186 (A. 1234); HX 188 (A. 1276). Thereafter, GSA entered into negotiations with the three offerors concerning their respective offers. HXs 187, 189, 190 (A. 1268, 1333, 1345).
(1) Bedford's Offer and the Purported Competition
Bedford's original offer in response to the solicitation was economically viable when made and was made in good faith with the expectation that Bedford would retain ownership of the building. Tr. 373, 381, 412-13 (D. Carver); tr. 628, 651-52 (M. Madonick); tr. 812-19 (C. Madonick).
Bedford offered the entire building, plus an additional 8,873 square feet at 110 Church Street, for a total of 350,024 square feet at $ 3,073,210.72 per year, including electricity, or approximately $ 8.78 per square foot. HXs 15, 16 (A. 799-811); DX 275. The offer also included approximately $ 1 million worth of construction. A. 223 (M. Madonick). See HX 16 (A. 811); HX 18 (A. 814-16).
The Port Authority and Prudential offers called for rents substantially higher than that provided for in the Bedford offer. The Port Authority offer was for noncontiguous space at $ 14.41 per square foot, substantially excluding electricity. The Prudential offer was for 317,000 square feet at $ 12.07 per square foot, excluding electricity, and exceeded the limitation set forth in the Economy Act. HX 119 (A. 1032); tr. 64 (Beck). The space referred to in these two offers may have been more attractive than 120 Church Street; however, because of the noncontiguous space of the Port Authority offer, the violation of the Economy Act of the Prudential offer, and the comparatively high rents of both, these offers were not competitive with the Bedford offer.
The Solicitation provided that there would be no public opening of bids and that all offers would be kept strictly confidential until an award was made. HX 12 (A. 722). GSA did not disclose the identities of the other offerors to Bedford during the negotiations. However, GSA did represent to Bedford that there was competition and used the existence of other offers as leverage in its negotiations with Bedford. See HX 190 (A. 1350, 1351) (memorandum of 11/2/77 meeting: GSA "stressed need to be competitive," "noted the competition . . . that is actively and strenuously after this lease"), (1352-53) (memorandum of 11/7/77 meeting), (1354) (memorandum of 11/9/77 meeting), (1358) (11/28/77 memorandum). See also A. 406 (M. Carver); tr. 82-83 (Beck) (GSA wanted to give the impression that the other bids were competitive). As late as November 28, 1977, after GSA had determined to recommend the Bedford offer, and after it had become clear that the other offers were not competitive, GSA was still referring to "other offers" in its negotiations. HX 190 (A. 1358). The Prudential representatives had advised GSA on November 22, 1977 that Prudential's best offer had been made, that its offer could not be reduced to meet the Economy Act limitation. In fact, the Prudential representatives at that meeting asked to be notified "as soon as possible as to when (Prudential could) be released from (its) offer." HX 189 (A. 1342).
Although the Prudential offer was net of utilities and the Port Authority offer was substantially net of utilities, GSA advised Bedford that it could not and would not consider offers net of utilities. A. 287, 321-23 (M. Madonick). GSA also told Bedford during the course of negotiations that the other offerors were offering new ceilings and persuaded Bedford to offer new ceilings as well. A. 96 (Margolin); A. 232 (M. Madonick); HX 18 (A. 816).
(2) Rent During Construction
At the time GSA commenced its search for improved space, it anticipated that the entire process of negotiating, obtaining congressional approval and making an award would be completed by April 1978. Because the IRS was supposed to be relocated by November 1, 1978, it was important that this schedule be met. DX 208; tr. 138-39 (LeDuc). Although Bedford was told by GSA on a number of occasions that no one could predict with certainty when congressional approval would be obtained or when an award would be made, tr. 45-46 (Beck); tr. 127 (LeDuc); A. 78-79 (Margolin), Bedford reasonably believed that an award under the Solicitation would be made by the end of 1977 or within the first few months of 1978. The Solicitation called for occupancy by November 1, 1978, HX 12 (A. 734), and Bedford knew that the Government wanted the new space by that date. A. 401-04 (M. Carver); tr. 618-19 (M. Madonick). Bedford's offer in response to the Solicitation included a construction package, and it had planned on beginning construction by early 1978. Tr. 620 (M. Madonick); tr. 337-39 (M. Carver). The Government was aware of the fact that Bedford wanted to start construction early in 1978. A. 234, 363-64 (M. Madonick); see also HX 21 (A. 823).
On November 18, 1977, Bedford wrote to GSA that it anticipated that a number of floors would be completely renovated prior to "the November 1st, 1978 commencement date of the new lease." HX 21 (A. 823).
Bedford proposed that in the event floors were not renovated by November 1, 1978, the Government would pay the rent called for under the second renewal option to the 1962 lease for all unrenovated floors on a pro rata basis. HX 21 (A. 823). As the delays in the processing of the proposed lease occurred, it became apparent to Bedford that the renovations were not going to proceed as quickly as anticipated and that consequently the rent it would be receiving after November 1, 1978 under the November 18, 1977 proposal would be much lower than it had anticipated. See A. 406-07, 411 (M. Carver); A. 431 (D. Carver). The delay in the making of an award threw the construction schedule off, and the resultant increases in construction costs rendered Bedford's bid no longer viable. A. 411-13 (M. Carver); tr. 617-20 (M. Madonick); HXs 30-35 (A. 836-41).
On March 2, 1978, Bedford proposed in writing to GSA that it pay the first renewal option rent and all utilities until the completion of construction or 18 months after the execution of the new lease, whichever came first, with the rent under the new lease to begin then. HX 25 (A. 830). Although GSA privately decided to reject this proposal, HX 175 (A. 1214) ("We don't want it"), Bedford was advised by letter dated April 5, 1978 that the proposal could be considered at a later time. HX 26 (A. 832); see also A. 248-49, 251 (M. Madonick). Bedford reasonably believed that this proposal would be negotiated with the Government after the award was made. A. 255 (M. Madonick); see DX 234. Bedford had been advised by GSA that an award letter was "in essence, a letter of intent by the United States Government," tr. 622 (M. Madonick), and, as Margolin himself testified, Bedford was told by GSA "to reserve all further changes" until after an award was made. A. 72-73. The March 2, 1978 proposal also made it clear that Bedford was withdrawing the November 18, 1977 proposal: the March 2d letter plainly stated, "As per our meetings and discussions, we propose the following as the terms of rental during the construction period." HX 25 (A. 830).
Bedford's original offer in response to the Solicitation called for a total of 350,024 square feet at $ 3,073,210.72. Some 311,727 square feet of this space was office space, and the balance of 38,297 square feet was storage space, 29,424 square feet at 120 Church Street and 8,873 square feet at 110 Church Street. HX 15 (A. 799). As a result of negotiations, the rental and footage figures underwent a number of changes. By December 8, 1977, the proposed rent had been reduced to $ 2,980,400 for 282,000 square feet of office space, 35,000 square feet of storage space, plus the optional 8,000 square feet of office space.
The provision for storage space at 110 Church Street was eliminated. HX 22A (A. 825). A subsequent amendment reduced the proposed rents for the two five-year optional renewal periods. HX 24 (A. 828). These reductions resulted from GSA's representations that Bedford had strong competition, from GSA's indications that it would if necessary exercise the second renewal option under the 1962 lease, and from GSA's claim that Bedford's offer had "quite a bit of fat" in it. HX 190 (A. 1350). This last claim was made despite GSA's knowledge that Bedford was seriously underestimating its operating costs. HX 191 (A. 1385).
Bedford originally offered all of 120 Church Street. However, when its offer was subsequently amended so that the Government would only be occupying 325,000 square feet under the new lease, including the optional 8,000 square feet, Bedford believed that there would be one or two floors of vacant space in the building after October 31, 1978. Tr. 632-35 (M. Madonick); A. 262-63 (M. Madonick). GSA also believed that there would be space left over in the building under the proposed new lease. On May 6, 1977, GSA had written that the building contained 333,120 net usable square feet "based on current measuring criteria." DX 207, at 2. The Solicitation called only for 325,000 net usable square feet, including the optional 8,000 square feet. At a June 1977 meeting between IRS and GSA, prior to the issuance of the Solicitation, it was indicated that 120 Church Street contained more space than IRS was then occupying, and that consequently the upper floors would probably not be necessary. DX 209. The Government was given "the right to select the floors it (would) occupy," DX 214; see also HX 190 (A. 1351), and GSA acknowledged to Bedford that possibly one or two floors would not have to be renovated because the Solicitation was for 282,000 square feet. HX 190 (A. 1351). By December 9, 1977, however, the IRS had apparently decided that it wanted the entire building. DX 215.
During December 1977 and January 1978, Bedford and GSA had a number of discussions concerning the square footage of 120 Church Street. On January 31, 1978, Ed Spitzer met with Mike Madonick and measured the floor plans. The two were in substantial agreement as to the measurements of the building, but because they did not agree on the applicability of the 10 per cent corridor reduction factor, they were not in substantial agreement as to the net usable square footage. Tr. 633-35 (M. Madonick); see tr. 277-78 (Spitzer).
Bedford did not believe the corridor deduction factor was applicable because the proposed remodelling called for "open landscaping," space which does not require fixed corridors. Tr. 633-35, 665-66 (M. Madonick); see also tr. 824 (C. Madonick).
The Solicitation provided that overtime services would be furnished by the lessor at the Government's request at rates to be agreed upon. HX 12 (A. 726, 774). Although Bedford proposed overtime rates, HX 18 (A. 818), the parties never did reach an agreement as to the rate the Government would pay for overtime services. HX 38 (A. 854); DX 234; A. 325-26 (M. Madonick). The cost of overtime services was a significant expense, having cost the Government at least $ 90,000 per year for several years prior to and including 1975. HX 10 (A. 716).
(5) The Second Renewal Option
Under the provisions of the 1962 lease, GSA's right to exercise its second renewal option was to expire on or about May 1, 1978, 180 days prior to the expiration date of the first renewal of the lease. The notice provision of the lease provided for notice of renewal "at least 180 days before this lease or any renewal thereof would otherwise expire." HX 1 (A. 677). Although two 1973 amendments to the lease, made at the Government's request, reduced the renewal notice period first to 90 days and then to 30 days, these amendments did not refer to renewal of any renewal of the lease. HXs 2, 3 (A. 692, 693). At the time these amendments were made, there was no discussion of extending the renewal notice period for the second five-year option. Tr. 415-16 (D. Carver). The 1973 extensions were granted because GSA needed the additional time to obtain approval from Congress for exercising the renewal options. A. 47 (Margolin). Since Congress approved both renewals in 1973, the reason for extending the notice period did not exist in 1978. The 1973 amendments thus did not affect the renewal notice period for the second renewal option, and the Government's time to exercise the renewal had indeed expired on or about May 1, 1978.
GSA, however, was apparently under the impression that it could renew the lease up to 30 days prior to the expiration date, and in September of 1978 it requested a waiver of the notice requirement. Tr. 38 (Beck). Michael Madonick and Dewey Carver advised GSA that it was Bedford's position that the second renewal option had already expired. Sidney Beck advised Dewey Carver that if a waiver were not granted, GSA would nevertheless seek to exercise the second option. Beck further told Dewey Carver that if Congress approved the proposed new lease, the second renewal would not be exercised. To avoid difficulties and a possible lawsuit, and because of Beck's assurances that the second renewal option would not be exercised if congressional approval was obtained, Dewey Carver reluctantly "waive(d) the 180 day notice to renew and grant(ed GSA) the right until October 31, 1978, to exercise the (second) option to renew . . . ." HX 36 (A. 844); see tr. 39-40 (Beck); A. 427-29 (D. Carver).
The Government's efforts to obtain a waiver of the renewal notice requirement were made in spite of the fact that it had decided, long before these efforts were made, not to exercise the second renewal option. See, e.g., DX 206 (IRS letter dated 3/22/77); HX 11 (A. 720) (GSA memorandum dated 6/2/77); DX 216 (draft prospectus attached to GSA cover letter dated 12/16/77). Although GSA representatives may have told Bedford on a number of occasions that the Government would exercise the second option in the event suitable improved space was not found, see, e.g., HX 190 (A. 1350); A. 181 (Margolin); tr. 12, 14-15 (Turetsky), the Government would not have actually done so. A GSA memorandum dated April 1, 1977 stated that if a satisfactory site for the IRS were not found by September 30, 1978, the Government would stay at 120 Church Street as a holdover tenant rather than exercise the second renewal option. DX 206. Exercising the second renewal option was simply not an acceptable or viable alternative, for it was "just about . . . impossible" for the IRS to function efficiently at 120 Church Street without renovations and improvements. A. 61 (Margolin); see also DX 206 (IRS letter dated 3/22/77: "Several years ago, we were forced into accepting a 5-year renewal . . . . We do not intend for this to happen again. . . . "(W)e do not want GSA to enter into a 5-year renewal at our present location in October 1978."); DX 211 (GSA memorandum of 11/4/77 meeting with IRS: "IRS noted it does not want to renew the current lease").
GSA knew that exercising the second renewal option would result in financial disaster to Bedford. A. 401 (M. Carver). GSA was told that renewal would cause ownership to lose the building, HX 190 (A. 1350), and it knew that the renewal rent would not cover ownership's debt service, much less provide for a return on the investment. See HX 191 (A. 1377) (renewal rent would leave $ 117,704 for mortgage indebtedness, interest, return on investment); HX 52 (A. 1002-03) (interest expense exceeded $ 600,000 yearly); HX 53A (A. 1018) (GSA calculated Bedford's annual loss under renewal rent to be over $ 600,000). See also A. 180 (Margolin); tr. 21 (Turetsky); tr. 62 (Beck).
(6) The Government's Requests for Extensions
By letters dated February 28, June 6, 14, July 25, August 30, and September 22 and 27, 1978, Bedford granted the Government's requests for extensions of the time within which the Government could accept Bedford's offer until October 31, 1978. HXs 29, 30, 31, 32, 33, 34, 35 (A. 835-41). In these letters, Bedford emphasized the economic hardship it was sustaining because of these delays, and expressed the hope that this fact would be recognized by GSA in negotiations. Bedford reasonably believed that the terms of its offer would be renegotiated following an award to compensate it for the economic injury it was suffering by reason of the Government's delays. A. 409-10 (M. Carver); 641-43 (M. Madonick); tr. 389, 391 (D. Carver); tr. 826-29, 837 (C. Madonick); A. 455-59 (C. Madonick); see also GX 510, 511.
(7) Termination of Negotiations
Negotiations between GSA and Bedford regarding the latter's offer formally commenced on August 25, 1977. HX 190 (A. 1345). During the course of the negotiations, Bedford submitted ten letters of change to its original offer, dated September 6, 1977, November 1, 10, 15, 17, 18, 28, 1977, December 8, 1977, January 31, 1978, and February 1, 1978. HXs 16, 17, 18, 19, 20, 21, 22, 22A, 23, 24 (A. 811-29). Additional letters submitted by Bedford from February 28, 1978 onward must also be considered to have revised or supplemented Bedford's original offer. HXs 25 (A. 830), 29-37 (A. 835-48). The negotiations did not cease in February of 1978, as alleged by the Government, but continued until after November 1, 1978. See, e.g., DX 218 (GSA mem. dated 2/23/78); DX 230 (GSA mem. dated 8/15/78); GX 511 (letter on behalf of Bedford dated 9/14/78); DX 235A (GSA mem. dated 10/6/78); GX 556 (GSA mem. dated 10/26/78); DX 243 (handwritten GSA notes dated 12/29/78 through 1/10/79). See also tr. 642-43, 676-79 (M. Madonick); A. 276-82 (M. Madonick) & HXs 176 (A. 1215-16); A. 331-32 (M. Madonick) & HXs 177, 178 (A. 1217-18); A. 384-87 (M. Madonick). Although GSA may have considered negotiations closed as of February 2, 1978, see A. 68, 112-13 (Margolin); tr. 50-51 (Beck); tr. 180-82 (LeDuc), it did not give Bedford advance written notice of termination of negotiations as required by the GSA handobok on the acquisition of leasehold interests in property, DX 248, chap. 3-18, at 24, and also by 41 C.F.R. § 1-3.805-1(b). The April 5, 1978 ...