The opinion of the court was delivered by: WERKER
These consolidated cases involve the adjudication of the rights and liabilities of Bedford Associates as owner-mortgagor, The Bowery Savings Bank as mortgagee, and the United States government as tenant of the 21 story office building located at 120 Church Street, in New York City. The background of these cases is contained in the prior opinions of this court and the Court of Appeals for the Second Circuit. United States v. Bedford Associates, 618 F.2d 904 (2d Cir. 1980), on remand, 491 F. Supp. 848 (S.D.N.Y. 1980) and 491 F. Supp. 851 (S.D.N.Y. 1980), aff'd in part, rev'd in part and remanded, 657 F.2d 1300 (2d Cir. 1981), cert. denied, 456 U.S. 914, 102 S. Ct. 1767, 72 L. Ed. 2d 173 (1982). Reader familiarity with the opinions is assumed.
These actions presently are before the court following remand from the United States Court of Appeals for the Second Circuit for trial of the government's claim for damages arising from Bedford's breach of a lease of the premises. Also before the Court are (1) the government's condemnation of a leasehold interest in the entire premises at 120 Church Street pursuant to 28 U.S.C. § 2509a; and (2) Bowery's action for foreclosure of its consolidated first mortgage on the premises and a sale of the premises pursuant to the judgment of this court dated June 9, 1980.
THE GOVERNMENT'S ACTION FOR DAMAGES
In its second amended complaint, the government sought damages for Bedford's failure to alter the premises, to perform certain obligations with respect to the provision of electrical and other services to the premises, and to provide free and uninterrupted possession, use and enjoyment of the premises to the United States. The government seeks recovery for both past and prospective damages.
First, the government seeks to recover from Bowery as assignee of Bedford's right to receive rents under the lease all payments made to Bowery in excess of the rent and utilities payments due to Bedford under the terms of the lease. As the rent that the government was required to pay under the judgment of this court dated June 9, 1980 was modified as of October 1981 to reflect the rent due under the lease agreement as found by the Court of appeals, at issue here is the recovery of overpayments of rent made by the government between November 1978 and September 1981. With respect to utilities payments, the government seeks to recover all utilities payments except for amounts allocated to "special equipment" and "overtime" between November 1978 and November 1981.
The government relies primarily on section 74 of the Restatement of Restitution (1937) which provides:
A person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable or the parties contract that payment is to be final; if the judgment is modified, there is a right to restitution of the excess.
An award of restitution is not a matter of right but rests in the sound discretion of the court. Atlantic Coast Line v. Florida, 295 U.S. 301, 310, 79 L. Ed. 1451, 55 S. Ct. 713 (1935). "The court will not order it where the justice of the case does not call for it or where the retention is not shown to be contrary to equity and good conscience." Id.; see Rae v. Rosenberg, 67 Misc. 2d 881, 324 N.Y.S.2d 898 (Sup. Ct. Kings County 1971). As discussed by Mr. Justice Cardozo in Atlantic Coastline v. Florida:
Decisions of this court have given recognition to the rule as one of general application that what has been lost to a litigant under the compulsion of a judgment shall be restored thereafter, in the event of a reversal, by the litigants opposed to him, the beneficiaries of the error . . . . But the rule, even though general in its application, is not without exceptions. A cause of action for restitution is a type of the broader cause of action for money had and received, a remedy which is equitable in origin and function. The claimant to prevail must show that the money was received in such circumstances that the possessor will give offense to equity and good conscience if permitted to retain it. The question no longer is whether the law would put him in possession of the money if the transaction were a new one. The question is whether the law will take it out of his possession after he has been able to collect it.
Atlantic Coastline v. Florida, 295 U.S. at 309-10.
From the foregoing, it is plain that only a party who obtained a benefit to which he was not entitled may be required to make restitution of funds paid under a judgment that ultimately is reversed. Bowery, however, has applied all rents received to pay existing debts of Bedford and to maintain the premises.
Having received only that to which it was entitled under the terms of Bedford's mortgage, it is evident that Bowery did not benefit unjustly from the government's overpayments. See Equilease Corp. v. Hentz, 634 F.2d 850, 853 (5th Cir. 1981); see generally Lowenstein v. Reikes, 258 N.Y. 444, 180 N.E. 113 (1932); Millfield Realty Co. v. Joseph P. Day, Inc., 257 N.Y. 515, 178 N.E. 775 (1931); Youmans v. Edgerton, 91 N.Y. 403 (1883). Under these circumstances, it would be "patently unfair" to require Bowery which stands in the position of "an innocent payee who has received and used the money to satisfy a debt," to repay the money. Equilease Corp. v. Hentz, 634 F.2d at 853.
Bedford, on the other hand, did receive the benefit of satisfaction of pre-existing debts as a result of the government's overpayments. Consequently, it is Bedford and not Bowery that may be required to make restitution to the government. See Eightway Corp. v. V. Ponte & Sons, Inc., 99 Misc. 2d 989, 420 N.Y.S.2d 836 (App. T. 2d Dep't 1979).
The next issue that must be determined is the amount of rent that the government was required to pay during renovations. The Court of Appeals held that the term concerning rent during renovations was fixed as that set forth in Bedford's November 1977 proposal, but required that this court consider on remand whether GSA's delay in securing congressional approval of the lease constituted a lack of cooperation sufficient to excuse Bedford from its obligation to renovate the premises within the period set forth in the lease.
It is the judgment of this court that Bedford was excused from any duty to renovate the premises by GSA's dilatory behavior in procuring the necessary approvals for the proposed lease. My conclusion is based on the well-settled principle that where one of the parties to a contract makes performance by the other materially more difficult or expensive, the latter will be discharged. 6 Corbin, Contracts § 1323 at 334 (1964); see United States v. Peck, 102 U.S. 64, 26 L. Ed. 46 (1880); Shear v. National Rifle Association of America, 196 U.S. App. D.C. 344, 606 F.2d 1251, 1255 (D.C. Cir. 1979); Vanadium Corp. of America v. Fidelity & Deposit Co. of Maryland, 159 F.2d 105 (2d Cir. 1947); American Trading & Production Corp. v. United States, 172 F. Supp. 165 (D. Md. 1959); George A. Fuller Co. v. United States, 108 Ct. Cl. 70, 69 F. Supp. 409 (Ct. Cl. 1947); 11 Williston on Contracts § 1296 pp. 56-59 (3d ed. 1968 & Supp. 1981). In this case, there is no dispute that GSA's delay caused the commencement of renovations to be postponed until a time when construction costs had skyrocketed and performance would have been economically devastating to Bedford. 491 F. Supp. at 856, 864. Thus, the rent which should have been paid by the government was $241,846.66 per month from the date of commencement of the lease, November 1, 1978.
The Court of Appeals found that "Bowery was entitled to receive only the rental specified by the lease agreement" and that the June 9, 1980 judgment of this court should be modified accordingly. Id. at 1318 (emphasis added). In my opinion, this language contemplates restitution of overpayments made by the government pursuant to this court's June 9, 1980 judgment. In the exercise of this court's equitable powers, however, I find that restitution to the government of rental overpayments must be offset by any and all deficiencies in the monthly rental payments made by the government between November 1978 and May 1980.
The next issue is whether the government is entitled to restitution from Bedford of all overpayments of utilities from November 1978 to November 1981 except those made for "special equipment" and "overtime." On March 5, 1980, the Court of Appeals affirmed this court's decision requiring the government to pay all utilities expenses at 120 Church Street as a condition to the granting of a preliminary injunction in favor of the government, but modified prospectively the amount to be paid to $14,000 per month. Since the payment of utilities was required as a condition of granting to the government the equitable relief of specific performance of the lease pendente lite, see United States v. Bedford Associates, 618 F.2d 904, 916 (S.D.N.Y. 1980), the government is not entitled to restitution of amounts paid for utilities prior to the date of judgment. As observed by the Court of Appeals:
If the District Court is free to exercise the typical powers of a court of equity, it has the power to impose conditions requiring maintenance of the status quo. Conditions of this nature traditionally may be made the price of relief when the injunctive powers of the court are invoked and the conditions are necessary to do justice between the parties.
United States v. Bedford Associates, 618 F.2d 904, 917 (S.D.N.Y. 1980). Accordingly, the government is entitled to restitution of overpayments for utilities only for the period from June 1980 to November 1981.
The next issue that must be determined is the amount that was to be paid by the government for utilities under the terms of the lease. Under the lease agreement, the government was entitled to all lighting, whenever used. The government, however, was obligated to pay for all "over-time" usage which was defined in the lease as all air-conditioning and heating that it requested beyond the hours of 8:00 a.m. to 6:00 p.m. Monday through Friday. Hearing Exs. 12-25, 29, 38 (A. 744, 794-830, 834, 850-964). In addition, the government was responsible for the cost of electricity consumed by special equipment in the premises, such as photocopying machines and computers. Id.
The government's cost for electricity consumed by all equipment at the premises, including special equipment, is approximately $58,200.00 per year. The Internal Revenue Service did not incur any "overtime" for air-conditioning or heating in 1980 until December 28, 1980. Between December 28, 1980 and September 30, 1981, however, the IRS incurred $4,160,000 for overtime services. G. Exs. 566, 567; Tr. at 122, 131-32, 234-36.
Thus, the government is entitled to restitution from Bedford of utilities payments made between June 1980 and November 1981 in excess of the $4,160.00 for overtime services and the proportionate special equipment costs attributable to the period June 1980 to November 1981 based on an annual cost of $58,200.00 per year.
In accordance with the above, the government is entitled to restitution from Bedford of (1) $1,141,476.10 in rental payments and (2) $1,054,302.84 in utilities payments.
The government's solicitation called for offers of 317,000 net usable square feet, plus an option on an additional 8,000 net usable square feet. The method for computing net usable square feet was set forth in the solicitation. A. 788. It required deductions for certain areas of the building which normally would not be deducted in an ordinary commercial leasing situation. See pp. 21-22, infra.
Although Bedford and GSA were substantially in agreement as to the measurements of the building, they did not agree as to the square footage to be rented because of their disagreement as to the applicability of the corridor deduction factor. The issue of the applicability of the corridor deduction factor was never resolved . . . .
United States v. Bedford Associates, 491 F. Supp. at 863. This disagreement was held by the Court of Appeals to be insignificant and not of a nature that would preclude enforcement of the agreement, United States v. Bedford Associates, 657 F.2d at 1311, since under the terms of the agreement, the "dispositive measurement of the leased space was to be a mutual field measurement after delivery of the space [with] any disagreement [being] resolved through administrative proceedings." Id. at 1310.
The parties disagreement with respect to the net usable square footage of 120 Church Street was based on the disparity in measurement arising from Bedford's position that the corridor deduction factor did not apply to open landscaping and the government's contention that it did. Thus, the only question that must be resolved is whether the corridor deduction factor applies to open landscaping.
Two Board of Contract Appeals decisions have found that the corridor deduction factor which requires that "if the corridor system . . . does not provide ready access to all rooms required, a deduction for corridors will be made in an amount equal to 10% of the gross area" after certain deductions, applies to offices with open landscaping if even one room lacks access to a corridor. Appeal of Grubbs & Ellis Development Co., Board of Contract Appeals Decisions 76-2 § 12,189 (1976); Appeal of Third and Pierce, Inc., Board of Contract Appeals Decisions 74-1 para. 10,452 (1974). Although the government's blanket statement that the Board of Contract Appeals has held that the 10% deduction factor applies to open landscaping appears to be incorrect, there is sufficient evidence in this case to infer that even with "open landscaping," 120 Church Street would not provide ready access to all rooms required. Appraisal of James Peel at 28-29; see Appeal of Grubbs & Ellis Development Co., Board of Contract Appeals Decisions 76-2 § 12,189 (1976). The parties having agreed to resolve any disputes with respect to net usable square footage of the building through administrative proceedings and the interpretation of the 10% ...