The opinion of the court was delivered by: ROBERT W. SWEET
The dispute which has given rise to this action has its origins in an ambitious plan to create an International Design Center in Queens, New York ("the Center") where the leading firms in the contract furniture industry could present their products to their industry. The Center failed to live up to the expectations of its promoters as a consequence of its location, the recession of the late 80's, and changes in the contract furniture industry and its practices. These forces compelled the landlord to rent space in the Center to tenants outside the contract furniture industry, an act upon which Herman Miller seized in an effort to get out of a lease it no longer wished to perform. The dispute has focused on a particular provision of the lease which provided that the landlord would provide a building "intended to be used for showrooms and other related uses." It is the significance of this language that controls the disposition of this action.
This action was commenced on March 25, 1992. Both parties were represented by skilled counsel with the happy consequence that the pretrial proceedings were executed with despatch and without unnecessary motion practice. Despite a good faith effort between the parties, it was not possible to settle the dispute which extends beyond the immediate parties involved, as the facts below will demonstrate, and may well be central to the survival of the Center.
A bench trial commenced on December 27, 1993 and was completed on January 24, 1994 after five days of testimony and an adjournment to accommodate witnesses. After final argument and briefing the action was considered finally submitted on April 11, 1994. Upon all the proceedings had herein, the following findings and conclusions are reached.
Herman Miller is a Michigan corporation with its principal place of business at Byron Road, Zeeland, Michigan, and is a manufacturer, assembler and seller of contract furniture. Contract furniture manufacturers constitute that portion of the furniture business which manufactures, assembles and sells products for commercial users such as offices and hotels.
Herman Miller is highly sophisticated regarding the operation of its business and the interior design and contract furniture industry and is one of the leading contract furniture manufacturers in the country with respect to both volume of sales and design innovation.
Thom Rock, a developer and owner of real estate, is a New York limited partnership. Its principal place of business at the time the lease was signed was 666 Fifth Avenue, New York, New York. It owns the premises known as the International Design Center of New York (the "Center") which is located just over the Queensboro Bridge from Manhattan.
The Center is and has been operated and managed by the international Design Center, Inc. ("IDC"), a New York corporation with offices at 29-10 Thomson Avenue, Long Island City, New York. From 1983 through the present, IDC has acted as agent for and on behalf of Thom Rock.
In 1981, Lazard Realty, Inc. began the rejuvenation of certain properties in the vicinity of Thomson Avenue and 47th Street in Long Island City in Queens, New York, intending to provide facilities for secondary or back-office purposes. This plan was abandoned by 1983 and instead a plan was conceived to develop the properties as a design center for the interior design industry. The new concept for these properties became known as the international Design Center of New York. A development plan was created by I.M. Pei & Partners on behalf of Lazard Realty, and the Thom Rock partnership was created to raise the capital needed for the project and as the ownership vehicle. At the time the plan was announced, it received considerable press coverage and was supported by New York City and State instrumentalities as, among other things, an effort to extend the commercial activity of Manhattan to Queens.
In 1983, the plan, as set forth in an impressive brochure, called for the complete renovation of two existing vacant buildings. One was the former American Chicle building and was to be known as Center I; another was the former Bucilla building and was to be known as Center II. The renovation of a third partially vacant building, formerly the Executone building, was also planned. This building was to be known as Center III. The plan also contemplated, depending upon market conditions, the construction of a fourth building, Center IV, on vacant land and the possibility of further development of the area for design center and office purposes. The development of the Center was to proceed in phases. The first phase involved the development of Centers I and II.
As originally conceived, Centers I and II were to be dedicated only to tenants in the interior design industry who would use their leased premises as showrooms to display interior design products to the trade. Such products included residential or contract furniture, floor coverings, textiles, wall coverings, accessories, and electrical or construction materials or related merchandise. The original emphasis was on residential furnishings manufacturers but by 1984 the intent of Thom Rock was that Centers I and II of the Center would become a showroom facility for the contract furniture industry. The products included but were not limited to furniture, floor coverings, wall coverings and wall systems, architectural products, lighting products and textile products.
The project proposed a design center, similar in concept to those existing in Chicago, Los Angeles and Phoenix, but larger in scope and with an international cast. The design center, which was a building with showrooms that were to be open to the trade and not to the general public, would host events including periodic industry markets.
Unlike other kinds of commercial buildings, a design center seeks tenants who are in the same business so that when one tenant attracts clients or prospects to its showrooms, such client traffic will also benefit other tenants when those clients and prospects patronize the showrooms of other tenants. The success or failure of a design center is therefore dependent upon the synergy the design center is able to create for its tenants. Thus, unlike other commercial buildings tenants, a design center's tenants are very much dependent upon the success of their co-tenants. For this reason, the nature and character of the tenant base, not just their ability to make their rental payments, is critical to the success or failure of the design center. This synergy was one of the essential underpinnings of the Center and one of the main selling points by which it was marketed, promoted and sold to prospective tenants.
The Center held itself out as the premier design showroom facility of its kind in the United States, if not the world, with world-class architectural and design features and facilities designed exclusively for use by its prospective tenants, all of whom would be in the interior design industry, and intended to become the largest contract furniture design center in the world.
Centers I and II were designed to house approximately 1,000,000 square feet of showroom tenants in the contract furniture industry. Center I is a six story building which has approximately 550,000 square feet of showroom space. Center II is an eight-story building which has approximately 450,000 square feet of showroom space. The great bulk of the floor space was originally divided into many showrooms which front onto common circulation corridors organized around open atrium spaces so that a pedestrian circulation system permitted prospective clients visiting showrooms at the Center to travel easily, not only from showroom to showroom within one of the Centers, but between the buildings as well as across bridges between the buildings located on the 3rd and 4th floors.
However, in the earlier years of marketing itself as a design center, the IDC contemplated that it might not succeed in attracting a critical mass of tenancy that would allow it to lease only to showroom tenant and as a result, the IDC wrote an "escape clause" into leases, such as the lease between IDC and Helikon, giving the landlord the right to rent to non-showroom tenants and the tenant the right to cancel if more than 10% of the space on its floor was occupied by a non-showroom tenant.
On November 11, 1983, IDC leased space to Helikon for a showroom. The Helikon lease contains the following provisions, as excerpted, of which Herman Miller only became aware when it acquired Helikon in 1989:
51. Pre-Leasing Contingency.
A. Landlord and Tenant hereby agree that in the event leases for an aggregate amount of not less than two hundred fifty thousand (250,000) square feet of rentable area in the Project have not been duly executed on or before March 31, 1984, either party hereto shall have the right to terminate the Lease, at which time all of the terms and conditions hereof shall become null and void, and both parties shall be relieved of their obligations hereunder without further liability.
B. Landlord and Tenant hereby agree that in the event leases with six (6) of the tenants listed in Exhibit C (who intend to use their premises as their principal showrooms in the New York City area) have not been duly executed on or before March 31, 1984, which leases contain no leasing contingencies which have not been met, Tenant shall have the right to terminate the Lease on or before April 15, 1984. Upon termination of the Lease all of the terms and conditions hereof shall become null and void, and both parties shall be relieved of their obligations hereunder without further liability.
A. To the extent reasonably feasible, Landlord covenants to lease space in the Project only to tenants who sell residential or contract furniture, floor coverings, textiles, wall coverings, accessories, electrical or construction materials or related merchandise to the trade, at wholesale only, and which intend principally to use their demised premises as a showroom for the display of merchandise and for offices related thereto (said tenants hereinafter collectively referred to as the "Design Industry Tenants"), and to those tenants referred to in subsection B below. Notwithstanding the foregoing, after making reasonable efforts to lease space in the project to the foregoing classes of tenants at rents and subject to terms and conditions acceptable to Landlord, Landlord may, without any liability or limitation, lease space in the Project to tenants of any nature whatsoever as it in its sole discretion shall determine, provided that it shall lease space on the ground floor in either building in the Project only to tenants meeting the criteria described in this subsection and in subsection B below [emphasis supplied].
As the IDC began to succeed in attracting contract furniture industry tenants to the Center, the signing of these tenants became part of the marketing strategy to attract those in the industry who had not yet signed leases for space at the Center. Center marketing materials sent to prospective tenants in the contract furniture industry began listing those contract furniture industry companies that had signed (or purportedly signed) with the IDC and contained references only to tenant companies in the contract furniture industry. Other than support or service companies such as restaurants and a photocopy service establishment, all of the tenants signed up by the IDC prior to the signing of Herman Miller were contract furniture companies which, by the operation of the terms of their leases, were required to use their leased space only for showroom display and sale to the trade, at wholesale only, of contract furniture industry products.
Through the use of these marketing materials as well as through the oral presentations made by IDC employees and agents, the IDC represented that the Center had the intention of becoming the largest contract furniture showroom facility in the world.
The location of the Center in Long Island City was the biggest obstacle to leasing up the Project with contract furniture tenants and the transportation to the Center was frequently frustrating and delayed. On the other hand, the reduced rental rates being offered by IDC as compared to ...