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Terra Capital Associates v. Verizon Pennsylvania

June 14, 2010

TERRA CAPITAL ASSOCIATES, PLAINTIFF,
v.
VERIZON PENNSYLVANIA, INC., DEFENDANT.



The opinion of the court was delivered by: John T. Curtin United States District Judge

This action was originally brought in New York State Supreme Court, Erie County, in September 2007, and was removed to this court on the basis of diversity of citizenship of the parties. Plaintiff Terra Capital Associates ("Terra Capital") seeks money damages from defendant Verizon Pennsylvania Inc. ("Verizon") for breach of a commercial lease of property and premises located in Monroeville, Pennsylvania. The parties have now filed cross-motions for summary judgment (Items 48 and 51) seeking various forms of relief pursuant to Rule 56 of the Federal Rules of Civil Procedure. Verizon has also filed a motion to compel responses to its discovery requests (Item 30).

For the reasons that follow, the motions for summary judgment are denied, and the motion to compel is granted.

BACKGROUND

On November 28, 1989, Terra Capital and Verizon*fn1 entered into a ten-year commercial lease of premises located on approximately 6.10 acres of property at 1500 Tech Center Drive in Monroeville (the "Lease") (see Item 49, Ex. C). Pursuant to the terms of the original agreement, Terra Capital constructed a two-story, 75,000 square foot (approx.) building on the property to be used by Verizon as warehouse and office space. The initial term of the Lease, adjusted to account for partial occupancy due to brief construction delays, ran from January 15, 1991 to January 14, 2001, at an annual rental rate of approximately $978,000.00.*fn2 The Lease was ultimately renewed for an additional five-year term, which expired on January 14, 2006 (see Item 52, Ex. D).

The dispute in this action centers around the parties' differing interpretations of the Lease provisions governing responsibility for the cost of removing several physical alterations made to the property and premises by Verizon during the course of its fifteen-year tenancy. The pertinent provisions are set forth here as follows:

12. Alterations. LESSEE may, without expense to LESSOR, make such non-structural alterations in the demised premises as it may consider necessary for its purposes, with the approval of LESSOR, said approval not to be unreasonably withheld. All structural or mechanical changes shall be approved by LESSOR's architect at LESSEE's expense. All fixtures and equipment installed by LESSEE shall remain its property and may be removed by or before the termination of this Agreement. All improvements remain the property of LESSOR unless otherwise mutually agreed upon in writing.

.... 17. Surrender of Premises. Upon the termination of this Agreement, LESSEE shall surrender the demised premises in good order and condition, reasonable wear and tear, fire and other casualty excepted. LESSEE shall reimburse LESSOR for any repairs required which result from the removal of any fixtures and equipment.

18. Options to Renew. This Agreement may be renewed at the option of LESSEE at the end of the initial term under the same covenants, terms and conditions, except for rental, for an additional term of five (5) years by giving to LESSOR at least six (6) months prior to the end of such term, written notice of its exercise of such option and thereafter this Agreement may in like manner be renewed at the option of LESSEE for one (1) additional term of five (5) years....

....

29. Entire Agreement, Captions. It is expressly agreed by Tenant as a material consideration for the execution of this Lease, that there are, and were, no verbal representations, understandings, stipulations, agreements or promises pertaining to this Lease which are not incorporated herein. It is agreed between the parties that this Lease shall not be altered, waived, amended or extended, except by a written agreement signed by Landlord and Tenant. The captions contained in this Lease are for convenience of reference only and in no way limit or enlarge the terms or conditions of this Lease. (Item 49, Ex. C).

The major structural alterations at issue took place between the years 1998-2000, involving the installation of approximately 3,800 square feet of exterior loading dock space, along with associated modifications to the facility's mechanical infrastructure (electrical, plumbing, HVAC, sprinklers, and generators), landscaping, parking lot, and fencing (see Item 52, Ex. G, p. 1). A review of the multiple submissions made in connection with the present motions reveals an extensive history of communications between the parties regarding the construction project's effect on the leasehold, with escalating confrontational overtones and a deteriorating landlord/tenant relationship.

The original proposal for the loading dock project was transmitted under cover of a letter dated February 19, 1998, from R J. Koch, Verizon's Assistant Manager for Real Estate Leasing, to Terra Capital's Managing General Partner, Victor Liberatore, Sr. (see Item 52, Ex. E). Mr. Koch requested that Mr. Liberatore indicate his "timely review and approval" of the proposal by signing, dating, and returning the enclosed duplicate copy of the cover letter (id.).

On February 24, 1998, Michelle Ahrens (Terra Capital's Secretary) signed and dated the proposal letter in the space provided, and transmitted the approval under cover a separate letter, also dated February 24, 1998, which stated as follows:

Dear Mr. Koch:

Enclosed you will find an executed copy of the approval you have requested. As per your meeting with Mr. Liberatore this approval is subject to a few items that you and Mr. Liberatore have discus[s]ed and agreed upon.

First, [Verizon] will either pay additional rent on the additional space or bring back the space to [its] original condition if they should vacate the space. In addition, all equipment and material that will be removed or dismantled during the construction must be saved and stored for the restoration.

Mr. Liberatore requests that you keep him abreast of the happenings of this construction and if you should need any further assistance, please feel free to contact him. (Item 58, Ex. 6).

The next documented communication on record is a June 29, 2000 letter from Christopher J. Kelly (Verizon's Executive Director for Portfolio Management) to Mr. Liberatore, advising that Verizon was exercising its option to renew the Lease for an additional five-year term, beginning on January 15, 2001 and ending on January 14, 2006 (Item 52, Ex. D). The letter also referenced discussions between the parties regarding calculation of the "lowest possible rental rate" for both a five-year and ten-year renewal period (id.). Terra Capital responded by letter dated September 14, 2000, authored by Ms. Ahrens, transmitting a draft "Lease Renewal & Extension" agreement as "the necessary renewal documents for... signature" (Item 58, Ex. 8). The agreement included a provision for increasing the new rental rate to account for the square footage attributable to the newly constructed loading docks (id.).

No signature was forthcoming. Instead, the record reflects a series of telephone conversations and written communications between the parties regarding the appropriate square footage to be used as a basis for calculation of the new rental rate, as documented in letters from Mr. Liberatore and Ms. Ahrens to Mr. Kelly and Charlene Hoback, Verizon's Assistant Manager in charge of real estate. For example, on October 6, 2000, Terra Capital transmitted a revised Lease Renewal & Extension agreement for Verizon's review (which added a provision for reducing the base rent in exchange for snow and ice removal) (see Item 58, Ex. 10). Then, on October 31, 2000, Mr. Liberatore sent Ms. Hoback a letter referencing a recent telephone discussion regarding the renewal options facing Verizon:

1.) If [Verizon] is still only considering a five-year lease renewal there are two options available with respect to the additional square footage. [Verizon] can either pay rent on this additional space or provide us with documentation that upon the vacating of this premises [Verizon] will be fully responsible to restore this additional space to [its] original condition.

2. If [Verizon] is willing to entertain a ten year lease renewal then we can agree that [Verizon] will not have to restore this additional space to [its] original condition.

(Id., Ex. 11). The letter also contains a rather lengthy explanation of Mr. Liberatore's rationale for taking this position, summarized briefly here as follows:

In our discussions, you have made reference to [Terra Capital's] approval of the alterations exempting [Verizon] for any additional items with respect to such alterations.... The mere fact that I have approved plans for alterations does not leave this unfinished business out of the picture. If you review your own documents, you will see that there is no place in which it was agreed that... [Verizon] would not have to restore this space to its original condition or... [t]hat [Verizon] would be exempted from paying rent on this additional space.

....... [Y]ou and your superiors must consider that the improvements completed are very specific to the needs of [Verizon]. Without having a long-term lease commitment causes us to have a lot of risk and exposure with the present condition of the building. (Id.).

Further communications regarding the matter are reflected in letters between the parties dated January 31 and February 9, 2001 (see id., Exs. 12, 13). Then, on March 23, 2001, Ms. Ahrens wrote to Ms. Hoback, stating:

I am writing this letter as a follow up to our recent discussions concerning the lease renewal....

... [O]n March 8, 2001 we had a telephone conversation in which you agreed... that a few items remained open... which we were both going to look into and get back with each other. One of these items pertained to whether Verizon would decide to pay rent on the additional 3,815 sq. ft. of space... or if they would decide to completely restore this additional space to [its] original condition.

....... Mr. Liberatore was very explicit in the specifics that would be required in the event Verizon decided to restore this space as opposed to paying rent. Such specifics pertained to a complete description agreed and approved by Terra Capital of how this space would be restored along with an escrow account being established by Verizon for the cost of such restoration. At a bare minimum Verizon would have to front approximately $1,500,000.00 for such costs. (Id., Ex. 14).

On April 4, 2001, Ms. Hoback wrote to Ms. Ahrens, stating: The letter dated October 31, 2000, from Mr. Liberatore gives Verizon two choices; (1) pay rent on the docks that were built by Verizon, or (2) be fully responsible for restoring this additional space to its original condition upon vacating the premises. This letter is to confirm that Verizon has elected to remove the loading docks and restore the building to its original condition prior to the lease termination date. Verizon will not pay rent on the newly constructed loading docks, that contain 3,815 square feet of floor space, nor will Verizon deposit $1.5 million dollars in an escrow account to cover your estimate for restoring the building. (Id., Ex. 15). Ms. Ahrens replied by letter dated April 9, 2001, advising Ms. Hoback that "Verizon does not have the right to dictate to Terra Capital Associates what perimeters [sic] it will follow if they should elect to restore this building to [its] original condition," and explaining Mr. Liberatore's reasons for protecting his property interests by requiring an escrow security, as well as complete plans and specifications for the restoration project (id., Ex. 16).

On April 23, 2001, Ms. Hoback wrote back to Ms. Ahrens, stating as follows:

As per the Lease Agreement dated November 28, 1989, Mr. Liberatore has stated in writing that he wants the building restored to its original condition. Verizon has agreed to restore the building to its original condition, reasonable wear and tear excepted. Mr. Liberatore approved a set of plans consisting of 41 drawings detailing the improvements on December 15, 1999. These plans reveal the changes that were made to the building.... The building will be restored to its original condition; nothing more and nothing less. (Id., Ex. 17).

It was around this time that the parties' lawyers became involved in the letter-writing activity. On July 20, 2001, Terra Capital's attorney, J. Michael Kelleher, sent a letter to Ms. Hoback, outlining three options for Verizon to consider in order to avoid legal action with respect to its obligations under the Lease: (1) pay rent on the additional square footage, with no responsibility for restoration of the premises; (2) obtain a detailed analysis and cost estimate for restoration, and put the money to be spent on the restoration in an escrow account; and (3) provide a one-year prior written notice of intent to terminate the lease, at which time bids would be solicited and Verizon would pay Terra ...


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