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Expo Properties, LLC v. Experient, Inc.

United States District Court, D. Maryland

July 26, 2016

EXPO PROPERTIES, LLC, et al., Plaintiffs,
v.
EXPERIENT, INC, Defendant.

          MEMORANDUM OPINION

          George L. Russell, III United States District Judge.

         THIS MATTER is before the Court on Defendant’s, Experient, Inc. (“Experient”), [1] Motion for Partial Summary Judgment (ECF No. 54) and Plaintiffs’, Expo Properties, LLC (“Expo Properties”) and Merchants Properties, LLC (“Merchants Properties”), Motion for Partial Summary Judgment[2] (ECF No. 62). This case concerns a landlord-tenant dispute associated with the Galaxy Building, a large commercial property in Frederick, Maryland. Principally at issue are how the parties’ lease agreement should be construed as a matter of law and whether the parties amended their lease agreement to make Experient responsible for paying the entire cost of all repairs.

         Having reviewed the Motions and supporting documents, the Court finds no hearing necessary. See Local Rule 105.6 (D.Md. 2016). For the reasons outlined below, the Court will deny Expo Properties’s Motion and grant in part and deny without prejudice in part Experient’s Motion.

         I. BACKGROUND[3]

         A. The Lease Agreement

         On March 17, 1994, John Laughlin, the Galaxy Building’s original owner, executed a Lease Agreement with Galaxy Registration, Inc. (“Galaxy”). Galaxy agreed to rent approximately 25, 000 square-feet of office and warehouse space in the Galaxy Building (the “Leased Premises”) for an initial term of five years.

         The Lease Agreement assigns financial responsibility for repairs, maintenance, and capital improvements. Article 4D(2) provides that Galaxy “agrees to pay the costs and expenses paid or incurred by or on behalf of Landlord for managing, operating, maintaining and repairing the Leased Premises.” (Def.’s Mot. for Partial Summ. J. Ex. 1A [“Lease Agreement”], at 4, ECF No. 54-2). Article 4D(3) then states that capital improvements shall be included in “Landlord expenses and charged to the Tenant as additional rent.” (Id. at 5). Article 6C provides that Galaxy is responsible for paying all repair and maintenance costs associated with the “exterior and interior of the Leased Premises, together with all windows and glass, electrical, plumbing, heating, air conditioning and other mechanical equipment.” (Id. at 8). Galaxy’s exclusive financial responsibility for all repairs and maintenance, however, is subject to an exception. The final clause of Article 6C (the “Article 6 Cost-Sharing Provision”) stipulates that landlord and tenant shall each pay fifty percent of the cost of a repair or replacement when it “(i) is not made necessary in whole or in part as a result of Tenant’s negligence, (ii) is Five Thousand Dollars ($5, 000.00) or more in amount, and (iii) has an actual economic life in excess of the term of the Lease then in effect.” (Id.).

         Article 8 governs structural repairs and maintenance. It provides that “Tenant shall be responsible to make all necessary repairs during the term of this Lease to the roof of the building to which the Leased Premises are a part and all necessary structural repairs to the exterior walls, foundations, sidewalks, parking lots, and driveways.” (Id. at 11). Article 8 specifies that “Landlord is under no obligation to perform any repairs and/or maintenance with respect to the Leased Premises.” (Id.). Nevertheless, Article 8’s penultimate clause (the “Article 8 Cost-Sharing Provision”) provides an exception to the tenant’s sole financial responsibility for structural repairs and maintenance. Like the Article 6 Cost-Sharing Provision, the Article 8 Cost-Sharing Provision stipulates that landlord and tenant shall each pay fifty percent of the cost if: “(i) the structural repair or maintenance is not made necessary in whole or in part as a result of Tenant’s negligence, (ii) the cost of an item of structural repair or maintenance is Five Thousand Dollars ($5, 000.00) or more, and (iii) the actual economic life of such structural repairs or maintenance is in excess of the term of the Lease then in effect.” (Id. at 11-12).

         The Lease Agreement also addresses the condition in which the tenant must return the Leased Premises at the end of the term. Article 6C makes Galaxy responsible for returning “the exterior and interior of the Leased Premises . . . in the same good order in which they are received.” (Id. at 8). And, Article 24 provides that the tenant must “return the Leased Premises and all equipment and fixtures of Landlord therein to Landlord in as good condition as when Tenant originally took possession, ordinary wear . . . excepted.” (Id. at 22).

         B. Lease Amendments, the May 1998 Letter, and the Estoppel Certificate

         The parties amended the Lease Agreement on several occasions. In the “Amendment to Lease” (“First Amendment”) executed on April 21, 1997, Laughlin agreed to construct a two-story, 25, 700 square-foot addition to the Leased Premises, which Galaxy would occupy beginning in January 1998. (Id. Ex. 1B, ECF No. 54-2). Following a change in Galaxy’s ownership structure, Expo Exchange, LLC (“Expo Exchange”) became the tenant under the Lease Agreement in October 1997. In the “Second Amendment to Lease Agreement, ” (“Second Amendment”) executed on January 12, 1998, the parties agreed to increased rent to account for Galaxy[4]moving into the addition and adjusted the start date of the five-year lease to February 1, 1998. (Id. Ex. 1C, ECF No. 54-2).

         On May 1, 1998, Laughlin wrote a letter to Michael Goodwin, the President and Chief Executive Officer of Galaxy (the “May 1998 Letter”). (Id. Ex. 4, ECF No. 54-5). The apparent purpose of the May 1998 Letter was to resolve what Laughlin perceived as confusion regarding who the Lease Agreement requires to pay for repairs, maintenance, and capital improvements. Laughlin explained that “our lease makes it clear that all costs for repairs, maintenance, and capital improvements will be borne by Galaxy.” (Id.). Laughlin went on to further emphasize this point, stating that “in all cases where we agree that work needs to be done, Galaxy pays the bill.” (Id.). Laughlin did not address the Articles 6 and 8 Cost-Sharing Provisions in the May 1998 Letter.

         In the “Third Amendment to Lease, ” (“Third Amendment”) executed on March 29, 2002, Expo Exchange exercised its option to extend the lease for an additional five-year term commencing on February 1, 2003 and terminating on January 31, 2008. (Id. Ex. 1D, ECF No. 54-2). In the “Fourth Amendment to Lease Agreement, ” (“Fourth Amendment”) executed on August 30, 2005, Expo Exchange agreed to rent 11, 150 square-feet of space in the property adjacent to the Galaxy Building. (Id. Ex. 1E, ECF No. 54-2).

         In October 2004, Laughlin transferred his interest in the Lease Agreement to Expo Properties, LLC (“Expo Properties”). Then, in 2006, Merchants Properties, with a loan from Mercantile Safe Deposit and Trust Company (“Mercantile”), acquired the Leased Premises when it acquired all membership interests in Expo Properties. In accordance with the obligation in Article 26 of the Lease Agreement, Expo Exchange executed an Estoppel Certificate on July 18, 2006. (Id. Ex. 5, ECF No. 54-6). In the Estoppel Certificate, Experient represents that it is the tenant under the Lease Agreement and it is not in default of any of its obligations. (Id.). The Estoppel Certificate also provides that the Lease Agreement had been amended by the First through Fourth Amendments and the May 1998 Letter. (Id.).

         Paragraph 8 of the Estoppel Certificate addresses Expo Exchange’s financial responsibility for repairs, maintenance, and capital improvements. It begins by reciting the first sentence of Article 8 of the Lease Agreement, which provides that the tenant shall be responsible for all structural repairs and maintenance. (Id. at 3). Paragraph 8 then states that “[t]his provision and provisions of Article 4D(2) and 4D(3) are clarified in the May 1998 Letter.” (Id.). Finally, Paragraph 8 provides that “Tenant acknowledges that all repairs to the Building and the Leased Premises of which the Building are a part are the responsibility of Tenant, including capital improvements.” Like the May 1998 Letter, Paragraph 8 does not mention the Articles 6 and 8 Cost-Sharing Provisions. (Id.).

         On November 14, 2011, Expo Properties and Experient, Expo Exchange’s successor in interest, executed a “Fifth Amendment to Lease” (“Fifth Amendment”) to extend the lease termination date to July 31, 2013. (Id. Ex. 1F [“Fifth Amendment”], ECF No. 54-2). The Fifth Amendment defines the “existing Lease” as the Lease Agreement plus the First through Fourth Amendments and the Estoppel Certificate.

         C. Preparation for Lease Expiration

         In June 2012, approximately one year before the Lease Agreement was due to expire, Expo Properties requested that Experient provide inspection reports for the roof and the heating, ventilation, and air conditioning (“HVAC”) systems. Experient responded in January 2013 with one-page summaries. On January 30, 2013, Harry Halpert, President of Expo Properties, wrote a letter to Mark Alspaw, Vice President of Real Estate for Maritz Holding, Inc., Experient’s parent company, explaining that the one-page summaries were insufficient. Halpert stated that Expo Properties fully expected Experient to promptly make the repairs recommended in the one-page summaries and that Expo Properties would send its own inspector to complete a survey of the entire Leased Premises. Halpert then added that if Expo Properties’s inspector determined that any additional repairs or replacements were necessary, Experient would have to complete them, in their entirety, before the Lease Agreement expired.

         Halpert also used his January 30, 2013 Letter as an opportunity to further clarify what he considered Experient’s responsibilities for repairs and replacements under the Lease Agreement. Halpert asserts that the Fifth Amendment to the Lease Agreement expressly incorporated by reference the Estoppel Certificate and May 1998 Letter. As such, he contends, the Leased Premises “are to be surrendered by Experient to [Expo Properties] with all the necessary repairs and replacements having been made by Experient, and in the condition otherwise required under the Lease, on or before July 31, 2013.” (Id. Ex. 8, at 2, ECF No. 54-9).

         Expo Properties sent KCI Technologies, Inc. (“KCI”) to inspect the Leased Premises on March 19, 2013. That inspection resulted in a Building Assessment Report dated May 30, 2013 (“KCI’s Initial Report”). (Id. Ex. 9, ECF No. 54-10). KCI’s Initial Report includes three-and-a-half pages of recommended repairs and replacements estimated to cost approximately $1 million. (Id.).

         Also on May 30, 2013, Douglas Hoffberger, the President of Keystone Realty, with whom Expo Properties had contracted to manage the Leased Premises, sent an email to Alspaw (the “Hoffberger Email”). (Id. Ex. 10, ECF No. 54-11). Hoffberger attached KCI’s Initial Report and directed Experient to perform all the work that KCI identified before the end of the lease term. (Id.). Hoffberger also directed Experient to remove walls that did not reach the ceiling (“half-walls”), replace the carpeting that had been removed under the footprint of the half-walls, and remove and replace “[a]ll carpeting that is damaged or worn.” (Id. at 2).

         In early July 2013, Experient began to vacate the Leased Premises by moving its employees, furniture, fixtures, and equipment. Around this same time, Experient sent a letter to Expo Properties stating that Experient disagreed with numerous items in KCI’s Initial Report. (Id. Ex. 17, ECF No. 54-18). Experient explained that “[s]everal items in [KCI’s Initial] Report are ‘should’ or ‘could’ repairs, not deemed ‘necessary.’” (Id. at 2). Experient also asserted that the May 1998 Letter did not modify the Lease and, as such, the Articles 6 and 8 Cost-Sharing Provisions were still operative. (Id.).

         Furthermore, Experient listed all the repairs and replacements recommended in the Hoffberger Email and KCI’s Initial Report and identified those which it would and would not perform. (Id. at 3-17). Experient agreed to remove all the half-walls it installed, but only “as a courtesy” to Expo Properties. (Alspaw Dep. 174:7-10, May 12, 2015, ECF No. 54-19). Experient did not agree to fill in with new carpet the voids under the half-walls, replace old HVAC units remaining from the original construction of the Galaxy Building, replace original thermostats with programmable thermostats, replace carpeting that was damaged or worn throughout the Leased Premises, or perform several types of roof repairs. (Def.’s Mot. for Partial Summ. J. Ex. 17, ECF No. 54-18).

         Experient vacated the Leased Premises on or about the lease expiration date of July 31, 2013. Experient has made some, but not all, of the repairs and replacements identified in the Hoffberger Email and KCI’s Initial Report.

         D. Notice of Default

         KCI, at Expo Properties’s request, re-inspected the premises on August 8, 2013 and prepared a Re-Inspection Report dated August 27, 2013 (“KCI’s Re-Inspection Report”). (Id. Ex. 14, ECF No. 54-15). KCI’s Re-Inspection Report identified all of the repairs and recommendations in KCI’s Initial Report that Experient did not complete and also highlighted additional repairs that KCI considered necessary in light of the re-inspection. (Id.).

         On October 2, 2013, Expo Properties sent Experient a formal notice of default advising Experient that its “failure to properly maintain, repair, and restore” the Leased Premises violated Articles 6 and 8 of the Lease Agreement, the Estoppel Certificate, and the May 1998 Letter. (Id. at 1). Expo Properties then asserted that Experient was responsible for making all repairs specified in KCI’s Initial and Re-Inspection Reports. (Id.). Expo Properties also contended that prior to vacating the Leased Premises, Experient “was required to remove certain interior walls” and replace the carpet “damaged by the addition and removal of such walls.” (Id. at 2). Expo Properties attached a floor plan that identified all the floor-to-ceiling walls that it wanted removed and estimated that the cost to remove the walls and replace the carpet would be $240, 504. (Id. at 2-4). Finally, Expo Properties concluded the letter by demanding that Experient cure the purported defaults by paying Expo Properties $1, 145, 669. (Id. at 2).

         E. Procedural History

         Expo Properties initiated this suit on March 10, 2014, raising four claims: (1) breach of contract (Count I); (2) promissory estoppel (Count II); negligence (Count III); and (4) declaratory judgment (Count IV). (ECF No. 1). The Complaint alleges that “Experient failed to perform its maintenance and repair obligations, and left the [Leased Premises] in poor condition and disrepair when it vacated.” (Compl. ¶ 2, ECF No. 1). The Complaint specifies that Experient failed to remove certain interior walls, restore carpeting, and repair the roof, asphalt, sidewalk, HVAC units, and certain other structural areas. (Id. ¶¶ 21, 22).

         Expo Properties filed a First Amended Complaint on May 13, 2014, increasing the amount of damages from $1, 900, 000 to $2, 389, 000. (ECF No. 17). The $2, 389, 000 figure includes $1, 419, 000 in holdover rent that Expo Properties calculated pursuant to Article 28 of the Lease Agreement. (Id.). On September 29, 2014, the Court issued a Letter Order dismissing Expo Properties’s negligence claim. (ECF No. 37). Experient filed a Motion for Partial Summary Judgment on September 11, 2015. (ECF No. 54). Expo Properties filed a cross Motion for Partial Summary Judgment and Opposition to Experient’s Motion on October 20, 2015. (ECF Nos. 62, 62-1). Experient then submitted a Response to Expo Properties’s Motion and a Reply in support of its Motion on December 4, 2015. (ECF No. 65). Finally, Expo Properties filed a Reply in Support of its Motion for Partial Summary Judgment on January 8, 2016. (ECF No. 68). The Motions are ripe for disposition.

         II. DISCUSSION

         A. Standard of Review

         1. ...


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