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United States v. Bedford Associates

decided: February 5, 1980.


Appeals from various interlocutory orders of the United States District Court for the Southern District of New York, Henry F. Werker, Judge . The district court entered a preliminary injunction restraining defendants Bedford Associates, et al., from terminating services to and closing a building occupied by the United States, and ordering the United States to pay all rents thereon, without setoff for utilities payments, to the mortgagee Bowery Savings Bank. The United States appeals from that part of the preliminary injunction which requires it to bear the cost of utilities without setoff from rental payments, and from an order denying its motion for an injunction bond. Affirmed in part and remanded in part.

Before Van Graafeiland and Kearse, Circuit Judges, and Dooling, District Judge.*fn*

Author: Kearse

The United States appeals from various interlocutory orders entered by the United States District Court for the Southern District of New York, Henry F. Werker, Judge, in these consolidated actions involving a building occupied by the government and owned by defendant-appellee Bedford Associates ("Bedford"). The government formerly occupied the building pursuant to a lease which expired on October 31, 1978; it claims that a new lease agreement was entered into as of November 1, 1978. Bedford disputes the existence, or alternatively, the enforceability, of the new agreement. On March 20, 1979, Bedford notified the government that it planned to discontinue services to the building and to close it on March 23 unless the government agreed to pay a "reasonable and fair rent" for its occupancy. The government commenced suit on March 22 against Bedford and its agents, seeking preliminary and permanent injunctive relief against the threatened actions.

Meanwhile, on March 21, 1979, The Bowery Savings Bank ("Bowery"), the mortgagee of the property, commenced suit against Bedford and the government, seeking foreclosure of its mortgage and an assignment of rents. Bowery was allowed to intervene in the government's action, and eventually the two actions were consolidated.

A five-day hearing was held on the government's motion for a preliminary injunction against Bedford. Bowery supported the government's motion, but urged that it be granted only on condition that the government pay the rent to Bowery, and that such payments be made without any setoff by the government for its payment of utilities charges. The government expressed its willingness to pay the rent, but contended that it had the right to deduct its utilities payments from the rent payments. At the close of the hearing, the district court framed a preliminary injunction, filed on April 17, 1979, which, pending a trial on the merits, restrained Bedford and its agents from denying the government access and from terminating services to the building, and required the government to pay rent to Bowery and to bear the cost of all utilities without setoff from rent.

The government appeals, principally, from so much of the April 17, 1979 order as requires it to pay utilities without setoff from the rent, arguing that the district court was without jurisdiction to impose such a condition on the United States. The government appeals also from the denial of its motion by letter dated June 1, 1979, to require Bedford to post a bond. Appellees have moved for dismissal of the government's principal appeal for lack of appellate jurisdiction.*fn1 We hold that we have jurisdiction to hear the principal appeal, and that the district court had jurisdiction to enter the preliminary injunction. However, we conclude that the preliminary injunction must be modified with respect to the amount the government is to be required to pay, and therefore remand so that the district court may modify its order in accordance with this opinion.


A. The Original Lease

Bedford, a partnership consisting of defendants-appellees Doris Carver and Samuel Ades, owns the twenty-one story office building at 120 Church Street in New York City.*fn2 Bowery holds a consolidated first mortgage on the premises. The entire building is occupied by the Manhattan District Headquarters of the Internal Revenue Service ("IRS").

In 1962, the United States General Services Administration ("GSA") executed a lease of the premises with Bedford. The lease had an initial ten-year term, from November 1, 1963, through October 31, 1973, with two five-year renewal options exercisable by the government on notice at least 180 days prior to the expiration of the lease term. The government exercised its first renewal option in 1973, after obtaining successive reductions of the notice period to 90 and 30 days, and after obtaining several extensions of the deadline for notice necessitated by delays in securing the required Congressional approval.*fn3 The government did not exercise its second renewal option.

The lease required annual rent payments of $1,949,500 during the first ten years, $2,115,499 during the first five-year renewal term, and $2,226,194 during the second five-year renewal term. Bedford was obligated to provide and bear the cost of various services, including electricity, cleaning, security, maintenance and repairs. It was also to provide and pay for heat, air conditioning and elevator service from 8 A.M. to 6 P.M. during the week, and to provide those services at other times for specified rates of additional compensation.

From time to time, and with increasing frequency during the first renewal term, Bedford complained about losses it assertedly was incurring in the operation of the building. One point of contention concerned the government's responsibility for certain electricity charges. Over the course of its occupancy, the government has installed a number of new office machines which consume electricity. Since this office machinery was not included in the government's original solicitation, the government was responsible for the cost of the electricity it used. However, it appears that the parties have never determined the precise extent of these excess costs. The government concedes in this Court that it remains responsible for some electricity payments for such consumption.

The government, for its part, has often sought changes in the building's physical plant. As a result, the parties entered into a series of supplementary agreements under which Bedford made various alterations to the building and was reimbursed for them by the government. Supplemental agreement number 24 is of more immediate concern than the others because it also dealt with payment of utilities expenses.

Under this supplemental agreement, dated December 15, 1975, the owners released the government from any claims for excess electricity consumption through that date, and agreed to make specified alterations on four floors of the building, in return for which the government agreed to assume the cost of all utilities, in addition to the specified amount of rent, for the remainder of the first renewal term, through October 31, 1978. At about the same time, Bedford and Bowery executed a forbearance agreement, under which the mortgage payments were reduced and Bowery obtained the right to an assignment of rents in the event of default.

B. The Quest for a New Lease

By early 1977, Bedford was complaining that its losses were larger than ever. At the same time, IRS apparently had become quite dissatisfied with the 120 Church Street building. Thus, the government started looking for new premises. GSA conducted a market survey of lower Manhattan, and on the basis of information obtained from IRS, drafted a solicitation for bids which it sent to twelve potential offerors in June 1977. The solicitation called for offers of 317,000 square feet in lower Manhattan, to be occupied by IRS beginning November 1, 1978. GSA received three responses on the return date, August 15, 1977, one of which was a new offer from Bedford for the 120 Church Street building. GSA considered all three offers to be incomplete in various respects, and thus began to gather further information and to negotiate over terms with the three offerors. By December 1977, GSA had rejected the two other offers, leaving Bedford's new offer and the second renewal option as its only alternatives. The renewal option, for 369,000 square feet at an annual rent of $2,226,194, did not include the alterations needed to satisfy IRS.

Bedford's August 15, 1977 offer provided for 350,000 square feet at an annual rent of $3,073,000, and included various alterations which Bedford estimated would cost $1 million. GSA deemed the proposed alterations insufficient, and the offer was, on its face, for more space than the solicitation requested. (It later transpired that the parties disagreed on how the space was to be measured and, consequently, on how much space the building contained). The parties engaged in further negotiations. As these progressed, Bedford modified its offer by a series of letters. In a letter dated December 8, 1977, Bedford offered 317,000 square feet (with an option on 8000 more) for a fixed term of ten years, at an annual rent of $2,902,160,*fn4 with alterations estimated by Bedford to cost $2.6 million. In its original offer and in all modifications made during the following six months, Bedford was to pay for utilities.

As noted above, the solicitation requested that the premises be ready for occupancy on November 1, 1978. Nevertheless, the solicitation recognized that the contemplated renovations might not be completed by that date and required that they be completed no later than eighteen months after the date of the lease. This created a question as to what rental would be paid during the period between November 1, 1978, and the completion date. Bedford sent GSA two letters which specifically addressed this point. The first letter, dated November 18, 1977, proposed that rent be calculated, in effect, on a per floor basis: for each unrenovated floor Bedford would be paid at the second renewal option rate ($185,516 per month for the entire building); for each renovated floor, Bedford would be paid at the new lease rate ($241,847 per month for the entire building). Thus, the rental payments would escalate as construction progressed.*fn5 There was no suggestion in the November 18, 1977 letter that the government pay for utilities.*fn6

The second letter, dated March 2, 1978, proposed a scheme of rental payments under which the government would continue paying at the rate then in effect i. e., the first renewal option rate ($176,292 per month) plus all utilities costs until completion of the renovation or eighteen months after execution of the new lease, whichever came first. There was testimony that Bedford and GSA had discussed this variation many times in December 1977 and January 1978, and that the March 2 letter was sent in response to GSA's suggestion that Bedford put the proposal in writing. GSA eventually responded, however, orally and by letter dated April 5, 1978, that it would not consider the March 2 proposal or any further revisions of Bedford's offer at that time, but that it would consider the March 2 proposal after the offer had been approved by Congress and the lease had been awarded to Bedford.*fn7 Bedford did not insist that the March 2 letter be included in its offer, but apparently chose to acquiesce in GSA's exclusion of the proposal.

GSA's April 5 letter brought to a temporary halt negotiations over the substance of Bedford's offer. Bedford argues that so many vital terms had been left inconclusive at this point including the amount of rent to be paid during the renovation period, the number of square feet in the building, the amount of space to be occupied by the government, and the extent of Bedford's responsibility for utilities payments that no lease was created when the government subsequently accepted the offer.

Alternatively, Bedford argues that any resulting lease was unenforceable because it was entered into under duress and because its terms were unconscionable. At the hearing below, Bedford witnesses testified that the various changes Bedford made in its offer were made at the instance of GSA under the threat of competition from other bidders (the seriousness and duration of which are alleged to have been misrepresented) and the threat that if the changes were not made, GSA would exercise the second renewal option under the old lease. The witnesses testified that all parties to the negotiations knew that such a renewal would have a disastrous economic impact on Bedford.*fn8

GSA's solicitation had specified that all offers were to remain open until April 15, 1978. In February 1978, GSA obtained an extension of Bedford's offer until July 1, 1978. During the summer of that year GSA obtained several further extensions, and in the autumn GSA asked for and obtained extensions of both the time to accept Bedford's new offer, and the time to exercise the second renewal option under the old lease,*fn9 until October 31, 1978. Bedford repeatedly asserted during this period that the delay in obtaining Congressional approval was causing the costs of the proposed alterations to increase substantially.

GSA was notified on October 25, 1978, that Congressional approval had been obtained. On October 30, GSA delivered to Bedford a letter accepting Bedford's offer, which it identified as Bedford's August 15, 1977 submission "as amended by letters dated September 6, 1977, November 1, 10, 15, 17, 18 and 28, 1977, December 8, 1977, January 31, 1978 and February 1, 1978."*fn10 GSA's letter specified that the annual rental, covering all services, utilities and alterations, was to be $2,902,160. On November 14, Bedford wrote GSA, urging that Bedford be paid rent at that level immediately. On December 13, GSA presented Bedford with the proposed lease for execution. This lease consisted of a standard form "U.S. Government Lease for Real Property," GSA's solicitation for offers, Bedford's original offer, and the subsequent letter changes to that offer, including the November 18 letter but not the March 2 letter, and a rider specifying that pending renovations, the annual rent would be $2,226,194, or $185,516 per month. Bedford rejected the proposed lease by one of two letters to GSA dated December 15, 1978, on the ground that it did not conform with the solicitation and award. This letter did not elaborate on this assertion, other than to refer to a November 21, 1978 letter from Bedford to GSA which (1) pointed out that a premise of the government's solicitation and of Bedford's submissions had been that the renovation of at least several floors would have been completed by November 1, 1978, and (2) detailed the substantial increases in construction costs and financing costs that had occurred during the year. Bedford's other letter to GSA dated December 15, 1978 also detailed cost increases and concluded that the alterations originally estimated to cost $2.6 million would now cost an estimated $3.8 million.

After Bedford's rejection, the parties entered into renewed negotiations in which Bedford asserted that because of the government's delays, its current losses had become enormous. Bedford witnesses at the hearing below testified that at the time Bedford submitted its offer and during the subsequent negotiations in late 1977, they believed that work on the proposed alterations would commence in January, or at the latest April, 1978. They testified that due to escalating costs, the subsequent delays in obtaining Congressional approval had rendered their offer economically unfeasible. Thus, in Bedford's view, Bedford was entitled to relief from the terms of its offer.

The parties failed to resolve their differences through negotiation, and Bedford did not start work on the proposed alterations. The government paid rent at the second renewal option rate of $185,516 per month for November and December. In December the government decided to deduct utilities payments it was making from its rent checks to Bedford. Thus, the government tendered a check for January rent in the amount of $151,187, and a check for February rent in the amount of ...

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