Appeals from final judgments of the United States District Court for the Southern District of New York, Henry F. Werker, Judge, after a bench trial, dismissing the United States' claims for specific performance and damages under a disputed lease, ordering the United States to pay rent to appellees, and foreclosing mortgage against the United States and the other appellees. Affirmed in part, reversed in part, and remanded.
Before Moore, Mulligan, and Kearse, Circuit Judges.
These consolidated appeals, now before us for the second time, require us to determine the rights and liabilities of three parties interested in a 21-story office building located at 120 Church Street in New York City. Bedford Associates*fn1 owns the building; The Bowery Savings Bank ("Bowery") holds a consolidated first mortgage on it; and the United States Internal Revenue Service ("IRS") has occupied the building as its Manhattan District Headquarters since shortly after construction in 1962. The lease under which the IRS formerly occupied the building expired on October 31, 1978. This litigation commenced in March 1979, when the government sued Bedford for specific performance of, and damages under, a new lease it contended had been concluded through negotiations between Bedford and the General Services Administration ("GSA"). Bedford denied that these negotiations had produced a valid lease and counterclaimed for damages arising from the government's continued occupancy after the old lease had expired. At about the same time, Bowery brought an action to quiet title to the premises in itself and to foreclose its mortgage against the interests of Bedford and the government. Proceedings in the two actions were later consolidated.
The district court denied the government's motion to dismiss Bowery's foreclosure action, 491 F. Supp. 848 (S.D.N.Y.1980), and, after a bench trial, entered final judgments denying all relief to the government, awarding substantial damages to Bedford and Bowery, foreclosing Bowery's mortgage against Bedford and the government, and ordering the government to pay rent to Bowery. 491 F. Supp. 851 (S.D.N.Y.1980). In the present appeal,*fn2 the government renews its contention that the district court lacked jurisdiction to adjudicate Bowery's mortgage foreclosure action and assails the final judgment entered against it. We affirm in part, reverse in part, and remand for further proceedings.
I. FACTS AND PRIOR PROCEEDINGS
A. The Relations Among the Parties
The relationship between Bedford and the government commenced in 1962, when GSA and Bedford executed the initial lease of 120 Church Street. The 1962 agreement provided for an initial ten year term, commencing November 1, 1963, at an annual rental of $1,949,500. The agreement gave the government two five-year renewal options, with the annual rental set at $2,115,499 during the first renewal term, and at $2,226,194 during the second. The government exercised the first renewal option in 1973, and the IRS occupied the building under the old lease through October 31, 1978. The government did not exercise its second renewal option, and the old lease expired on October 31, 1978.
Relations between Bedford and the government were never perfectly smooth. Bedford periodically complained that it was losing money under the lease; one point of contention was the government's responsibility for certain excess electricity costs, not provided for in the original agreement, that resulted from IRS's increasing use of electrical office machines. The government, for its part, often sought changes in the building's physical plant. Although the parties were able to resolve many of their differences through supplemental agreements amending the lease, their relationship was becoming rather strained toward the end of the first renewal period. Bedford complained that its losses were mounting under the old lease, while the government had determined that 120 Church Street no longer met the IRS's needs. By early 1977, the government had decided to seek improved space.
In June 1977, GSA solicited several prospective lessors, including Bedford, for offers of appropriate leases. GSA's solicitation called for offers of 317,000 square feet of space on contiguous floors, plus an option on 8000 additional square feet, with the premises to be ready for occupancy by November 1, 1978. By August 15, 1977, when the solicitation period closed, GSA had received three offers, including an offer from Bedford for the 120 Church Street building. Bedford offered 350,000 square feet at an annual rental of $3,073,000, and proposed renovations that it estimated would cost it about $1 million. GSA deemed the proposed renovations insufficient, and the offer was, on its face, for more space than the solicitation requested. The two other offers, however, were also deficient in various respects. By December 1977, GSA had rejected those offers, leaving as its only alternatives Bedford's new offer and the second renewal option under the old lease. The renewal option, for 369,000 square feet at an annual rent of $2,226,194, did not include the renovations needed by IRS.
After extensive negotiations, the rocky progress of which is recounted in detail below, and after considerable delay in processing Bedford's offer, GSA delivered to Bedford, on October 30, 1978, an award letter purporting to accept Bedford's offer, as amended through the negotiations. On December 13, 1978, GSA presented Bedford a proposed lease for execution. Under this lease, Bedford was to be paid rent at the second renewal option rate of $2,226,194 per year until renovations were completed, at which time the rent would rise to $2,902,160 per year. Bedford rejected the proposed lease by letters dated December 15, 1978, claiming that the lease did not conform with the solicitation and award and pointing out the substantial cost increases that had occurred during the year.
The parties resumed negotiations after Bedford's rejection, but no progress was made. Bedford asserted that its losses had become enormous and that the delay in commencing the proposed renovations had rendered them infeasible. The government paid rent at the second renewal option rate in November and December 1978, and then decided to deduct utilities payments in January and February 1979. On March 8, 1979, Bedford demanded additional rent and utilities payments from the government. Apparently, the government did not respond to this letter. On March 20, 1979, Bedford notified GSA that it would close the building and terminate services to it on March 23, 1979, unless the government paid "a reasonable and fair rent" for its occupancy.
On March 22, 1979, the government filed suit against Bedford. As interim relief, the government sought a temporary restraining order and preliminary injunction against Bedford's threatened "lockout." For permanent relief, it sought specific performance of the new lease it said had been created through its negotiations with Bedford, including a permanent injunction against interference with its access to the building. The government also sought damages for Bedford's breach of the alleged new lease. Bedford consented to entry of a temporary restraining order against the lockout. Bowery was allowed to intervene in the action.
In the meantime, Bowery's mortgage on the building had fallen into default through Bedford's failure to pay real estate taxes and its failure to pay interest and late charges to Bowery. On March 19, Bowery demanded of Bedford an assignment of rents, and two days later filed suit against Bedford and the government. Bowery sought a declaratory judgment quieting title to the building, foreclosure of its mortgage against Bedford's and the government's interests, and an assignment of rents.
After an evidentiary hearing, the district court granted the government's motion for a preliminary injunction. The court's decree forbade Bedford to interfere with the government's occupancy of 120 Church Street, ordered the government to pay rent to Bowery at the second renewal option rate, and ordered the government to pay all utilities expenses, without setoff from its rental payments. Dissatisfied with the terms of its victory, the government appealed, arguing principally that the provision of the decree requiring it to bear utilities costs violated principles of sovereign immunity. After concluding that we had jurisdiction of the government's appeal, we affirmed the district court's imposition of the disputed term upon the United States as a condition of awarding equitable relief. We remanded the order, however, for modification of the amount of rent to be paid to Bowery and of the proportion of utilities costs to be borne by the government. United States v. Bedford Associates, 618 F.2d 904 (2d Cir. 1980).
Shortly after the preliminary injunction was entered, Bedford filed its answer to the government's complaint. Bedford denied that its negotiations with GSA had produced a lease agreement and, alternatively, argued that any agreement formed was unenforceable on grounds of unconscionability, misrepresentation, and duress. In addition, Bedford counterclaimed against the government for the fair market value rental of the premises. Later, Bedford answered Bowery's complaint in the mortgage foreclosure action, asserting that the court lacked subject matter jurisdiction of the action and that it was barred by laches, and counterclaiming against Bowery for payments from the rents Bowery was then collecting under the preliminary injunction. In May 1979, the government moved to dismiss Bowery's complaint in the foreclosure action on grounds of lack of subject matter jurisdiction. Eventually, the government answered Bowery's complaint, renewing its contention that subject matter jurisdiction was lacking and raising affirmative defenses of equitable estoppel, waiver, and unclean hands.
On remand after the first appeal, in an opinion and order dated March 18, 1980, the district court denied the government's motion to dismiss Bowery's complaint for lack of subject matter jurisdiction. Rejecting the government's argument that principles of sovereign immunity precluded Bowery's suit against it, the court held that 28 U.S.C. § 2409a (1976) permits the United States to be named as a defendant in actions "to adjudicate a disputed title to real property in which the United States claims an interest," and concluded that the government had thereby waived sovereign immunity as to an action by a mortgagee to foreclosure against the interest of the United States as occupant or lessee.
Shortly thereafter, the district court entered its final judgment and order on the merits. Briefly, the court denied all relief to the government and awarded substantial relief to Bedford and Bowery. Because a thorough understanding of the district court's findings of fact and conclusions of law is essential to our review of the judgment, we set them forth in some detail below.
C. The District Court's Opinion
The district court made extensive findings of fact concerning the expectations and conduct of the parties during the negotiations period, focusing on (a) Bedford's expectation that certain terms of the offer could be negotiated, or renegotiated, after the lease had been awarded; (b) the failure of Bedford and GSA to reach agreement on certain terms of the lease; (c) the oppressive effect of the lease upon Bedford; (d) GSA's conduct during the negotiations; and (e) Bowery's conduct.
a. Bedford's expectations concerning post-award negotiations. When GSA initially solicited offers in June 1977, it contemplated that the entire process of negotiating, obtaining congressional approval for,*fn3 and awarding the lease would be completed by April 1978. Because the term of the lease was not to commence until November 1, 1978, this schedule would have afforded the lessor several months in which to begin work on improvements called for under the solicitation. With this timetable in mind, the solicitation required that offers remain open until April 15, 1978.
As it happened, however, the process became delayed. For reasons unexplained, GSA did not recommend acceptance of Bedford's offer until April 1978, even though its decision to recommend the offer had been reached in November 1977. Not until June 1978 did GSA send to Congress for its approval a final prospectus concerning Bedford's offer. Because of these delays, GSA repeatedly requested Bedford to extend its offer beyond the April 15, 1978 expiration date. Bedford reluctantly granted these extensions, giving the last on September 27, 1978.
This delay sharply reduced the value of the proposed lease to Bedford. As GSA knew, Bedford had initially planned to complete the renovations called for in its bid by early 1978. As the delay in approving the lease prevented Bedford from beginning the renovations, their cost increased dramatically. Whereas Bedford's mid-1977 bid had contemplated renovation costs of approximately $1 million, by late 1978 the cost apparently had risen to some $3.8 million. In addition, utilities costs, which Bedford was to pay under the terms of its initial offer, had risen sharply.
Alarmed by these and other cost increases, which threatened it with ruin, Bedford repeatedly protested the delay and, as will be seen, sought to negotiate more favorable terms for several items of the offer. As will also be seen, the terms of some of these items were never finalized. The district court found that GSA indicated to Bedford, and Bedford reasonably believed, that all or most of these items could be renegotiated after the lease was approved and awarded. The district court also found that Bedford indicated to GSA that it did not intend to be bound by the terms of its offer with respect to the items said to be subject to: renegotiation.
b. Failure to reach agreement on certain terms. As stated above, the speedy completion of renovations at 120 Church Street was of great concern both to Bedford and to the government. On November 18, 1977, anticipating that many floors of the building would be renovated when the new lease took effect on November 1, 1978, Bedford by letter proposed to GSA that the government pay the rent called for under the second renewal option, on a pro rata basis, for any floors not renovated by November 1, 1978. Soon, however, as the processing of Bedford's offer became delayed and construction costs mounted, the firm realized that renovations could not proceed on schedule and that its November 18, 1977, proposal would not generate adequate rent. On March 2, 1978, Bedford by letter proposed instead that the government pay the first renewal option rent plus all utilities until the completion of construction or 18 months after the new lease was executed, whichever came first. The district court found that this letter withdrew the November 18, 1977 proposal. GSA decided to reject the March 2 proposal, but it did not immediately so advise Bedford; by letter dated April 5, 1978, it told Bedford that the proposal could be considered after an award was made. Although the new lease actually proffered to Bedford by GSA in late 1978 contained Bedford's November 18, 1977, proposal, the district court found that the parties had never agreed to it.
Another point on which Bedford and GSA never came to terms was the total area to be leased to the government. GSA's solicitation called for 317,000 square feet plus an option on 8000 more. Bedford's initial bid had offered the whole of 120 Church Street, containing, by its measure, 350,024 square feet. During the negotiations period, Bedford reduced the area it offered to 325,000 square feet, the total amount called for by the government's solicitation. As a result of these reductions, Bedford reasonably believed that the IRS would not occupy the whole building, as originally contemplated, and that one or two floors might be available to be leased on favorable terms to another tenant. By late 1977 and early 1978, however, GSA had apparently decided that it wanted the whole building. Because the parties disputed the applicability of a "10% corridor reduction factor,"*fn4 they were unable to agree on the total footage in the building and hence area to be leased, Bedford believing that the building contained enough space to accommodate another tenant in addition to IRS, and GSA believing that there was room only for IRS.
The third item on which the parties never agreed was the rate for "overtime" services, i. e., building services and utilities to be furnished by the lessor after normal business hours. The government's solicitation provided that the lessor would furnish such services on request at rates to be agreed upon. Bedford proposed rates for this potentially significant item, but no specific terms were ever reached.
c. The oppressiveness of the lease. The district court found that Bedford's August 1977 offer was made in good faith and was economically viable when made. However, as a result of GSA's delay in processing Bedford's offer and the increases in construction and utilities costs, the offer became uneconomical sometime early in 1978. The government's adoption of Bedford's November 18, 1977 proposal concerning rent during the renovations period, which the court found that Bedford had withdrawn in its March 2, 1978, letter, further diminished Bedford's return under the new lease. GSA was well aware of the harsh effect of the new lease upon Bedford. The rental fixed under the new lease, about $9.16 per square foot, was substantially below both GSA's appraised fair annual rental of $11.86 per square foot and its standard level user's charge*fn5 of $13.00 per square foot. In January 1979, when GSA was insisting that Bedford perform according to the new lease, a GSA audit estimated that Bedford would lose some $521,616 annually if it did perform.
d. GSA's conduct (i) Misrepresentations concerning Bedford's competition. Bedford initially offered 350,024 square feet at an annual rent of $3,073,210.72, or about $8.78 per square foot, with electricity costs included in the rent. The two other offers submitted to GSA called for substantially higher rents $14.41 per square foot in one case, and $12.07 per square foot in the other and neither included electricity. Given these substantial cost differentials, the other offers were not competitive with Bedford's offer. Despite the apparent superiority of Bedford's offer, GSA repeatedly represented to Bedford that its offer was not competitive with the others. Even after GSA had decided, unbeknownst to Bedford, to reject the other offers, and despite a provision in the bid solicitation assuring that bids would be kept confidential, GSA disclosed to Bedford certain portions of the rejected offers and represented to Bedford that its offer was not competitive with them. Through these misrepresentations concerning the extent of Bedford's competition, GSA extracted substantial concessions from Bedford that further diminished the value of the lease to Bedford.
(ii) Threats to exercise the second renewal option. GSA also exerted pressure on Bedford through repeated threats to exercise the second renewal option under the old lease. Under that lease as originally drafted, the second option was to expire if notice of intent to renew were not given 180 days before the first renewal expired. GSA believed, however, that a reduction of the notice period to 30 days negotiated for the first renewal option in 1973 also applied to the second option. Thus, GSA requested a waiver of the notice requirement in September 1978. Bedford, although believing that the government's right to renew had expired, ultimately granted the waiver in order to avoid litigation and on the understanding that the government would not exercise the second option if the new lease were approved. As early as November 1977, both GSA and Bedford knew that exercising the second option would bring ruin to Bedford, forcing it to sell the building. Indeed, GSA estimated that Bedford would lose more than $600,000 annually under the option. Moreover, GSA knew that it could not in fact exercise the option, for IRS could not function effectively at 120 Church Street without renovations and improvements. Despite its knowledge, GSA repeatedly told Bedford that it might exercise the option unless Bedford made further concessions.
e. Bowery's conduct. The district court found that Bowery's role during the negotiations was primarily that of anxious spectator. Bowery's mortgage, as amended in 1975, required Bowery's approval of any new lease of the premises. Although Bowery never received a complete copy of Bedford's initial offer, it knew enough by September 1978 to conclude, on a preliminary basis, that the lease as then proposed would be unacceptable to Bowery. Nonetheless, the district court found that Bowery, like Bedford, believed that any award made as a result of Bedford's offer would not be binding with respect to certain apparently open terms, but would merely serve as starting point for post-award negotiations. In particular, Bowery understood that the area ...