ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of

-- ) ) Mach I AREP Carlyle Center LLC ) ) Under ContractNo. DACA-31-5-2010-0181 )

APPEARANCES FORTHE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 59821

Terry L. Elling, Esq. Gregory R. Hallmark, Esq.

Holland & Knight LLP Tysons Corner, VA

Thomas H. Gourlay, Jr., Esq.

Engineer ChiefTrial Attorney Richard P. White, Esq. Michael Shields, Esq. Jennifer L. McGrath, Esq.

EngineerTrial Attorneys U.S. Army Engineer District, Baltimore

OPINION BYADMINISTRATIVE JUDGE PROUTY

This case involves the earlier-than-anticipated termination ofa lease entered by the United States Army Corps ofEngineers (the Corps) with appellant Mach I AREP Carlyle CenterLLC (Mach I) for office space in the Northern Virginia suburbs of Washington, DC. The lease ostensibly required the Corps to exercise nine separate one-year options after its first year, so long as Congress appropriated sufficientmoney each year for the lease, and obligatedthe government to use its "best efforts" to obtain such an appropriation from Congress. In the midst ofperformance, after imposition of mandatory budget cuts through the "sequester,"the government notified Mach I that it
was "terminating"the lease at the end ofthe current option year and subsequently reorganized the portion ofthe Department ofDefense that was acting as a tenant in the subject lease property such that it no longerneeded the lease property. The government then paid Mach I the amount ofmoney requiredby a contract clause that governed lease terminations in the event oflost appropriations. Thus, we are presentedwith the question ofwhetherthis termination and/or the events leading up to it constituted a breach ofthe lease contract.
The parties electedto proceed without an evidentiary hearing, via Board Rule 11, with each side relying upon the Rule 4 file and its supplements and submitting opening and reply briefs in accordance with an agreed-upon schedule. Forthe reasons set forth below, we conclude that the terms ofthe lease requiring the "automatic" exercise of option years are contrary to law and thatthe government's decision notto exercise the next option was thus not a recoverable breach ofcontract.FINDINGS OF FACT

I. The Lease

On 4 February 2010, the Corps issued a "Solicitation for Offers" to obtain for leasing by the Corps ofapproximately 22,000 square feet ofoffice space (R4, tab 2 at 1). Carlyle-Lane-CFRI Venture II, L.L.C. (Carlyle-Lane) responded with an offer on 19 February 2010 (R4, tab 3). The government selected Carlyle-Lane for the lease, and the parties executed ContractNo. DACA-31-5-2010-0181 (the lease) on 14 June 20I0 for the fifth floor ofa building in Alexandria, Virginia (R4, tab 4 at 1 ). Paragraph 1ofthe lease specified that the lease term was one year from the "CommencementDate" (R4, tab 4 at 4). The lease commencement date was, in fact, 1November 2010 1(R4, tab 5 at 2). The next provision ofthe lease, paragraph 2, entitled "GOVERNMENTRELIABILITY AND RENEW AL" envisions nine one-year extension options. We thus quote it in its entirety:

This lease may be renewed at the option ofthe Government, for the following period and at the following terms:
This Lease shall be renewed from yearto year for a nine (9) yearperiod, provided that adequate appropriations are available from yearto year for rental payments which shall be confirmed in writing by the Governmenttothe Landlord nine (9) months in advance ofthe last day ofthe current Lease year, and provided further thatthis Lease shall in no event extend beyondthe tenth (I0th) anniversary ofthe initial Commencement Date. In the event that Congress does not appropriate funds for continuance ofthe mission supported by the subject Lease, the Government's liability shall be limitedto the Rental Adjustment amount, shown in Schedule 1attached hereto, effective in the current Lease yearthat a Renewal is not exercised. Such Rental Adjustment shall be payable to Landlord four (4) months priorto the last day of the Lease.
(R4, tab 4 at 1-2)

1The government document cited here actually states "l/1/2010" as the Commencement Date, but, in context, this appears to be a typographical error, given that the end date ofthe lease is on 31 October 2020 and the contract was only awarded in June 2010 (see also R4, tab 12 at 54). 2Appropriations were addressed in paragraph 9 ofthe lease, entitled "PROCUREMENTAUTHORITY," which imposed upon the government an obligation to seek funding from Congress and which provides:

The Government's obligation hereunder is made contingent upon Congress enacting appropriations in support ofthe mission requiring this leased space. The supplies and services to be obtained by this instrument are authorized by,
are for the purpose set forth in, and are chargeable to ProcurementAuthority NumberFW1F3D61G%07610, the available balance ofwhich is sufficient to coverthe costs set forth in this Lease.

The Government shall use its best efforts to obtain and maintain all necessary appropriations and related approvals in connection with this Lease.
(R4, tab 4 at 6)

The real estate contracting officer, without contradiction by Mach I, explained in his declaration that the ProcurementAuthority Number referenced above in paragraph 9 ofthe lease referred to money available at the time ofthe execution ofthe lease for its first year (supp. R4, tab 138 at 2,**~** 6).

Two more provisions ofthe contract are particularly importantto the dispute here. First, paragraph 3, labeled "TERMINATION," sets forth the government's liability in the eventthat the lease is terminated due to loss ofprocurement authority. It provides, in relevant part, that:

Not withstanding [sic] the rights provided in any other Paragraph, in the eventthe Government's procurement authority set forth in Paragraph 9 ofthis Lease is not obtained in any Lease Year otherthan the first Lease Year, then the Government may terminate this lease within nine (9) months after the procurement authority is denied provided notice is given in writing to the Lessor at least eight (8) months in advance ofthe intended early Termination date. The Government's liability shall be limited [to] the Rental Consideration owed priorto the Termination date and the Rental Adjustment amount, shown in Schedule 1attached hereto, effective in the Lease Year the Termination is exercised.
(R4, tab 4 at 2)
3The lease also includes a form "TENANT ESTOPPEL CERTIFICATE," to be used when necessary (see R4, tab 4 at 35), which provides in partthat:

11. Thatthe Commencement Date ofthe Lease was

----, and this lease shall be automatically renewed from yearto year without notice unless and until the tenant shall give notice oftermination in accordance with the lease. The lease shall in no event extend beyond

___ _ (Id. at 36)

On 4 February 2013, at Carlyle-Lane's request, the government executed a tenant estoppel certificate for the use ofMach I, a prospective buyer ofthe property, in accordance with the form attached to the lease (R4, tab 5). On 14 February 2013, Carlyle-Lane soldthe property and the lease to Mach I (app. supp. R4, tabs 43, 45-47). By Supplemental AgreementNumber 8, the government acknowledgedthat the lease
was assigned to and assumed by Mach I (R4, tab 6).

II. Defunding of The Lease by the Department of Defense

The Budget Control Act of2011, Pub. L. No. 112-25, 125 Stat. 240 (2011), set forth mandatory mechanisms for reducing federal spending that were to automatically go into effect on 2 January 2013 unless the Administration and Congress negotiated a different agreement (R4, tab 13 at 3, 5). These automatic cuts, known as "sequestration," were to be in the amount of$1.2 trillion over 10 years and were to fall equally upon defense and non-defense accounts (R4, tab 13 at 3). Although Section 901(c)(l) ofthe American Taxpayer ReliefAct of2012 (Pub. L. No. 112-240, 126 Stat. 2313 (January 2, 2013)), delayed the onset ofsequestration until 1March 2013, the Administration and Congress failed to come to an agreement upon the budget and,
on 1March2013,President Obama ordered sequestration into effect (R4, tab 21).

The record reflects no immediate effect ofthe sequestration orderupon the lease. In an undated memorandum, the "CustomerAgency"2requested that the Corps seek to terminate the lease, effective 31 October 2014 (R4, tab 7). Presumably, subsequentto receiving this undated memorandum, on 28 February 2014, the Corps wrote a letterto Mach Iproviding "official notification that the Government elects to terminate this lease, effective 31 October 2014" (R4, tab 8). This letter made no mention oflack of appropriations (id.).

2 Because ofthe classified nature ofthe work performed by the unit occupying the space obtained by the leased, we refer to it as the "TenantOrganization" while we refer to its parent organization as the "CustomerAgency" throughout. 4 

# IIn the summer of2014 during option year 3 ofthe lease, the Corps broke with its priorpractice and made no request for funds from the CustomerAgency for the lease

- presumably because the Corps had already notified Mach I ofits intent to end the lease 

### (see gov'tbr. at 6-7,**~** 25 and citations therein). 3 No funding, in fact, was allocated to the Corps for the lease in the summer of2014 or any time subsequently (supp. R4, tab 138 at 2).

In a 3 December 2013 memorandum to the Director ofthe Customer Agency from the CustomerAgency's Director ofOperations, which cited an 8.5% reduction in funds for the CustomerAgency in Fiscal Year 2015 due to sequestration, authority was sought to "disestablish"the Tenant Organization which had ceased operations on 1October 2013 (supp. R4, tab 128 at 1). On 4 December 2013, this request was formally approved and the Tenant Organization officially ceased to exist (id. at 2).



### Ill. The Dispute

Inthe meantime, after receiving the 28 February 2014 letter from the Corps terminating the lease, Mach I stated its beliefthatthe termination did not comply with the terms ofthe lease. On 12 March 2014, representatives ofthe Corps and Mach I met to discuss the termination letter. (R4, tab 9 at 1) They discussed a rental adjustment amount, pursuantto paragraph 3 (termination) ofthe lease, and Mach I requested the "back-up documentation"purportedly required byparagraph 3 ofthe lease (id.). By letter dated 27 March 2014, Mach I informed the Corps that it consideredthe lack ofthe back-up documentation supporting the lease termination to be non-compliant with the lease's terms, and that Mach I was thus rejecting the Corps' "offerto terminate the Lease" (id. at 1-2). Mach I went on to state that it consideredthe lease to "remain[] in full force and effect" (id. at 2).

The Corps responded to Mach I's 27 March 2014 letterwith a letter dated 24 April 2014 (R4, tab 10). In this letter, the Corps informed Mach I that it did not considerthe lease to require the governmenttoprovide "back-up documentation" to support its termination and that obtaining such documentation would be problematic given the classified nature ofthe Tenant Organization's mission, although the Corps was authorized to inform Mach Ithat "the mission that occupied the space was terminated as of31 December 2013 due to cuts in funding as appropriated by Congress to their parent organization. That is, because offunding level cuts, the parent organization terminated

...the mission." (Id. at 1-2) The Corps also explained that it did not consider its priortermination letter (which it characterized as a "termination notice") to constitute

3 Theparties appear to agree with this fact, 

### i.e., thatthe government made no further attempts to obtain such funding, although the recordbefore the Board never directly proves as much. Given the decision that we make below, there is no need to seek further support for this allegation, which we believe to be most likely true in any event. 5a "request"to terminate the lease, but, rather, a notification that it hadterminated the lease (id. at 1 ).

Mach I respondedto the Corps with a 21 May 2014 letter sentby its counsel arguing that the Corps was compelledto make its bestefforts to obtain funding for the lease and that it had not done so (R4, tab 11). Apparently nothaving received what it consideredtobe a satisfactory response from the Corps, on 11 August 2014, Mach I filed a certified claim with the real estate contracting officer (R4, tab 12). The claim alleged thatthe governmenthadrepudiated the lease andthat Mach I was entitled to $5,879,487 in damages less $1,138,400 already paid bythe government or $4,741,087 (id. at 6).

Thereal estate contracting officer issued a final decision on 12 December 2014 denying Mach I's claim (R4, tab 1). Mach I then filed a timely appeal to the Board.

DECISION

While the inclusion ofa provision requiring the governmentto use its best efforts to secure funding for the option years ofthe lease may haverepresentedthe parties' effort to enter into a 10-yearlease which couldhavepotentiallybeen to the advantage of both parties, any provision for "automatic"renewal is precludedbythe longstanding Supreme Courtprecedent interpreting the Anti-Deficiency Act (ADA), which cannot be evadedbythe inclusion ofa "bestefforts" clause.4 Thus, the lease cannotbe breached by failure to exercise its options, and Mach I's remedies are limited to those set forth in the lease, whichhave already been paid.
I. "Automatic"Renewal of the Lease is PrecludedbyLaw

Mach I makes a good argumentthat, based upon its text, the lease required "automatic"renewal (i.e., exercise ofoption years) subject to the availability of appropriated funds, which the governmentwas required to use its bestefforts to obtain (see app. br. at 2, 18-21). This is consistentwith the language in paragraph 2 ofthe lease stating that it "shall"be renewed from year to year so long as funds were available, and the contractually-mandated language in the "TenantEstoppel Certificate"

- which directly stated that, "this lease shall be automaticallyrenewed from yearto yearwithout notice unless and until the tenant shall give notice oftermination in accordance with the

4 By statute, the General Services Administration (GSA) is given the authority to enter a long-term lease withoutrunning afoul ofthe ADA. See SpringfieldParcel, LLC
v. UnitedStates, 124 Fed. Cl. 163, 189-90 (2015) (citing 40 U.S.C. § 585(a)(2)). This authority, however, is limited to the GSA and does not extend to the Corps ofEngineers. 6lease."5 The termination clause in paragraph 3, moreover, requires the government to give Mach I eightmonths' notice before "early [t]ermination," which is more consistent with the notion that anything other than continual exercise ofthe option years constitutes
a termination ofthe contract, ratherthan apermissive action by the government. Indeed, the notice from the governmentto Mach I that the lease was ending was referenced as a "terminationnotice" ratherthan a simple statement declining to exercise an option.

But for 90 years, the controlling law has forbidden such an agreement, and that law has not changed. InLeiter v. UnitedStates, 271 U.S. 204 (1926), the Supreme Court concluded, in somewhat similar circumstances to those presented here, that the contemporary version ofthe ADA,6 dictated that:

A lease to the Government for a term ofyears when entered into under an appropriation available for but one fiscal year, is binding onthe Government only in thatyear. McCollum v. UnitedStates, 17 Ct. Cl. 92, 104; Smoot v. UnitedStates, 38 Ct. Cl. 418, 427. And it is plainthatto make it binding for any subsequent year, it is necessary, not only that an appropriation bemade available for the payment ofthe rent, butthatthe Government, by its duly appointed officers, affirmatively continue the lease for such subsequent year; thereby, in effect, bythe adoption ofthe original lease, making a new lease underthe authority ofsuch appropriation for the subsequent year.
271 U.S. at 207.

The facts inLeiter are illuminating. The government, through the Department of the Treasury, had entered into leases for a period ofyears thatprovided for stipulated annual rentals to be paid monthly, although

- just like the lease at issue here

- the appropriations available atthe time thatthe leases were signed were only sufficient for their first year. See 271 U.S. at 205. The leases inLeiterprovidedthatthe terms of occupancy should extend to 30 June 1925, "'contingentupon' the making available by Congress ofappropriations out ofwhichthe rent might bepaid afterthe current fiscal year; andthat ifsuch appropriationwas not made for any fiscal year, the lease should terminate as of[the end ofthe last fiscal year for which the appropriation was available]." 

### Id. After a few years ofperformance, although appropriations were made for the fiscal yearbeginning 1July 1922, the government terminated the leases as ofthat

5 A completed certificate was issued to Mach I priorto its purchase ofthe property (R4, tab 5). 6 Then, section 3679 ofthe Revised Statutes; now, 31U.S.C.§1541(c)(l). The requirements set forth by their operative terms are not materially different for our purposes here. 7date. Id. Itwas these terminations, notwithstanding the government'spromise to continue the leases for an additional three years ifit had obtained the appropriations (which it did), that were the subject ofthe lawsuit against the government in Leiter. Id. at 205-06. And the end result was that, notwithstanding the existence ofthe necessary appropriations, the government was not obligated to renew the leases. Id. at 207.

A similarresult followed in Goodyear Tire & Rubber Co. v. UnitedStates, 276 U.S. 287 (1928). Goodyear was another case involving the government's agreement to a multi-year lease subjecttoproper appropriations, and in which the government agency had received the necessary appropriation for the future year before it, nevertheless, terminatedthe lease. See 276 U.S. at 290-91. Relying uponLeiter, the Supreme Court determined that the government's action was not a breach ofcontract and went so far as to permitthe governmentto cancel the lease, hold over for six months, and only be subjectto damages for the six month hold-overperiod, rather than the one-year leaseperiod. Id. at 293.

Leiter and Goodyear remain good law and have not been overruled or questioned.7 Although Leiter is dispositive, Mach I has not meaningfully addressed it or materially distinguished it from the case here. Indeed, Mach I appears to misapprehend the central holding ofthe case. In its opening brief, Mach I characterizes the holding of Leiter as "unremarkable" and standing merely for the proposition that appropriated funds must be available and that a government official "affirmatively continue" a lease
over the years for it to be lawful (see app. hr. at 20-21). Mach I argues that the lease here accomplished these requirements by imposing an affirmative obligation upon the governmentto renew the lease ifthe funds were available (id.). But, Leiter went much further than Mach I recognizes: it precluded the initial contract from imposing upon future government officials a duty to automatically renew the lease, as Mach I claims happenedhere. Indeed, it would be nonsensical for the Supreme Court to have held (as Mach I argues) that government officials could not contract for a multi-year lease to be renewed automatically in the eventthatthere was sufficient funding, but could contract for the exact same thing by including a term that future government officials

7 We would be remiss, however, ifwe did not acknowledge a recent case, not cited by appellant, in which the United States Court ofFederal Claims (CoFC), has opined that binding options in multi-year contracts might not violate the ADA. See Northrop Grumman ComputingSys. v. UnitedStates, 93 Fed. Cl. 144, 150 (2010) (citingRCSEnters. v. UnitedStates, 57 Fed. Cl. 590, 594-95 (2003); Cray Research v. UnitedStates, 44 Fed. Cl. 327, 332 (1999); and Solar Turbines Int'!
v. UnitedStates, 3 Cl. Ct. 489, 494-95 (1983)). CoFC cases, ofcourse, are not binding upon us and we do not find thatNorthrop Grumman or any ofthe cases cited therein provide us any reason to depart from the dictates ofLeiter and Goodyear. Moreover, these CoFC cases cited are simply not apposite to the factual circumstances presented here.8would renew the contract every year in the event that there was sufficient funding. The dictates ofthe law may not be evaded by too cleverwordplay.

In its reply brief, Mach I unpersuasively argues that, in 

### Leiter and 

### Goodyearthe federal agencies involved did not have specific statutory leasing authority, unlike the
case here, where the Corps has been granted such authority (app. reply br. at 7). This
was important, Mach I asserts, because, "[t]he Court's finding that some affirmative action was necessary to renew the leases in those cases was apparently based on the agencies' lack ofstatutory leasing authority" (id.). We read them differently. The rulings were based purely on the ADA. Itis tellingthat Mach I neverpoints to any particularpart ofthe opinions to demonstrate this "apparent"basis. We have reviewed the opinions closely and find no support for this reading.

Mach I also argues, in its reply brief, that the parties' conduct during the first several years ofthe lease, during which the real estate contracting officer allegedly treated the lease as ifit were automatically renewed, somehow demonstrates that the lease should be treated as ifit were automatically renewing (app. reply br. at 7-8). Ifthe issue before us were simply one ofcontract interpretation, this argument might have merit, butthe salient consideration here is what contract is permitted by law

- and the parties' prior conduct here does not change the meaning and implications of

### Leiter and 

### Goodyear in any way.


### 11 In theAbsence of"Automatic Renewal," the Government's Failure to Renew the Lease is nota Compensable Breach of Contract

The end results of

### Leiter and 

### Goodyear make clearthat, in the absence ofa validly-exercised option, there can be no liability against the government for its failure to continue a lease in future years. Ironically, Mach I recognizes this in the conclusion ofits reply brief, in which itpresents a quote from Justice Holmes's dissent in 

### Goodyear, expressing his displeasure withthe results, by which "the United States could accept the contract and repudiate the consequence" (app. reply br. at 15 (quoting 276 U.S. at 293-94)). Although Mach I argues thatJustice Holmes's rhetoric demonstrates the perfidy ofthe government's position 

### (see app. reply br. at 15-16), the learned Justice's elucidation ofthe consequences ofthe binding majority opinion in 

### Goodyear are more to the point here. As Mach Iput it, "the Government here seeks to do precisely what Justice Holmes decried" (id. at 15). Stripped ofits value judgments, that statement by Mach I is more or less accurate, and, critically, it is more or less what the binding decisions in 

### Goodyear and 

### Leiter allow.

We further note that the existence ofthe "best efforts" clause here does not helpfully distinguish the case from 

### Leiter and 

### Goodyear. Even ifMach I were to argue that a breach bythe government ofthe best efforts clause was an independent breach of contract, separate and apart from the government's failure to exercise the options

9clause,8thatwould advance its cause little: in Leiter and Goodyear, the agencies already possessed the appropriations that the best efforts clause would have required them to attempt to obtain, but even with the appropriations in hand, their determination not to exercise the options was not an actionable breach ofcontract. Thus, even ifthe governmenthad fully complied with the best efforts clause here9 and had also been successful in obtaining the necessary appropriation, it still possessed an effective veto at the point ofoption renewal which could not be challenged as a breach ofcontract, precluding breach ofthe best efforts clause from being the proximate cause ofMach I's damages. Accordingly, the lease affords Mach I no remedy for the government's actions that ended in its nonrenewal. 10

Because ofthis determination, we need not decide the government's allegation that it complied withthe contract orthe further defenses that a best efforts clause in a contract signedby the Corps had no authority overthe Department ofDefense's decision-making orthatthe doctrine ofsovereign acts precludes government liability here.

8 In fact, we read Mach I's argument to be the one more straightforwardly rejected by the Supreme Court inLeiter and Goodyear, that it breached the contract by failing to renew it without the excuse oflack ofappropriated funds (see app. hr. at 18). 9 To be clear, we do not decide today whetherthe government did, in fact, breach the clause. As we demonstrate herein, whetherthe clause was complied with, was breached, or (as the government suggests, see, e.g., gov't hr. at 18-19) was unenforceable, makes no difference to the outcome ofthis case. 10 Butsee S.A. Healy Co. v. UnitedStates, 576 F.2d 299 (Ct. Cl. 1978), in which the Court ofClaims heldthat, while a "funds available clause" did not impose upon the government a requirementto seek funding from Congress, a contract with such a clause would not be "construedto throw all the cost and loss necessarily incident to such a decision on the contractor

...unless clauses ofthe contract require thatresult without ambiguity" and thatthe government was required to take measures to mitigate the losses incurred by lack offunding. 576 F.2d at 307. Neitherparty citedHealy, which is distinguishable factually from the case here by virtue ofthe type ofcontractpresented, the nature ofthe losses, and because the lease included the equivalent ofa liquidated damages clause, unambiguously setting forth the amount to be paid to Mach I when the lease was not renewed. 10CONCLUSION
By law, no lease can compel the Corps ofEngineers to exercise option years that
were not yet funded at the time the lease was entered. Accordingly, we grantjudgment in favor ofthe government. The appeal is denied.

Dated: 1June 2016

I concur

# /~~¥--- MARK N.

# STEM.PL~ '(£: Administrative Judge Acting Chairman Armed Services Board ofContractAppeals I concur

RICHARD SHACKLEFORD Administrative Judge Vice Chairman Armed Services Board ofContractAppeals

I certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals in ASBCA No. 59821, Appeal ofMach I AREP Carlyle CenterLLC, rendered in conformance with the Board's Charter.

Dated:

11 JEFFREYD. GARDIN Recorder, Armed Services Board ofContract Appeals