Court Opinion

ID: 3212670
Source: CourtListenerOpinion
Date Created: 2016-06-13 21:00:11.031272+00
Date Added: 2024-06-11T09:18:17.088776
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                 )
                                             )
Mach I AREP Carlyle Center LLC               )      ASBCA No. 59821
                                             )
Under Contract No. DACA-31-5-2010-0181 )

APPEARANCES FOR THE APPELLANT:                      Terry L. Elling, Esq.
                                                    Gregory R. Hallmark, Esq.
                                                     Holland & Knight LLP
                                                     Tysons Corner, VA

APPEARANCES FOR THE GOVERNMENT:                     Thomas H. Gourlay, Jr., Esq.
                                                     Engineer Chief Trial Attorney
                                                    Richard P. White, Esq.
                                                    Michael Shields, Esq.
                                                    Jennifer L. McGrath, Esq.
                                                     Engineer Trial Attorneys
                                                     U.S. Army Engineer District, Baltimore

                 OPINION BY ADMINISTRATIVE JUDGE PROUTY

       This case involves the earlier-than-anticipated termination of a lease entered by
the United States Army Corps of Engineers (the Corps) with appellant Mach I AREP
Carlyle Center LLC (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 sufficient money
each year for the lease, and obligated the government to use its "best efforts" to obtain
such an appropriation from Congress. In the midst of performance, after imposition of
mandatory budget cuts through the "sequester," the government notified Mach I that it
was "terminating" the lease at the end of the current option year and subsequently
reorganized the portion of the Department of Defense that was acting as a tenant in the
subject lease property such that it no longer needed the lease property. The government
then paid Mach I the amount of money required by a contract clause that governed lease
terminations in the event of lost appropriations. Thus, we are presented with the
question of whether this termination and/or the events leading up to it constituted a
breach of the lease contract.

       The parties elected to 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. For the reasons set forth
below, we conclude that the terms of the lease requiring the "automatic" exercise of
option years are contrary to law and that the government's decision not to exercise the
next option was thus not a recoverable breach of contract.
                                    FINDINGS OF FACT

         I.     The Lease

        On 4 February 2010, the Corps issued a "Solicitation for Offers" to obtain for
leasing by the Corps of approximately 22,000 square feet of office 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 Contract No. DACA-31-5-2010-0181 (the lease) on 14 June 20 I 0
for the fifth floor of a building in Alexandria, Virginia (R4, tab 4 at 1).

        Paragraph 1 of the lease specified that the lease term was one year from the
"Commencement Date" (R4, tab 4 at 4 ). The lease commencement date was, in fact,
1 November 2010 1 (R4, tab 5 at 2). The next provision of the lease, paragraph 2,
entitled "GOVERNMENT RELIABILITY AND RENEWAL" envisions nine one-year
extension options. We thus quote it in its entirety:

                This lease may be renewed at the option of the Government,
                for the following period and at the following terms:

                This Lease shall be renewed from year to year for a nine (9)
                year period, provided that adequate appropriations are
                available from year to year for rental payments which shall
                be confirmed in writing by the Government to the Landlord
                nine (9) months in advance of the last day of the current
                Lease year, and provided further that this Lease shall in no
                event extend beyond the tenth (I 0th) anniversary of the initial
                Commencement Date. In the event that Congress does not
                appropriate funds for continuance of the mission supported
                by the subject Lease, the Government's liability shall be
                limited to the Rental Adjustment amount, shown in Schedule
                1 attached hereto, effective in the current Lease year that a
                Renewal is not exercised. Such Rental Adjustment shall be
                payable to Landlord four (4) months prior to the last day of
                the Lease.

(R4, tab 4 at 1-2)

1
    The 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 of the lease is on 31 October 2020 and the contract was only awarded in
         June 2010 (see also R4, tab 12 at 54).
                                                2
       Appropriations were addressed in paragraph 9 of the lease, entitled
"PROCUREMENT AUTHORITY," 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 of the
              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
              Procurement Authority Number FW1F3D61G%07610, the
              available balance of which is sufficient to cover the 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 Procurement Authority Number referenced above in paragraph 9
of the lease referred to money available at the time of the execution of the lease for its
first year (supp. R4, tab 138 at 2, ~ 6).

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

              Not withstanding [sic] the rights provided in any other
              Paragraph, in the event the Government's procurement
              authority set forth in Paragraph 9 of this Lease is not
              obtained in any Lease Year other than 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 of the intended early Termination date.
              The Government's liability shall be limited [to] the Rental
              Consideration owed prior to the Termination date and the
              Rental Adjustment amount, shown in Schedule 1 attached
              hereto, effective in the Lease Year the Termination is
              exercised.

(R4, tab 4 at 2)

                                              3
                                                                                             I
      The lease also includes a form "TENANT ESTOPPEL CERTIFICATE," to be
used when necessary (see R4, tab 4 at 35), which provides in part that:

                       11. That the Commencement Date of the Lease was
               - - - -, and this lease shall be automatically renewed
               from year to year without notice unless and until the tenant
               shall give notice of termination 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 of Mach I, a prospective buyer of the property, in
accordance with the form attached to the lease (R4, tab 5). On 14 February 2013,
Carlyle-Lane sold the property and the lease to Mach I (app. supp. R4, tabs 43, 45-47).
By Supplemental Agreement Number 8, the government acknowledged that 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 of 2011, 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) of the American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240,
126 Stat. 2313 (January 2, 2013) ), delayed the onset of sequestration until 1 March 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 of the sequestration order upon the lease.
In an undated memorandum, the "Customer Agency" 2 requested that the Corps seek to
terminate the lease, effective 31 October 2014 (R4, tab 7). Presumably, subsequent to
receiving this undated memorandum, on 28 February 2014, the Corps wrote a letter to
Mach I providing "official notification that the Government elects to terminate this
lease, effective 31 October 2014" (R4, tab 8). This letter made no mention of lack of
appropriations (id.).

2   Because of the classified nature of the work performed by the unit occupying the space
        obtained by the leased, we refer to it as the "Tenant Organization" while we refer
        to its parent organization as the "Customer Agency" throughout.
                                             4
       In the summer of 2014 during option year 3 of the lease, the Corps broke with its
prior practice and made no request for funds from the Customer Agency for the lease -
presumably because the Corps had already notified Mach I of its intent to end the lease
(see gov't br. at 6-7, ~ 25 and citations therein). 3 No funding, in fact, was allocated
to the Corps for the lease in the summer of 2014 or any time subsequently (supp. R4,
tab 138 at 2).

       In a 3 December 2013 memorandum to the Director of the Customer Agency
from the Customer Agency's Director of Operations, which cited an 8.5% reduction in
funds for the Customer Agency in Fiscal Year 2015 due to sequestration, authority was
sought to "disestablish" the Tenant Organization which had ceased operations on
1 October 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

        In the meantime, after receiving the 28 February 2014 letter from the Corps
terminating the lease, Mach I stated its beliefthat the termination did not comply with
the terms of the lease. On 12 March 2014, representatives of the Corps and Mach I met
to discuss the termination letter. (R4, tab 9 at 1) They discussed a rental adjustment
amount, pursuant to paragraph 3 (termination) of the lease, and Mach I requested the
"back-up documentation" purportedly required by paragraph 3 of the lease (id.). By
letter dated 27 March 2014, Mach I informed the Corps that it considered the lack of the
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' "offer to terminate the
Lease" (id. at 1-2). Mach I went on to state that it considered the lease to "remain[] in
full force and effect" (id. at 2).

        The Corps responded to Mach I's 27 March 2014 letter with a letter dated
24 April 2014 (R4, tab 10). In this letter, the Corps informed Mach I that it did not
consider the lease to require the government to provide "back-up documentation" to
support its termination and that obtaining such documentation would be problematic
given the classified nature of the Tenant Organization's mission, although the Corps was
authorized to inform Mach I that "the mission that occupied the space was terminated as
of 31 December 2013 due to cuts in funding as appropriated by Congress to their parent
organization. That is, because of funding level cuts, the parent organization
terminated ... the mission." (Id. at 1-2) The Corps also explained that it did not consider
its prior termination letter (which it characterized as a "termination notice") to constitute

3
    The parties appear to agree with this fact, i.e., that the government made no further
        attempts to obtain such funding, although the record before 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.
                                                5
a "request" to terminate the lease, but, rather, a notification that it had terminated the
lease (id. at 1).

        Mach I responded to the Corps with a 21 May 2014 letter sent by its counsel
arguing that the Corps was compelled to make its best efforts to obtain funding for the
lease and that it had not done so (R4, tab 11 ). Apparently not having received what it
considered to be 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 that the government had repudiated the lease and that Mach I was entitled to
$5,879,487 in damages less $1,138,400 already paid by the government or $4,741,087
(id. at 6).

      The real 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 of a provision requiring the government to use its best efforts
to secure funding for the option years of the lease may have represented the parties'
effort to enter into a 10-year lease which could have potentially been to the advantage of
both parties, any provision for "automatic" renewal is precluded by the longstanding
Supreme Court precedent interpreting the Anti-Deficiency Act (ADA), which cannot be
evaded by the inclusion of a "best efforts" clause. 4 Thus, the lease cannot be breached
by failure to exercise its options, and Mach I's remedies are limited to those set forth in
the lease, which have already been paid.

        I.      "Automatic" Renewal of the Lease is Precluded by Law

       Mach I makes a good argument that, based upon its text, the lease required
"automatic" renewal (i.e., exercise of option years) subject to the availability of
appropriated funds, which the government was required to use its best efforts to obtain
(see app. br. at 2, 18-21). This is consistent with the language in paragraph 2 of the lease
stating that it "shall" be renewed from year to year so long as funds were available, and
the contractually-mandated language in the "Tenant Estoppel Certificate" - which
directly stated that, "this lease shall be automatically renewed from year to year without
notice unless and until the tenant shall give notice of termination in accordance with the

4
    By statute, the General Services Administration (GSA) is given the authority to enter a
         long-term lease without running afoul of the ADA. See Springfield Parcel, LLC
        v. United States, 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
        of Engineers.
                                              6
lease." 5 The termination clause in paragraph 3, moreover, requires the government to
give Mach I eight months' notice before "early [t]ermination," which is more consistent
with the notion that anything other than continual exercise of the option years constitutes
a termination of the contract, rather than a permissive action by the government. Indeed,
the notice from the government to Mach I that the lease was ending was referenced as a
"termination notice" rather than 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. In Leiter v. United States, 271 U.S. 204 (1926), the Supreme Court
concluded, in somewhat similar circumstances to those presented here, that the
contemporary version of the ADA, 6 dictated that:

                A lease to the Government for a term of years when entered
                into under an appropriation available for but one fiscal year,
                is binding on the Government only in that year. McCollum v.
                United States, 17 Ct. Cl. 92, 104; Smoot v. United States,
                38 Ct. Cl. 418, 427. And it is plain that to make it binding
                for any subsequent year, it is necessary, not only that an
                appropriation be made available for the payment of the rent,
                but that the Government, by its duly appointed officers,
                affirmatively continue the lease for such subsequent year;
                thereby, in effect, by the adoption of the original lease,
                making a new lease under the authority of such appropriation
                for the subsequent year.

271 U.S. at 207.

        The facts in Leiter are illuminating. The government, through the Department of
the Treasury, had entered into leases for a period of years that provided for stipulated
annual rentals to be paid monthly, although - just like the lease at issue here - the
appropriations available at the time that the leases were signed were only sufficient for
their first year. See 271 U.S. at 205. The leases in Leiter provided that the terms of
occupancy should extend to 30 June 1925, "'contingent upon' the making available by
Congress of appropriations out of which the rent might be paid after the current fiscal
year; and that if such appropriation was not made for any fiscal year, the lease should
terminate as of [the end of the last fiscal year for which the appropriation was
available]." Id. After a few years of performance, although appropriations were made
for the fiscal year beginning 1 July 1922, the government terminated the leases as of that

5
    A completed certificate was issued to Mach I prior to its purchase of the property
        (R4, tab 5).
6
    Then, section 3679 of the 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.
                                              7
date. Id. It was these terminations, notwithstanding the government's promise to
continue the leases for an additional three years if it had obtained the appropriations
(which it did), that were the subject of the lawsuit against the government in Leiter. Id.
at 205-06. And the end result was that, notwithstanding the existence of the necessary
appropriations, the government was not obligated to renew the leases. Id. at 207.

        A similar result followed in Goodyear Tire & Rubber Co. v. United States,
276 U.S. 287 (1928). Goodyear was another case involving the government's
agreement to a multi-year lease subject to proper appropriations, and in which the
government agency had received the necessary appropriation for the future year before
it, nevertheless, terminated the lease. See 276 U.S. at 290-91. Relying upon Leiter,
the Supreme Court determined that the government's action was not a breach of contract
and went so far as to permit the government to cancel the lease, hold over for six
months, and only be subject to damages for the six month hold-over period, rather than
the one-year lease period. 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 of the 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
government to 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
happened here. 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 event that there 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, if we did not acknowledge a recent case, not cited by
       appellant, in which the United States Court of Federal Claims (CoFC), has opined
       that binding options in multi-year contracts might not violate the ADA. See
       Northrop Grumman Computing Sys. v. United States, 93 Fed. Cl. 144, 150 (2010)
       (citing RCS Enters. v. United States, 57 Fed. Cl. 590, 594-95 (2003); Cray
       Research v. United States, 44 Fed. Cl. 327, 332 (1999); and Solar Turbines Int'!
       v. United States, 3 Cl. Ct. 489, 494-95 (1983)). CoFC cases, of course, are not
       binding upon us and we do not find that Northrop Grumman or any of the cases
       cited therein provide us any reason to depart from the dictates of Leiter and
       Goodyear. Moreover, these CoFC cases cited are simply not apposite to the
       factual circumstances presented here.
                                             8
would renew the contract every year in the event that there was sufficient funding. The
dictates of the law may not be evaded by too clever wordplay.

       In its reply brief, Mach I unpersuasively argues that, in Leiter and Goodyear the
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 of statutory leasing authority" (id.). We read them differently. The
rulings were based purely on the ADA. It is telling that Mach I never points to any
particular part of the 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 of the lease, during which the real estate contracting officer allegedly
treated the lease as if it were automatically renewed, somehow demonstrates that the
lease should be treated as if it were automatically renewing (app. reply br. at 7-8). If the
issue before us were simply one of contract interpretation, this argument might have
merit, but the 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 the Absence of "Automatic Renewal," the Government's Failure to
              Renew the Lease is not a Compensable Breach of Contract

        The end results of Leiter and Goodyear make clear that, in the absence of a
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
of its reply brief, in which it presents a quote from Justice Holmes's dissent in
Goodyear, expressing his displeasure with the 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 that Justice Holmes's rhetoric
demonstrates the perfidy of the government's position (see app. reply br. at 15-16), the
learned Justice's elucidation of the consequences of the binding majority opinion in
Goodyear are more to the point here. As Mach I put it, "the Government here seeks to
do precisely what Justice Holmes decried" (id. at 15). Stripped of its 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 of the "best efforts" clause here does not
helpfully distinguish the case from Leiter and Goodyear. Even if Mach I were to argue
that a breach by the government of the best efforts clause was an independent breach of
contract, separate and apart from the government's failure to exercise the options

                                             9
clause, 8 that would 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 of contract. Thus, even if the
government had fully complied with the best efforts clause here 9 and had also been
successful in obtaining the necessary appropriation, it still possessed an effective veto at
the point of option renewal which could not be challenged as a breach of contract,
precluding breach of the best efforts clause from being the proximate cause of Mach I's
damages.

       Accordingly, the lease affords Mach I no remedy for the government's actions
that ended in its nonrenewal. 10

        Because of this determination, we need not decide the government's allegation
that it complied with the contract or the further defenses that a best efforts clause in a
contract signed by the Corps had no authority over the Department of Defense's
decision-making or that the doctrine of sovereign 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 in Leiter and Goodyear, that it breached the contract by failing
        to renew it without the excuse of lack of appropriated funds (see app. hr. at 18).
9 To be clear, we do not decide today whether the government did, in fact, breach the

        clause. As we demonstrate herein, whether the 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 of this case.
10
    But see S.A. Healy Co. v. United States, 576 F.2d 299 (Ct. Cl. 1978), in which the
        Court of Claims held that, while a "funds available clause" did not impose upon
        the government a requirement to seek funding from Congress, a contract with
        such a clause would not be "construed to throw all the cost and loss necessarily
        incident to such a decision on the contractor ... unless clauses of the contract
        require that result without ambiguity" and that the government was required to
        take measures to mitigate the losses incurred by lack of funding. 576 F.2d at 307.
        Neither party cited Healy, which is distinguishable factually from the case here
        by virtue of the type of contract presented, the nature of the losses, and because
        the lease included the equivalent of a liquidated damages clause, unambiguously
        setting forth the amount to be paid to Mach I when the lease was not renewed.
                                              10
                                    CONCLUSION

       By law, no lease can compel the Corps of Engineers to exercise option years that
were not yet funded at the time the lease was entered. Accordingly, we grant judgment
in favor of the government. The appeal is denied.

      Dated: 1 June 2016

 I concur                                        I concur

/~~¥---
  STEM.PL~
 MARK N.                        '(£:             RICHARD SHACKLEFORD
 Administrative Judge                            Administrative Judge
 Acting Chairman                                 Vice Chairman
 Armed Services Board                            Armed Services Board
 of Contract Appeals                             of Contract Appeals

     I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 59821, Appeal of Mach I
AREP Carlyle Center LLC, rendered in conformance with the Board's Charter.

      Dated:

                                                 JEFFREY D. GARDIN
                                                 Recorder, Armed Services
                                                 Board of Contract Appeals

                                           11