Opinion
No. C8-02-1437.
Filed April 29, 2003.
Appeal from the Ramsey County District Court, File No. C5013678
George B. Eck, Alexandra B. Klass, Andrew Holly, Dorsey Whitney, LLP, (for appellant)
Joseph T. Dixon, Jr., Scott A. Neilson, Henson Efron, P.A., (for respondent Outsourcing Solutions, Inc.)
David A. Gotlieb, Kevin R. Coan, Parsinen, Kaplan, Roseberg Gotlieb, P.A., (for respondent Sterling Roseville, L.L.C.)
Considered and decided by Minge, Presiding Judge, Kalitowski, Judge, and Hudson, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
In a dispute over liability for the unused balance in a tenant improvement allowance, the district court dismissed the purchaser's claims of misrepresentation by both the seller of a commercial building and a major tenant and granted summary judgment in favor of the seller and the tenant. Because we conclude that there are material questions of fact regarding the status of the account and the representations made by the seller and tenant that need to be resolved at trial, we reverse and remand.
FACTS
Respondent Sterling Roseville, L.L.C. (Sterling) owned a building known as Roseville Corporate Center. In 1998, Sterling leased a significant portion of the building to respondent Outsourcing Solutions, Inc. (OSI). As part of the lease agreement, Sterling provided a tenant improvement allowance (TIA) of $15.08 per rentable square foot to pay for leasehold improvements. The lease set forth the square footage; however, it did not give the TIA total of $685,000.
By the terms of the lease, OSI had until January 5, 1999 to submit final improvement plans or working drawings, which would be funded with the TIA. The lease provided that once plans had been submitted by the deadline, any remaining TIA would expire, with some exceptions not relevant to this proceeding. When OSI submitted its plans for leasehold improvements, it determined it would immediately leave 40% of the leased space as unfinished or "shell space." When the initial leasehold improvements were completed, OSI still had approximately $285,000 of unused potential TIA funds available, and no plans for improvements had been submitted prior to the January 1999 deadline for the remaining space.
On April 20, 1999, the firm managing the building sent a letter to OSI "to clarify some outstanding issues concerning the respective obligations of OSI and Sterling." With respect to the TIA account, the letter indicated that approximately $285,000 remained in the TIA, which OSI could use for the unfinished space "in accordance with the terms of the lease."
In March 2000, Sterling entered into a purchase agreement with North Prior for the sale of the Roseville Corporate Center. As part of the purchase agreement, Sterling represented that it had given North Prior copies of all leases and amendments and that there were no contracts, agreements or obligations relating to the property which extended beyond the closing date, "except those previously disclosed to the Buyer in writing." The purchase agreement further stated Sterling had given North Prior a "correct and complete copy of each Lease and all its amendments." No copy of the April 20, 1999 letter was given to North Prior nor was the existence of the $285,000 balance in the TIA specifically disclosed.
North Prior contends its due diligence was "comprehensive and exhaustive." In addition to reviewing documents, it interviewed all tenants, including OSI, and toured the property several times. North Prior did not ask either Sterling or OSI about any remaining TIA for the OSI space even though North Prior had seen the space that was not fully built out. North Prior never asked for any tenant files or correspondence or reviewed any actual tenant files. The parties disagree over what Sterling's representative told North Prior about any balance payable on the TIA for OSI.
Prior to closing, North Prior required all tenants to complete a tenant estoppel certificate. It did not specifically ask about tenant improvement accounts. However, the certificate generally requested disclosure of outstanding landlord obligations. OSI signed the agreement without indicating any remaining TIA balance. Other tenants disclosed that TIA-related obligations were outstanding; in those cases, North Prior received credits from Sterling for the amount remaining.
As part of the closing between North Prior and Sterling, both parties signed a closing agreement. The closing agreement stated that North Prior "acknowledges that it has completed its due diligence review * * * and that [North Prior] waives any outstanding objections that [North Prior] may have relating thereto." North Prior also acknowledged in the agreement that "[Sterling] has performed all obligations required to be performed by [Sterling]." When questioned about these representations at closing, Jeffrey Perelman, the president of Sterling, testified that Sterling "wanted to make sure every due diligence issue was waived" and that Sterling never wanted to hear from North Prior again.
Not long after closing, North Prior was told of OSI's claim to the remaining TIA. Sterling refused to provide the money. Perelman represented that North Prior would not have received credit for OSI's TIA at the closing even if it had been requested. At one point Sterling attempted to withdraw from the sale, but North Prior obtained a court order protecting its opportunity to make the purchase. As a result, Sterling refused to make any additional concessions to North Prior. In addition, during deposition, Perelman stated that he and others in the company recognized that North Prior was unaware of OSI's remaining TIA. They found this situation amusing and had joked about it.
North Prior filed suit against Sterling and OSI, requesting a declaratory judgment stating OSI was not due any remaining TIA or if they were, it was owed by Sterling, not North Prior. North Prior also alleged negligent misrepresentation against OSI and intentional and negligent misrepresentation against Sterling. The district court granted summary judgment in favor of Sterling and OSI. It found that the April 20, 1999 letter between OSI and Sterling was not a new contract but only clarified the lease. The court also found that North Prior knew a large portion of OSI's leased space was unfinished, that North Prior had a copy of the lease, which set forth basic information on the TIA, that January 5, 1999 was not a firm deadline for submitting plans for and using the TIA, that North Prior should have requested tenant correspondence and asked whether a tenant allowance was potentially owing, and that North Prior failed to perform its due diligence. North Prior appeals from the summary judgment.
DECISION
The core questions in this appeal are: (1) whether January 5, 1999 was a deadline for submitting plans for and using the TIA; (2) whether Sterling misrepresented the status of the TIA; and (3) whether OSI had any liability to North Prior under the estoppel certificate. In granting summary judgment, the district court ruled in favor of respondents on all questions and determined there were no issues of material fact that affected the decision of either question.
Summary judgment should not be granted unless there is no genuine issue of material fact and one party is entitled to a judgment as a matter of law. "On appeal, the reviewing court should view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993) (citation omitted). No genuine issue of material fact exists "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party." DLH, Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997) (alteration in original) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356 (1986)). In such a review of summary judgment, this court reviews the district court's decisions de novo. Fairview Hosp. and Health Care Servs. v. St. Paul Fire and Marine Ins. Co., 535 N.W.2d 337, 341 (Minn. 1995).
I.
The first issue before this court is whether the district court erred in its summary judgment determination that the lease between Sterling and OSI allowed OSI to submit plans for a build out of their unused space past the submission deadline of January 5, 1999, as stated in the lease. If a lease agreement is ambiguous, then extrinsic evidence may be considered to clarify the agreement's meaning. Blattner v. Forster, 322 N.W.2d 319, 321 (Minn. 1982). The intention of the parties is critical to determine the meaning of an ambiguous contract. Karim v. Werner, 333 N.W.2d 877, 879 (Minn. 1983) (courts should consider the intent of the parties in determining the meaning of a contract). In addition,
the construction which the parties in their dealings and by their conduct have placed upon the terms will furnish the court with persuasive evidence of their meaning.
Donnay v. Boulware, 275 Minn. 37, 44, 144 N.W.2d 711, 716 (1966) (citations omitted). If extrinsic evidence should be considered, the meaning of the agreement is a question for the jury and summary judgment is inappropriate. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979); see also Donnay, 275 Minn. at 44, 144 N.W.2d at 716 (1966) (stating that if writing is ambiguous, court may look to extrinsic evidence, and "unless such evidence is conclusive" the construction of contract then becomes question of fact).
There are three possibilities in determining the significance of the January 5 date: (1) the lease and related documents were ambiguous and extrinsic evidence could be submitted to determine their meaning; or (2) the lease and related documents were unambiguous, providing that no TIA would be provided for working drawings submitted beyond January 5, 1999; or (3) the lease and related documents were unambiguous but allowed for the payment of TIA for working drawings submitted after the January 5, 1999 date in the lease. The district court determined that the documents were unambiguous and allowed for payment of TIA for working drawings submitted after January 5, 1999, and that the April 20, 1999 letter was simply a clarification of the intent of the parties. But the court was presented with evidence that the lease did not allow OSI to submit plans after the January 5 deadline. Despite this evidence, which was not addressed by the court in its memorandum, the court determined that the intent of the parties was to allow the space to be built out and the TIA account to be used in phases. The president of Sterling testified that based on the terms of the lease documents and the clarification supplied by the April 20, 1999 letter, Sterling had agreed to allow OSI to recover the balance of the TIA. The court determined the parties' intent was that Sterling would pay the TIA for the completion of that space despite the fact that the deadline in the lease was not met.
The conflict here is among the intentions of OSI and Sterling, the plain meaning of the lease documents regarding the January 5 date, and the language in the April 20, 1999 letter. The lease documents are clear. OSI was to have working drawings for the remaining space by January 5, 1999 or lose the remaining TIA. The April 20, 1999 letter states that the unused portion of the TIA still could be used as provided in the lease. Because the lease contained the January 5 deadline, either the letter sent the parties in an unfruitful circle or it waived the deadline or it confirmed a change in the deadline that had previously been made. The situation is confused.
It is obvious from the record that the relationship between North Prior and Sterling was acrimonious and an interpretation of the April 20 letter as a clarification is to Sterling's advantage. To uphold the district court we would have to view this dispute in a light most favorable to Sterling and OSI. This directly violates the rule that we view disputed evidence most favorably to the nonmoving party, North Prior. See Fabio, 504 N.W.2d at 761. A trial should be held to determine the impact of the April 20 letter, the intentions of the parties and the status of the January 5 deadline set forth in the original agreements. We reverse the district court's grant of summary judgment and remand.
II.
The second issue is whether summary judgment was appropriate with respect to claims for breach of warranty or fraud. The claims require a showing of misrepresentation. For North Prior to be successful in a claim for misrepresentation, it has to show the following factors: (1) that Sterling made a false representation of a material fact; (2) that Sterling knew or should have known the representation was false or misleading; (3) that North Prior was induced to act in reasonable reliance on the misrepresentation; and (4) that North Prior suffered damages due to the misrepresentation. M.H. v. Caritas, 488 N.W.2d 282, 289 (Minn. 1992).
Misrepresentations may be made by either making an affirmative statement that is itself false, or concealing or not disclosing certain facts that render the facts that are disclosed misleading. An actionable misrepresentation requires proof either that the misrepresenter acted dishonestly or in bad faith, i.e., with fraudulent intent or, alternatively, acted negligently.
Dakota Bank v. Eisland, 645 N.W2d 177, 183 n. 4 (Minn.App. 2002).
The district court held that North Prior was "familiar with the business of leasing space and phasing of work." The court found that North Prior could easily observe that OSI was not using all of its space, that Sterling was not hiding that fact from North Prior, that there was no evidence that Sterling intentionally misled North Prior, that North Prior knew the work allowance was owed OSI prior to the closing, and that North Prior "was not induced to act based on a belief that OSI had used up its TIA." The court thus held that North Prior's claim of misrepresentation must fail as a matter of law.
In making these findings and reaching its conclusion, the court disregarded facts indicating misrepresentation on the part of Sterling. First, Sterling had agreed in both the purchase agreement and the seller's affidavit to inform North Prior about all contracts or encumbrances burdening the property. Sterling did not inform North Prior about the April 20 letter or any agreements leading up to the letter. Second, North Prior contends Sterling had an affirmative duty to disclose the existence of any remaining TIA according to Restatement (Second) of Torts § 551(2)(e) (1977). See Gerdin v. Princeton State Bank, 371 N.W.2d 5 (Minn.App. 1985) (holding there is an affirmative duty to disclose material facts even when one party has not made any misrepresentations to the other party). Here, the president of Sterling testified that he and others were aware that North Prior did not know about OSI's remaining TIA. In fact, he testified that they laughed and found it amusing that North Prior did not know. The district court does not address whether these facts are indicative of fraud or misrepresentation on the part of Sterling.
Here, a determination of whether there was intentional misrepresentation on the part of Sterling turns on a determination of whether Sterling had an obligation to explicitly inform North Prior of the April 20 letter, agreements leading up to the letter, if any, or the existence of the approximate $285,000 TIA balance. To be sure, North Prior saw the space not yet built out by OSI, North Prior had access to the raw per square foot TIA allowance and the amounts used, North Prior could have run calculations that would have revealed a balance in the TIA, yet North Prior neglected to question Sterling as to the circumstances surrounding the build out. A shrewd observer could have put these details together. However, in this era of renewed sensitivity to business ethics and accounting accuracy, at a minimum the determination of who must exercise care and the level of candor that is required is a question of fact. To say that Sterling had no obligation to reveal the terms of the letter of April 20 to North Prior elevates caveat emptor to such an exacted level that fraud is almost read out of the law. We are not prepared to go that far. That letter either changed the significance of the January 5 deadline in the lease or is critical to understanding the availability of the TIA. Sterling had some obligations of disclosure to North Prior under the terms of the purchase agreement. A trial is needed to determine what facts were revealed to North Prior and whether the entire circumstances constitute fraud. We reverse the district court's grant of summary judgment and remand for trial to determine this issue.
III.
The third issue is whether summary judgment was appropriate with respect to North Prior's claim that OSI negligently misrepresented a material fact in its estoppel certificate. The district court agreed with OSI that the language in the certificate did not require the disclosure of the existence of the TIA and that in any event North Prior was aware of circumstances that should have alerted it to the existence of the TIA obligation.
The estoppel certificate consists of a series of statements which the tenant is asked to either affirm or note exceptions and then sign the certificate. One of the statements on the certificate reads as follows:
[a]ll obligations of Landlord under the Lease with respect to the payment for or performance of leasehold improvements in and to the leased premised have been fully paid or performed. To the best of Tenant's knowledge, all other obligations of Landlord under the Lease required to be performed as of the date hereof have been performed.
Before North Prior and Sterling closed on the sale of the building, OSI signed this certificate, noted nothing regarding the TIA balance, and returned the certificate to North Prior. Approximately one year after the purchase of the building, North Prior sought to refinance the outstanding loans; and in that context, requested OSI and other tenants to complete a second estoppel certificate. This certificate was slightly different from the one that had been used when North Prior purchased the building and included the following provision: "All work to be performed * * * under the lease had been performed." OSI disclosed the TIA balance on this certificate. In its motion for summary judgment, OSI claimed that the first certificate only applied to past due obligations; that is, obligations fully determined where the amounts payable by the landlord were due without any condition precedent including items for which the landlord was in default. Applying this analysis, OSI argued that the $285,000 TIA obligation would not be due until OSI actually made a request and submitted plans, that this had not yet happened, that the TIA obligation was not currently due, and that Sterling as a landlord was not in default. OSI claimed that the latter certificate more clearly called for such disclosure.
The foregoing interpretation ignores the clear import of the first estoppel certificate and a more commonly understood meaning of the word "obligations." Viewing the facts from a perspective that is most favorable to North Prior, the party against which summary judgment was sought, there was an approximate $285,000 obligation outstanding. Sterling had a responsibility and OSI anticipated collecting on it. The purpose of the certificate was to alert the new owner and landlord to such obligations. OSI's management was well aware of this $285,000 credit. It takes an extraordinarily parsed reading of the first certificate to find as a matter of law that it does not call for disclosure of the TIA balance. We conclude the better reading is that the first certificate, at a minimum, was ambiguous and its ultimate interpretation should be guided by the circumstances in which it was provided and completed. On a request for summary judgment, the moving party should not benefit by having the outstanding factual ambiguities construed in its favor. Accordingly, we remand the issue of the ultimate interpretation of the estoppel certificate for trial.
In summary, there are several factual determinations to be considered on remand: (1) Was the lease modified such that the landlord had a responsibility for honoring the TIA and if so, did Sterling represent that the lease had not been modified? (2) If the deadline for requesting the TIA had not been extended, was OSI actually due any additional TIA? (3) Did OSI specifically represent that all TIA fees had been paid by Sterling? and (4) Did North Prior neglect to recognize that the unfinished space in the building indicated an outstanding TIA obligation and fail to follow up on that indication?
The finder of fact may well conclude that North Prior did not exercise due diligence, that it is unfair to place the burden on a tenant like OSI to interpret and complete estoppel certificates and shift to them the risk of loss for obligations North Prior as a buyer should have recognized or that Sterling as a seller should have disclosed. But, we do not prejudge the outcome in this matter. We simply hold that it was improper on this record to reach the conclusion that summary judgment should be granted entitling OSI to recover approximately $285,000 in TIA from North Prior.
We reverse and remand for trial in accordance with this opinion.